Australian travel company working as a CFO

Task One

You just joined an Australian travel company working as a CFO. The travel company arranges package tours in overseas destinations. The manager of the Accounting Department states: ‘When we arrange accommodation in foreign hotels we recognise a liability at the spot rate. Then when we pay for the accommodation any exchange gain or loss is included in the profit or loss. We believe that we are complying with AASB 121/IAS 21’The Effect of Changes in Foreign Exchange Rates’.

Required

Do you agree with the manager’s position? Explain why.

Task Two

On 1 June2020 Pacific Ltd. ordered inventories to the value of US$500, 000 on FOB destination terms. On 30 September 2020, the inventories were delivered. On 31October 2020, the invoice for the inventories was paid. On 1 June 2020, Pacific Ltd. also entered into a forward exchange contract to buy US$500 000 with a settlement date of 31 October 2020 to hedge against the foreign exchange risk attaching to the purchase of and payment for the invoice. Pacific Ltd. has a financial year ending 30 June.

Relevant exchange rates are as follows

Date Spot rate Forward rate
1 June 2020 A$1= US$1.00A$1= US$0.95
30 June 2020A$1= US$0.90 A$1= US$0.89
30 September 2020 A$1= US$0.85 A$1= US$0.84
31 October 2020 A$1= US$0.75 A$1= US$0.75

Assume that the hedging arrangement satisfies the requirements for hedge accounting as stipulated in AASB 139 ‘Financial Instruments: Recognition and Measurement’, and the management of Pacific Ltd. adopts Cash flow hedge accounting.

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