CFM26100 - Accounting for corporate finance: foreign exchange: hedging using a speculative currency contract

Currency contracts

Exchange gains and losses arise on a company’s currency contracts, as well as on assets or liabilities.

CFM26090 explains that where a foreign currency asset or liability is hedged by a currency contract, under SSAP20 a company will often account for the asset or liability, and the currency contract, at the rate implied in the contract. This means that no exchange gains or losses arise on the currency contract - see example at CFM26070.

But if a company enters into a currency contract speculatively, it will need to account for the contract on a ‘stand alone’ basis. Companies can also account for currency contracts in this way even where the contract is being used as a hedge. SSAP20 does not prescribe how currency contracts should be treated, and you may see different methods of accounting used.

See CFM26110 for examples of a currency contract being accounted for using:

• forward rates, or
• spot rates

See CFM24120, in the Accounting for Derivative Contracts guidance, for more about the accounting treatment of different types of currency contract.

The position is different for companies adopting FRS23/IAS21 - see CFM26310.