HEDGING WITH A FORWARD CONTRACT

Transactions covered by a matching forward contract

If a trading transaction is covered by a forward foreign exchange contract so that the company knows how much in sterling terms it will pay or receive, SSAP permits the company to translate the transaction at the exchange rate implied in the contract.

While SSAP20 permits this treatment, it does not require it, and the company could record the purchase and the forward contract as two separate transactions.

While either treatment accords with UK GAAP, the first treatment is more common in practice. Assuming that the company entered into the currency contract specifically to hedge the purchase, the first treatment better reflects the underlying economic reality – the company was never really exposed to fluctuations in exchange rates.