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NEW ZEALAND GAZETTE, No. 68

10 JUNE 2004

Therefore, the base price adjustment = $105,857 and since this is positive, the amount of NZD $105,857 is gross income of the
New Zealand corporate for the 30 June 2007 income year.

Example B: Seller of base currency (NZD); contract rate is equal to the 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 3 years’ time. The contract was entered into on 30 April 2004 for no consideration and the corporate
borrower has a balance date of 30 June. The contract rate is 0.5997 USD to 1 NZD, so settlement will require delivery of NZD
$1,667,416. The corporate chooses NZD as the base currency for this contract.

Assume that the New Zealand corporate has not been using Determination G14A and has been using an alternative method to
calculate the income or expenditure of the forward contract in the 2003-04 income year. In fact, the corporate has recognised
NZD $32,982 as gross income in respect of the forward contract for the year ending 30 June 2004. However, the corporate has
elected to use this determination for the 2004-05 and subsequent income years.

Further, assume that the forward rate on 30 June 2005 out to 30 April 2007, the delivery date of the forward contract, is
0.5919. Therefore, the market rate for the delivery of USD $1,000,000 on 30 April 2007 is NZD $1,689,475. Given the
contract rate of 0.5997 for the delivery of USD $1,000,000, there is an expected NZD net amount of NZD $22,059. Using this
determination, the expected NZD net amount should be spread on a straight line basis over the term of the forward contract.

The transitional adjustment in the 2004-05 income year – 30 June 2005

Using a straight line method to spread the expected NZD net amount of NZD $22,059, the gross income in relation to the
forward contract for the year ending 2004 and 2005 should have been NZD $1,226 and NZD $7,353, respectively.

Therefore the transitional adjustment is:

a – b – c + d

where:

a the sum of all amounts that would have been income from the time the corporate become a party to the forward contract
until the end of the income year
= 1,226 + 7,353 = 8,579

b the sum of all amounts that would have been expenditure from the time the corporate become a party to the forward
contract until the end of the income year
= 0

c the sum of all income in respect of the forward contract since it was acquired until the end of the previous income year
= 32,982

d the sum of all expenditure in respect of the forward contract since it was acquired until the end of the previous income
year
= 0.

The net amount of – NZD $24,403 is gross expenditure in the 2004-05 income year.

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 – 1,667,416
= 1,795,332 – 1,667,416
= NZD $127,916

income the sum of all amounts that would have been expenditure from the time the corporate become a party to the
forward contract until the end of the income year
= 32,982 + 7,353
= NZD $40,335

expenditure is expenditure incurred in previous income years
= NZD $24,403

amount remitted is the amount of consideration remitted
= 0.

Therefore, the base price adjustment = $127,916.00 – $40,335.00 + $24,403.00 + 0 = $111,984.00 and since this is positive,
the amount of NZD $111,984.00 is gross income of the New Zealand corporate for the 30 June 2007 income year.

Example C: Seller of base currency (NZD); contract rate is not equal to the 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 and the corporate borrower has a balance
date of 30 June. The contract rate is 0.5997 USD to 1 NZD, so settlement will require delivery of NZD $1,667,416. For the
purpose of this example, assume that the corporate borrower paid NZD $10,000 to enter into this forward contract. (This could
be the same forward contract as in the previous example where the forward contract was sold on 30 April 2005.) The corporate
chooses NZD as the base currency for this contract.

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

The forward rate in this case was 0.5919 USD to 1 NZD, which is different from the contract rate of 0.5997 USD to 1 NZD. The
expected settlement on the commitment to purchase USD $1,000,000 at 30 April 2007 is, therefore, NZD $1,689,475.
The payment made in acquiring the forward contract was NZD $10,000. Thus, the expected base currency payments in this
example consist of: