Accounting for Forex and Derivative Transactions
Accounting is generally handled by the back office which acts as an intermediary between the treasury business unit and the finance department to ensure that the accounting of treasury products is accurate and correct.
Attention of the readers is invited to paragraphs 36 to 39 of Accounting Standard 11, whereby a forward exchange contract or another financial instrument that is in substance a forward exchange contract in entered into, which is not intended for trading or speculation purposes, to establish the amount of the reporting currency required or available at the settlement date of a transaction, the premium or discount arising at the inception of such a forward exchange contract should be amortized as expense or income over the life of the contract. Exchange differences on such a contract should be recognized in the statement of profit and loss in the reporting period in which the exchange rates change.
Any profit or loss arising on cancellation or renewal of such a forward exchange contract should be recognized as income or as expense for the period. Such contracts should not be marked to market.
It also enables treasury operations staff to understand the accounting that is peculiar to treasury, such as the ‘trading account’ and ‘base currency’ concepts. This is vital as most of the accounting is ‘hidden’ by being automatically systems generated as a result of deal input of various types. Indeed, this problem is self-perpetuating as the more complex the deals become the more likely a bank will be to automate to prevent errors.