Page 19 - Chapter 22 - Foreign Exchange (Cont.)

Example

A Ltd’s year of assessment ends on the last day of February.

On 1 December 2014, the company purchases trading stock

from a supplier in another country for a foreign currency

amount of FC100 000. A matching FEC is entered into on the

same date to serve as a hedge in respect of the debt. The

forward rate is FC1 = R7,20. The debt is paid on 30 April

2015. All trading stock was sold by the end of February 2015.

Assume that the exchange rates on the relevant dates are as

follows:

• 1 December 2014 : spot rate FC1 = R6,60

• 28 February 2015 : spot rate FC1 = R7,00

• 30 April 2015 : spot rate FC1 = R7,50

The market-related forward rate available for a two-month

contract at 28 February 2015 (the remaining period of the

FEC) is FC1 = R7,36.

Calculate the effect on the taxable income of A Ltd.