Foreign Exhange Gains and Losses and Inventory Valuation

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RoelienV
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Foreign Exhange Gains and Losses and Inventory Valuation

Post by RoelienV »

Hi,
We import goods and use forward exchange contracts to secure a rate. When we cost the inventory, we use the forward contract rate and we deduct/add any fx gains or losses. For example, forward rate is R15 for 1usd. Spot rate on expiration of the contract is R16. Inventory (supplier payment) is 100usd. We would recognize the cost of goods at R1500. The question I have is, we recognize a R100 fx gain in p/l, but we have also adjusted our inventory valuation by R100 when we did the costing. Is this correct?
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Marek Muc
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Re: Foreign Exhange Gains and Losses and Inventory Valuation

Post by Marek Muc »

If you don't apply hedge accounting, then you recognise inventory using fx rate on their initial recognition (=delivery) i.e. at R1600 with a corresponding gain on derivative fx contract of R100
Leo
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Re: Foreign Exhange Gains and Losses and Inventory Valuation

Post by Leo »

And if you use hedge accounting (cash flow hedge here), you book the inventory at spot rate against payables, and the derivatives at fair value with movements in OCI.
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Marek Muc
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Re: Foreign Exhange Gains and Losses and Inventory Valuation

Post by Marek Muc »

carrying amount of inventory should be adjusted with gains/ losses accumulated in a cash flow reserve

https://ifrscommunity.com/knowledge-bas ... low-hedges
pub_acco
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Re: Foreign Exhange Gains and Losses and Inventory Valuation

Post by pub_acco »

The carrying amount of inventories is adjusted by the hedging gain or loss as of the date of inventories recognition, which usually is different than the settlement date of trade payable and currency forward contract. So even with the hedge accounting, the inventories cannot be recorded initially at R1500.
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Marek Muc
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Re: Foreign Exhange Gains and Losses and Inventory Valuation

Post by Marek Muc »

Good point!
RoelienV
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Re: Foreign Exhange Gains and Losses and Inventory Valuation

Post by RoelienV »

Thank you for your contribution. In short, inventory should be realized on BOL date at the spot rate (we ship FOB) from overseas supplier? This accounts for the initial recognition at the ROE. The fx gain is realised and set off subsequently. How should the landed costs (freight, duty etc) then be accounted for? These costs are only invoiced on receipt in South Africa. Thank you
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Marek Muc
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Re: Foreign Exhange Gains and Losses and Inventory Valuation

Post by Marek Muc »

please try again without using these arcane acronyms :lol:
RoelienV
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Re: Foreign Exhange Gains and Losses and Inventory Valuation

Post by RoelienV »

My apologies!

 In short, inventory should be realized on BOL (bill of lading, date of shipment from supplier) date at the spot rate (we ship FOB, free on board, risks and rewards pass on this date) from overseas supplier? This accounts for the initial recognition at the ROE (rate of exchange, spot rate on the day of the shipment). The fx gain is realised and set off subsequently. How should the landed costs (freight, duty etc) then be accounted for? These costs are only invoiced on receipt in South Africa. Thank you
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Marek Muc
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Re: Foreign Exhange Gains and Losses and Inventory Valuation

Post by Marek Muc »

yes, the exchange rate at initial recognition of inventory

you can add other costs to the carrying value of inventory even if they are incurred after initial recognition

https://ifrscommunity.com/knowledge-bas ... ventories/
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