10 JUNE 2004

NEW ZEALAND GAZETTE, No. 68

1621

c is the sum of all income in respect of the forward contract since it was acquired until the end of the previous income year
d is the sum of all expenditure in respect of the forward contract 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 first income year for which you must use this determination.

7. Examples—(1) A New Zealand corporate borrower enters into a long-term forward foreign exchange contract to buy USD $1,000,000 against delivery of NZD in 2 years’ time. The contract was entered into on 30 April 2005 for no consideration and the corporate borrower has a balance date of 30 June. The contract rate is 0.5919 USD to 1 NZD, so settlement will require delivery of NZD $1,689,475. The corporate chooses NZD as the base currency for this contract.

(2) At the time the New Zealand corporate becomes a party to the forward contract, the expected NZD net amount is nil and so the expected component of the gross income or expenditure from the forward contract is nil. The New Zealand corporate will recognise the unexpected component of the gross income or expenditure from the forward contract when performing the base price adjustment under section EH 47 of the Act.

Further examples are provided in the Schedule.

Signed on the 3rd day of June 2004.

ROBIN OLIVER, General Manager, Policy.

Schedule: Further examples

Note: In each example involving a base price adjustment, the base price adjustment is calculated on the assumption that the forward contract is subject to Division 2 of Part EH of the Act. The details of the calculation would differ for a forward contract that was subject to Division 1 of Part EH of the Act.

For the purpose of examples A to C, assume that the spot rates and the forward rates for USD/NZD on the relevant dates are as follows:

The forward exchange rates are derived on the principle of covered interest parity (CIP) using the expected interest rates in the United States of America (US,I) and the expected domestic interest rates (NZ,I). Fwd (0,t) represents the forward rates at 30 April 2004 out to period, t, while Fwd (1,t) and Fwd (2,t) represent the forward rates at 30 April 2005 and 30 April 2006, respectively, out to period, t. For convenience in these examples when calculating the base price adjustment, the same buy/sell spot rates have been used at date of delivery. In practice this would not normally be the case.

Example A: Seller of base currency (NZD); contract rate is equal to market rate

A New Zealand corporate borrower enters into a long-term forward foreign exchange contract to buy USD $1,000,000 against delivery of NZD in 2 years’ time. The contract was entered into on 30 April 2005 for no consideration and the corporate borrower has a balance date of 30 June. The contract rate is 0.5919 USD to 1 NZD, so settlement will require delivery of NZD $1,689,475. The corporate chooses NZD as the base currency for this contract.

At the time the contract was entered into – 30 April 2005

The expected base currency payments in relation to the forward contract consist of:

• the base currency value of the payment or receipt made in consideration of entering into the forward contract = 0;
• the base currency value of the non-base currency payment to be made under the contract valued at the forward rate = NZD $1,689,475;
• the base currency value of the non-base currency payment to be made under the contract valued at the contract rate = NZD $1,689,475.

Since the forward contract was entered into at the forward rate for no consideration, the expected NZD net amount is nil. So there is no expected component to be spread under the accrual rules.

At the final balance date – 30 June 2007

In the 30 June 2007 income year, the base price adjustment given in section EH 47 of the Act is calculated by applying the formula:

consideration – income + expenditure + amount remitted

where:

consideration is the consideration paid or payable to the company less the consideration paid or payable by the company

= 1,000,000/0.557 − 1,689,475
= 1,795,332 − 1,689,475
= NZD $105,857

income is all the amounts of gross income derived in previous income years
= 0

expenditure is expenditure incurred in previous income years
= 0

amount remitted is the amount of consideration remitted
= 0.