1406

NEW ZEALAND GAZETTE

No. 62

National Office, Inland Revenue, P.O. Box 2198, Wellington.

MARTIN SMITH, General Manager (Adjudication & Rulings).

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Determination G9B: Financial Arrangements That Are Denominated in a Currency Other Than New Zealand Dollars: An Expected Value Approach

This determination may be cited as “Determination G9B: Financial Arrangements that are Denominated in a Currency other than New Zealand Dollars: An Expected Value Approach”.

1. Explanation (which does not form part of the determination)

When do you use this determination?

You may use this determination if you have financial arrangements where the rights and obligations under the financial arrangement are fixed or otherwise determined in a currency other than NZD, including variable rate financial arrangements that are denominated in a currency other than NZD.

However, this determination only applies to financial arrangements where the payment dates are known not later than your first balance date after you become a party to the financial arrangement; and forward rates for the currency in which the financial arrangements are denominated can be determined.

What methods can be used to calculate income or expenditure in relation to a financial arrangement that comes within the scope of this determination?

Expected Value Approach

This determination sets out an expected value approach to calculate gross income or expenditure from a financial arrangement where any rights and obligations of the parties are expressed in a base currency other than New Zealand dollars. This expected value approach can only be used for financial arrangements within the scope of this determination, which is narrower than Determination G9A: Financial Arrangements that are Denominated in a Currency or Commodity other than New Zealand Dollars. If you elect to use this determination, you must not use Determination G9A for any such financial arrangement, and you must not use Determination G14A: Forward Contracts for Foreign Exchange and Commodities for any forward contract within the scope of Determination G14A: Forward Contracts for Foreign Exchange and Commodities: An Expected Value Approach.

Mark to Spot Approach

You can use Determination G9A: Financial Arrangements that are Denominated in A Currency or Commodity other than New Zealand Dollars to calculate gross income or expenditure of any financial arrangement within the scope of this determination if you have not used this determination or Determination G14A: Forward Contracts for Foreign Exchange and Commodities: An Expected Value Approach.

Alternatively, you may use the mark to market method if you satisfy the requirements of section EH 1 (6) of the Act. You may also use a method allowed by the proviso to section EH 1 (5) (a) of the Act.

How do I use the method set out in this determination?

Under this method, the gross income or expenditure from a financial arrangement where the rights and obligations of the parties are expressed in a base currency other than New Zealand dollars is the total of an expected component and an unexpected component. To apply this method:

• determine the expected component by taking into account all the base currency payments and payment dates in relation to the financial arrangement when you become a party to the financial arrangement.

• use the initial interest rate to calculate the base currency payments under a variable rate financial arrangement denominated in a base currency other than NZD, and assume that this rate will apply throughout the term of the financial arrangement.

• translate the base currency payments into expected NZD payments on the basis of the forward rates available at the time you become a party to the financial arrangement.

• spread the expected NZD net amount under the yield to maturity method and allocate it to each income year over the term of the financial arrangement on a daily basis.

• measure the unexpected component at the end of each balance date as the difference between actual and expected NZD payments.

• calculate the gross income or expenditure of a financial arrangement entered into before the income year you elect to use this determination as set out above, except that you must:

  (a) use actual NZD payments up to the income year you elect to use this determination and expected NZD payments for the remaining term of the financial arrangement in determining the expected component of the gross income or expenditure; and

  (b) use the relevant forward rates at the end of the income year you elect to use this determination for the purpose of calculating the expected NZD payments.

How do I elect to use the method outlined in this determination?

You may elect to use this determination by returning your gross income or expenditure on the basis of this determination for the 1998–1999 income year, or the 1999–2000 income year, or in the first income year in which you become a party to the financial arrangement that is within the scope of this determination.

In the income year you elect to use this determination to calculate gross income or expenditure from a financial arrangement entered into before the income year, you must perform a transitional adjustment calculation. This determination provides for a transitional adjustment calculation that is comparable to Determination G25: Variations in the Terms of a Financial Arrangement.

How do I calculate the transitional adjustment?

The transitional adjustment must be made in the income year you elect to use this determination. The transitional adjustment calculation must be made for each financial arrangement entered into before the income year you elect to use this determination. It requires that you treat the difference between the total amount that would have been gross income or expenditure calculated as described in this determination and the total amount actually recognised over the previous income years, as gross income or expenditure in the income year of the adjustment.