10 JUNE 2004

NEW ZEALAND GAZETTE, No. 68

1625

At the time the forward contracts were entered into – 30 June 2004

The forward contract for the supply of crude oil was entered into at a price below the market rate. (This may be because the supplier is expecting excess supplies that have not been factored into the market prices yet.) The contract rate of $20 is lower than the forward rate of $21. As a result, gains are expected from the forward contract. The expected base currency payments include:

● 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 = 10,000 × $21 = USD $210,000; and

● the base currency value of the non-base currency payment to be made under the contract valued at the contract rate = 10,000 × $20 = USD $200,000.

The expected base currency payments are converted at the forward rate of 0.5997 USD/NZD and the expected NZD net amount is spread under the accrual rules over the term of the forward contract. As the company did not pay anything to enter into the forward contract, the gains cannot be spread using the yield to maturity method. Therefore, the straight-line method will be adopted to spread the expected gains.

The forward contract for the foreign exchange was entered into at the forward rate. As such, there are no expected gains or losses to be spread under the accrual rules (see Example A).

At the first and second balance date – 30 June 2005 and 30 June 2006

For the forward contract for crude oil:

Expected component = 1/3 ($10,000/0.5997) = $5,558.

Unexpected component = 0.

The amount of $5,558 is gross income at the first and second balance date.

At the final balance date – 30 June 2007

On the 30 June 2007 balance date, the forward contract for the supply of crude oil would have been cash settled at the contract price of USD $20 per barrel. The market price per barrel of crude oil on the delivery date is USD $22. The spot exchange rate on the delivery date is 0.557 USD/NZD.

The base price adjustment given in section EH 47 of the Act in relation to the forward contract for the supply of crude oil 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

= 220,000/0.557 − 200,000/0.557

= 394,973 − 359,066

= NZD $35,807

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

= 5,558 + 5,558

= NZD $11,116

expenditure is expenditure incurred in previous income years

= 0

amount remitted is the amount of consideration remitted

= 0.

Therefore, the base price adjustment = $35,807 − $11,116 = $24,791 and since this is positive, the amount is gross income of the New Zealand company for the 30 June 2007 income year.

The forward contract for the foreign exchange is also settled on 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

= 200,000/0.557 − 200,000/0.5997

= 359,066 − 333,500

= NZD $25,566

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.

Therefore, the base price adjustment = $25,566 and since this is positive, the amount is gross income of the New Zealand company for the 30 June 2007 income year.