7 MAY NEW ZEALAND GAZETTE 1409

any financial arrangement entered into before the income year you made the election. You must perform the transitional adjustment calculation for each of those financial arrangements in accordance with the following formula:

a – b – c + d

where

a is the sum of all amounts that would have been income in respect of the financial arrangement from the time it was entered into until the end of the income year, if this determination was applied from the time you become a party to the financial arrangement;

b is the sum of all amounts that would have been expenditure in respect of the financial arrangement from the time it was entered into until the end of the income year, if this determination was applied from the time you become a party to the financial arrangement;

c is the sum of all income in respect of the financial arrangement since it was acquired until the end of the previous income year;

d is the sum of all expenditure in respect of the financial arrangement since it was acquired until the end of the previous income year.

A positive net amount is gross income while a negative net amount is gross expenditure in the income year you elect to use this determination.

7. Examples

(1) A New Zealand investor holds a United States Treasury Bond on its balance date of 30 June 2000. The bond has a term of 5 years and bears 10% interest payable semi-annually on 1 September and 1 March. It has a face value of USD $10 million. The bond was purchased at issue for USD $8,300,000 and matures on 1 September 2004.

(2) The New Zealand investor has to calculate the expected NZD net amount on the basis of forward rates available at the time it becomes a party to the financial arrangement. It then has to spread and allocate the expected NZD net amount to the income years over the term of the financial arrangement in accordance with Determination G3 and Determination G1A. In each of those income years, the investor also has to determine the unexpected component of the gross income or expenditure. The unexpected component is measured as the difference between the actual NZD payments and the expected NZD payments.

Signed on the 27th day of April 1998.

ROBIN OLIVER, General Manager, Policy.

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Determination G14A: Forward Contracts for Foreign Exchange and Commodities: An Expected Value Approach

This determination may be cited as “Determination G14A: Forward Contracts for Foreign Exchange and Commodities: An Expected Value Approach”.

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

What is a Forward Contract for Foreign Exchange and Commodities?

A forward contract for foreign exchange or commodities is a contract to buy or sell specified amounts of foreign currency or commodities at some future date at a specified contract rate. For example, a forward contract for foreign currency is a contract to buy or sell specified amounts of a currency at a future date at a price fixed (in terms of another currency) at the time the contract is entered into. Each party contracts simultaneously to sell one currency and purchase another currency. The same forward contract can always be viewed as either the sale of one currency or the purchase of the other currency. For example, a person who sells NZD forward against purchase of USD can view the contract as either—

• The forward sale of NZD; or
• The forward purchase of USD.

A forward contract has characteristics that are very similar to a swap contract. In fact, swaps are often structured as a series of forward contracts. If you are a party to a swap, however, you may not apply this determination to swaps that are subject to Determination G27. The only exception is a swap contract for fixed amounts, to be exchanged at a single fixed date. This type of swap is, in substance, a forward contract. Therefore, if you are a party to this type of financial arrangement, you have to apply this determination instead of Determination G27.

What methods can be used to calculate income or expenditure under a Forward Contract for Foreign Exchange and Commodities?

Expected Value Approach

This determination sets out an expected value approach to calculate gross income or expenditure from a forward contract. This expected value approach can only be used for forward contracts within the scope of this determination, which is narrower than Determination G14: Forward Contracts for Foreign Exchange and Commodities. If you elect to use this determination, you must not use Determination G14 for any such forward contract, and you must not use Determination G9A: Financial Arrangements that are Denominated in a Currency or Commodity other than New Zealand Dollars: An Expected Value Approach within the scope of Determination G9B: Financial Arrangements that are Denominated in a Currency other than New Zealand Dollars: A Mark to Market Approach.

Mark to Spot Approach

You can use Determination G14: Forward Contracts for Foreign Exchange and Commodities to calculate gross income or expenditure of any forward contract within the scope of this determination if you have not used this determination or Determination G9B: Financial Arrangements that are Denominated in a Currency Other than New Zealand Dollars: 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 forward contract is the total of an expected component and an unexpected component. A typical forward contract drawn at the forward rate for no consideration, however, has no expected component. To apply this method:

• ignore any offsetting of payments between the parties, so that every amount that would be payable under the forward contract is taken into account under this determination.
• choose one of the currencies under the forward contract as a base currency.
• determine the expected component by taking into account all the base currency payments and payment