New Zealand Gazette – 2004 – No. 68

Page 1624

✨ Financial Determination Example



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NEW ZEALAND GAZETTE, No. 68

10 JUNE 2004

Date Expected Cash (USD) Contract Cash (USD) Expected Cash (USD) Expected Cash (NZD) Expected Income
30-Apr-05 0 0 −6,149 −10,000
30-Apr-06 0 0 0 4,852
30-Apr-07 986,944 1,000,000 13,056 22,057 7,206
Total 6,907 12,057 12,057
YTM 46% 49%

At the first balance date – 30 June 2005

Expected component = (61/365 × $4,852) = $811.

Unexpected component = 0.

The amount of $811 is gross income at the first balance date.

At the second balance date – 30 June 2006

Expected component = (61/365 × $7,206) + (304/365 × $4,852) = $1,204 + $4,041 = $5,245.

Unexpected component = 0.

The amount of $5,245 is gross income at the second balance date.

At the final balance date – 30 June 2007

In the 30 June 2007 income year, the base price adjustment given in section EH 47 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 – 10,000

= 1,795,332 − 1,677,416

= NZD $117,916

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

= 811 + 5,245

= NZD $6,056

expenditure is expenditure incurred in previous income years

= 0

amount remitted is the amount of consideration remitted

= 0.

Therefore, the base price adjustment = $117,916 − $6,056 = $111,860 and since this is positive, the amount of NZD $111,860

is gross income of the New Zealand corporate for the 30 June 2007 income year.

Example E: Forward contract to purchase commodity for USD at non-market rate with a corresponding forward contract in foreign exchange in market rate

For the purpose of this example, assume that the forward rates for USD/NZD are as summarised in the following table. These

forward exchange rates are derived on the principle of covered interest parity (CIP). Fwd (0,t) represents the forward rates at

30 June 2004 out to period t while Fwd (1,t) and Fwd (2,t) represent the forward rates at 30 June 2005 and 30 June 2006,

respectively, out to period t.

Date Actual Spot CIP: Fwd (0,t) CIP: Fwd (1,t) CIP: Fwd (2,t) Expected US,I Expected NZ,I
30-Jun-04 0.635 0.6350 0.04 0.06
30-Jun-05 0.6149 0.6230 0.6149 0.04 0.06
30-Jun-06 0.575 0.6113 0.6033 0.5750 0.04 0.06
30-Jun-07 0.557 0.5997 0.5919 0.5642 0.04 0.06

The spot and forward rates per barrel of crude oil (in USD) are summarised in the following table. For example, the market

price for a barrel of crude oil was USD $19.2 per barrel on 30 June 2004 while the forward price out to 30 June 2007 was USD

$21 per barrel.

Date Actual Spot Fwd (0,t) Fwd (1,t) Fwd (2,t)
30-Jun-04 19.2 19.2000
30-Jun-05 19.6 20.2000 19.6000
30-Jun-06 21.1 21.8000 22.1000 21.1000
30-Jun-07 22 21.0000 22.8000 22.1000

A New Zealand company enters into 2 forward contracts simultaneously on 30 June 2004. The first forward contract secures

the supply of 10,000 barrels of crude oil. This forward contract is to be cash settled on 30 June 2007, at USD $20 per barrel.

The second forward contract was entered into for the purchase of USD $200,000 in exchange for the delivery of NZD at a

contract rate of 0.5997. The second forward contract is to be settled on 30 June 2007. For the purpose of this example, assume

that the corporate chooses USD as the base currency for both contracts.



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Online Sources for this page:

VUW Te Waharoa — PDF NZ Gazette 2004, No 68


Gazette.govt.nz — PDF NZ Gazette 2004, No 68




✨ LLM interpretation of page content

💰 Determination G14B: Forward Contracts for Foreign Exchange and Commodities: An Expected Value Approach (continued from previous page)

💰 Finance & Revenue
3 June 2004
Forward Contracts, Foreign Exchange, Commodities, Expected Value Approach, Financial Determination