Financial Reporting · Module 6: Financial instruments
Asset or Liability? P&L or OCI?
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Chapters
- 0:00Question
- 0:27Breakdown
- 1:05Rule
In short
A forward contract that is not designated as a hedge is measured at fair value through profit or loss. When the contract lets the entity buy currency at a rate better than the current forward rate, it is a financial asset, and the gain goes to profit or loss, not other comprehensive income.
- Favorable contract terms make the forward a financial asset.
- No hedge designation means fair value through profit or loss.
- OCI only applies to specific elections and designated cash flow hedges.
Transcript
0:00Question
Four answers. Two decisions. Get either one wrong, and you lose the mark. Peak Hill agrees to buy one million US dollars in August, at A$1.50 each. By 30 June, the forward rate for August has risen to A$1.55. There's no hedge accounting. What does it recognize? Pick one.
0:27Breakdown
Split it into two questions. First: asset or liability? Peak Hill locked in A$1.50 for dollars now worth A$1.55. That's a good deal. A favorable contract is an asset: 5 cents on a million dollars, $50,000. Second: where does the gain go? With no hedge designation, a derivative goes through profit or loss. So the liabilities are wrong. Cross out B and D. And OCI needs a hedge designation that isn't there. Cross out C. A: a $50,000 asset, with the gain in profit or loss.
1:05Rule
No hedge designation? Fair value through profit or loss. Every reporting date, until the contract settles. Want more traps like this? Follow for the next one.
Try a question on this lesson
From the EstatePass Financial Reporting bank. Answer it, then read the explanation.
On 1 June 2026, Peak Hill Ltd enters into a forward contract to buy US$1,000,000 on 31 August 2026 at A$1.50 per US$1. It does not apply hedge accounting. At 30 June 2026, the forward rate for 31 August 2026 is A$1.55 per US$1. Ignore discounting. What does Peak Hill Ltd recognize at 30 June 2026?
Sources
- AASB 9 Financial Instruments, para 4.1.4 and 5.7.1
- CPA question bank: cpa-fr-1065
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