Hedging in foreign currency risk of a firm commitment or a highly probable forecast transaction
ICDS requires recognition of premium, discount or exchange difference on contracts for hedging of the foreign currency risk of a firm commitment or a highly probable forecast transaction on settlement basis. Here, firm commitment does not include assets and liabilities existing at the end of the previous year.
However, AS-11 requires the premium or discount arising at the inception of a forward exchange contract to be amortized as expense or income over the life of the contract and FE differences to be recognized as income or expense in the previous year in which the exchange rates change. Any profit or loss arising on cancellation or renewal to be recognized as income or expense for the previous year.
The content of this post has been contributed by CA Prashant Kumar Dutt.