Question Tag: Foreign Exchange

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  • 10 Marks

CR – Nov 2024 – L3 – Q2a – Lease Accounting and Foreign Exchange

Discuss lease accounting treatment and foreign exchange effects on lease payments.

On 1 January 2023, Fabin Ghana Airlines PLC (FGA) leased a new fuel-efficient aircraft from German Jets Builders PLC (GJB) for ten (10) years, with an option to extend the lease period for five (5) additional years. However, at lease inception, FGA determined that the renewal option was not economically beneficial and would not be exercised.

The lease formed part of FGA’s sustainability strategy to green its air operations. Lease payments were structured as follows:

  • Fixed annual lease payments of €6 million, payable at each year-end starting 31 December 2023.
  • An additional 5% annual payment, conditional on FGA’s aircraft noise footprints and nitrogen oxide emissions declining by at least 15% and 10%, respectively.
  • At 31 December 2023, the Sustainability Committee determined that these environmental targets were met.

Additional lease details:

  • Estimated residual value of €15 million at 31 December 2032 and €10 million at 31 December 2037.
  • Residual Value Guarantee: FGA guaranteed that the relevant residual value will not drop below 30%.
  • Initial Direct Costs: GH¢500,000 was incurred in setting up the lease.
  • Discount Rate: 12%
  • Exchange Rates:
    • 1 January 2023: €1 = GH¢10
    • 31 December 2023: €1 = GH¢12
    • Average rate: €1 = GH¢11

Discount Factors at 12%:

Year Single-Period Factor Annuity Factor
10 0.32 5.65
14 0.20 6.63
15 0.18 6.81

Required:

In line with IFRS 16: Leases and IAS 21: Effects of Changes in Foreign Exchange Rates, discuss how this lease should be accounted for in the financial statements of FGA for the year ended 31 December 2023.

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  • 10 Marks

CR – May 2021 – L3 – Q1c – Property, Plant and Equipment (IAS 16)

Record journal entries for PPE acquisition and related foreign exchange adjustments in the books of Ngono Plc.

c. Ngono Plc. has a financial year end of September 30. The Company buys property, plant and equipment for its office in Nigeria from foreign supplier Omaha Inc. in USA. On June 30, 2020, Ngono Plc. took delivery of PPE from Omaha Inc. with invoice value amounting to $100,000 and is due for settlement in equal instalments on August 30, 2020 and November 30, 2020. Clearing cost and import duty paid on the acquisition of the PPE amounted to N1,250,000. It is the policy of Ngono Plc to depreciate PPE at 20% on cost using the straight –line method. The depreciation is provided in full in the year of acquisition and none in the year of disposal.
Both Ngono Plc. and Omaha Inc. honoured their own part of the agreement in the transaction.
Movement recorded in the exchange rate were as follows:

Required:
Show the journal accounting entries to record the above transaction in the books of Ngono Plc. (10 Marks)

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  • 16 Marks

FM – May 2024 – L3 – SC – Q6 – Financial Distress and Bankruptcy

Discuss economic exposure in currency risk management and calculate impact of USD strengthening on Linko Plc’s market value.

(a) With respect to foreign currency risk management, explain economic exposure and discuss generally how a company can manage economic exposure. (8 Marks)

(b) Linko Plc is a UK-based company supplying medical equipment to the USA and Europe, while importing raw materials from the USA. It has net imports of 8 million dollars from the USA, which is expected to continue for the next six years. The company’s cost of capital is 10% per year. Assume cash flows occur at year-end and ignore taxation.

Required:
Assuming no change in the physical volume or dollar price of imports, estimate the impact on the expected market value of Linko Plc, if the market expects the dollar to strengthen by 4% per year against the pound. The current spot exchange rate (US$ per £1) is 1.9156 – 1.9210. (7 Marks)

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  • 6 Marks

ATAX – Nov 2018 – L3 – Q6b – Petroleum Profits Tax (PPT)

Explanation of two roles each of DPR, NNPC, and CBN in regulating Nigeria's oil and gas industry.

A large proportion of the total foreign exchange earnings generated by the Federal Government of Nigeria is from petroleum-related activities. In the oil and gas industry, several regulatory agencies, such as the Nigerian National Petroleum Corporation (NNPC), National Petroleum Investment Management Services (NAPIMS), Department of Petroleum Resources (DPR), Central Bank of Nigeria (CBN), Federal Inland Revenue Service (FIRS), etc., have been established to ensure sanity and accountability in the upstream, midstream, downstream, gas utilization, and oil service sectors.

You are required to: Explain two roles each, of the following players in the oil and gas industry in Nigeria:

  • DPR
  • NNPC
  • CBN

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  • 20 Marks

FM – Nov 2023 – L3 – SB – Q2 – Foreign Exchange Risk Management

Analyze hedging methods for foreign exchange risk involving a future CHF transaction.

About one year ago, you were employed by Tesco, an American company based in New York. You work online from home in Nigeria and are a member of the international treasury of Tesco.

Tesco supplies medical equipment to the USA and Europe and also buys some basic raw materials from Europe. It is currently 30 November 2024. On 31 May 2025, Tesco is due to receive CHF16.3 million from a Swiss customer and also to pay CHF4.0 million to a Swiss supplier.

Exchange rates (quoted as US$/CHF1):

  • Spot: 1.0292 – 1.0309
  • Three months forward: 1.0322 – 1.0341
  • Six months forward: 1.0356 – 1.0378

Annual interest rates available to Tesco:

  • Switzerland: 3.2% (investing), 4.4% (borrowing)
  • USA: 4.6% (investing), 5.8% (borrowing)

Currency futures (contract size CHF125,000, futures price quoted as US$ per CHF1):

  • Future price: December – 1.0306, March – 1.0336, June – 1.0369

Currency options (contract size CHF125,000; exercise price quotation US$ per CHF1, premium in US cents per CHF1):

Calls Puts
Dec Mar June Dec Mar June
1.0375 0.47 0.50 0.53 0.74 0.79 0.86

Required:

  • a. Calculate the net receipt if hedged using a forward contract. (4 Marks)
  • b. Calculate the net receipt if hedged using money market hedging. (8 Marks)
  • c. Calculate the net receipt if hedged using futures. (10 Marks)
  • d. Calculate the net receipt if hedged using options. (8 Marks)
    (Total: 30 Marks)

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  • 20 Marks

FM – Nov 2017 – L3 – Q4 – Foreign Exchange Risk Management

Evaluate foreign exchange exposure, determine forward rates, assess hedging strategies, and discuss economic exposure significance for Kudi Limited.

You are the Financial Director of Kudi Limited, a Nigerian company that imports raw materials mainly from Tiko (currency: T$) and exports finished products to Katuga (currency: K$). Kudi is partly financed by a loan raised in the domestic market and usually hedges its foreign currency exposure using forward or money markets. Most customers are allowed a 3-month credit. The company recently sold products to a customer in Katuga for K$20 million.

Available Information:

Exchange Rate K$ per N T$ per N
Spot Rate 1.9600 1.4600
1 Month Forward 1.9580 1.4579
Central Bank Base Rate Per Annum Nigeria Katuga Tiko
Rate (%) 5.5% 4.25% 3.75%

Required:

(a) Comment on the Interest Rate Parity (IRP) and Purchasing Power Parity (PPP) methods for estimating exchange rates. (6 Marks)

In answering the following questions, include relevant calculations:

  1. Given that interest rates are higher in Nigeria than in Tiko, should T$ be depreciating against the naira and thus trading at a discount? (3 Marks)
  2. Determine the 3-month K$ forward rate of exchange implied by the given information and calculate the naira receipts expected in 3 months from the customer in Katuga. (3 Marks)
  3. Assess whether buying T$ on the spot market now and placing it on deposit would be a sensible policy for Kudi. (3 Marks)

(b) Discuss the concept and significance of foreign exchange economic exposure for a multinational company. (5 Marks)

(Total 20 Marks)

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  • 10 Marks

CR – May 2020 – L3 – Q3a – Foreign Currency Transactions

Foreign currency transactions related to purchases, sales, and investment property with exchange rate variations and reporting implications.

Medina Power Ltd has carried out certain transactions denominated in foreign currency during its financial year ended 31 October 2019 and has also conducted foreign operations through a foreign entity. Medina Power Ltd.’s functional and presentation currency is the cedi.

On 31 July 2019, Medina Power Ltd purchased goods from a foreign supplier for 16 million dinars. At 31 October 2019, the supplier had not yet been paid and the goods were still held in inventory by Medina Power Ltd.

On 31 July, Medina Power Ltd sold goods to a foreign customer for 8 million dinars, and it received payment for the goods in dinars on 31 October 2019.

Medina Power Ltd had also purchased an investment property on 1 November 2018 for 56 million dinars. At 31 October 2019, the investment property had a fair value of 48 million dinars. The company uses the fair value model in accounting for investment properties.

Medina Power Ltd wants advice on how to treat these transactions in the financial statements for the year ended 31 October 2019.

question table

Required:
Discuss the accounting treatment of the above transactions in accordance with the advice required by the directors. (You should show detailed workings as well as a discussion of the accounting treatment used.)

 

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  • 10 Marks

SCS – Nov 2019 – L3 – Q2b – Capital structure

Discuss the potential benefits and problems of converting short-term borrowing into long-term loans.

i) Discuss the potential benefits and problems with proposals to convert the company’s short-term borrowings into a longer-term loan.

ii) Pay bigger cash salaries, or add a share option element to the remuneration packages.

iii) Maintain the dividend for 2019 at the 2018 level, or even reduce it further.

iv) Convert any surplus dollar cash into cedis.

(10 marks)

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  • 10 Marks

SCS – Dec 2022 – L3 – Q5 – Financial management

Calculate the required loan, interest earned, and the Cedi gain or loss from a money market hedge.

The Board has directed the CEO to take the necessary steps to arrange with its bankers, a money market hedge for the expected receipts from DMP, to protect the company against the downside risk of expected Cedi appreciation.

Required:
As the Financial Controller of the company, the CEO has asked you to calculate the following relating to money market hedge:

a) The initial dollar amount of loan that TCWL could take from the bank in Cameroon on 1 December 2022 and the cedi equivalent of the initial loan if converted on the same date. (3 marks)
b) The total Cedi amount and interest the company will earn by 31 May 2023, if the converted amount is invested in Ghana for the duration of the money market hedge. (3 marks)
c) The Cedi gain or loss that TCWL would make by hedging. (2 marks)
d) The effective forward rate of the Cedi to U.S. dollar on 31 May 2023. (2 marks)

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  • 1 Marks

BL – MarJul 2020 – L1 – SA – Q8 – Law Relating to Banking

Question testing knowledge of the reporting limits for foreign exchange transactions under the Money Laundering Act.

Under the Money Laundering (Prohibition) Act, what is the limit of foreign exchange in a single transfer that must be reported to the Central Bank of Nigeria?
A. $10,000
B. $20,000
C. $50,000
D. $100,000
E. $500,000

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  • 10 Marks

CR – Nov 2024 – L3 – Q2a – Lease Accounting and Foreign Exchange

Discuss lease accounting treatment and foreign exchange effects on lease payments.

On 1 January 2023, Fabin Ghana Airlines PLC (FGA) leased a new fuel-efficient aircraft from German Jets Builders PLC (GJB) for ten (10) years, with an option to extend the lease period for five (5) additional years. However, at lease inception, FGA determined that the renewal option was not economically beneficial and would not be exercised.

The lease formed part of FGA’s sustainability strategy to green its air operations. Lease payments were structured as follows:

  • Fixed annual lease payments of €6 million, payable at each year-end starting 31 December 2023.
  • An additional 5% annual payment, conditional on FGA’s aircraft noise footprints and nitrogen oxide emissions declining by at least 15% and 10%, respectively.
  • At 31 December 2023, the Sustainability Committee determined that these environmental targets were met.

Additional lease details:

  • Estimated residual value of €15 million at 31 December 2032 and €10 million at 31 December 2037.
  • Residual Value Guarantee: FGA guaranteed that the relevant residual value will not drop below 30%.
  • Initial Direct Costs: GH¢500,000 was incurred in setting up the lease.
  • Discount Rate: 12%
  • Exchange Rates:
    • 1 January 2023: €1 = GH¢10
    • 31 December 2023: €1 = GH¢12
    • Average rate: €1 = GH¢11

Discount Factors at 12%:

Year Single-Period Factor Annuity Factor
10 0.32 5.65
14 0.20 6.63
15 0.18 6.81

Required:

In line with IFRS 16: Leases and IAS 21: Effects of Changes in Foreign Exchange Rates, discuss how this lease should be accounted for in the financial statements of FGA for the year ended 31 December 2023.

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  • 10 Marks

CR – May 2021 – L3 – Q1c – Property, Plant and Equipment (IAS 16)

Record journal entries for PPE acquisition and related foreign exchange adjustments in the books of Ngono Plc.

c. Ngono Plc. has a financial year end of September 30. The Company buys property, plant and equipment for its office in Nigeria from foreign supplier Omaha Inc. in USA. On June 30, 2020, Ngono Plc. took delivery of PPE from Omaha Inc. with invoice value amounting to $100,000 and is due for settlement in equal instalments on August 30, 2020 and November 30, 2020. Clearing cost and import duty paid on the acquisition of the PPE amounted to N1,250,000. It is the policy of Ngono Plc to depreciate PPE at 20% on cost using the straight –line method. The depreciation is provided in full in the year of acquisition and none in the year of disposal.
Both Ngono Plc. and Omaha Inc. honoured their own part of the agreement in the transaction.
Movement recorded in the exchange rate were as follows:

Required:
Show the journal accounting entries to record the above transaction in the books of Ngono Plc. (10 Marks)

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  • 16 Marks

FM – May 2024 – L3 – SC – Q6 – Financial Distress and Bankruptcy

Discuss economic exposure in currency risk management and calculate impact of USD strengthening on Linko Plc’s market value.

(a) With respect to foreign currency risk management, explain economic exposure and discuss generally how a company can manage economic exposure. (8 Marks)

(b) Linko Plc is a UK-based company supplying medical equipment to the USA and Europe, while importing raw materials from the USA. It has net imports of 8 million dollars from the USA, which is expected to continue for the next six years. The company’s cost of capital is 10% per year. Assume cash flows occur at year-end and ignore taxation.

Required:
Assuming no change in the physical volume or dollar price of imports, estimate the impact on the expected market value of Linko Plc, if the market expects the dollar to strengthen by 4% per year against the pound. The current spot exchange rate (US$ per £1) is 1.9156 – 1.9210. (7 Marks)

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  • 6 Marks

ATAX – Nov 2018 – L3 – Q6b – Petroleum Profits Tax (PPT)

Explanation of two roles each of DPR, NNPC, and CBN in regulating Nigeria's oil and gas industry.

A large proportion of the total foreign exchange earnings generated by the Federal Government of Nigeria is from petroleum-related activities. In the oil and gas industry, several regulatory agencies, such as the Nigerian National Petroleum Corporation (NNPC), National Petroleum Investment Management Services (NAPIMS), Department of Petroleum Resources (DPR), Central Bank of Nigeria (CBN), Federal Inland Revenue Service (FIRS), etc., have been established to ensure sanity and accountability in the upstream, midstream, downstream, gas utilization, and oil service sectors.

You are required to: Explain two roles each, of the following players in the oil and gas industry in Nigeria:

  • DPR
  • NNPC
  • CBN

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  • 20 Marks

FM – Nov 2023 – L3 – SB – Q2 – Foreign Exchange Risk Management

Analyze hedging methods for foreign exchange risk involving a future CHF transaction.

About one year ago, you were employed by Tesco, an American company based in New York. You work online from home in Nigeria and are a member of the international treasury of Tesco.

Tesco supplies medical equipment to the USA and Europe and also buys some basic raw materials from Europe. It is currently 30 November 2024. On 31 May 2025, Tesco is due to receive CHF16.3 million from a Swiss customer and also to pay CHF4.0 million to a Swiss supplier.

Exchange rates (quoted as US$/CHF1):

  • Spot: 1.0292 – 1.0309
  • Three months forward: 1.0322 – 1.0341
  • Six months forward: 1.0356 – 1.0378

Annual interest rates available to Tesco:

  • Switzerland: 3.2% (investing), 4.4% (borrowing)
  • USA: 4.6% (investing), 5.8% (borrowing)

Currency futures (contract size CHF125,000, futures price quoted as US$ per CHF1):

  • Future price: December – 1.0306, March – 1.0336, June – 1.0369

Currency options (contract size CHF125,000; exercise price quotation US$ per CHF1, premium in US cents per CHF1):

Calls Puts
Dec Mar June Dec Mar June
1.0375 0.47 0.50 0.53 0.74 0.79 0.86

Required:

  • a. Calculate the net receipt if hedged using a forward contract. (4 Marks)
  • b. Calculate the net receipt if hedged using money market hedging. (8 Marks)
  • c. Calculate the net receipt if hedged using futures. (10 Marks)
  • d. Calculate the net receipt if hedged using options. (8 Marks)
    (Total: 30 Marks)

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  • 20 Marks

FM – Nov 2017 – L3 – Q4 – Foreign Exchange Risk Management

Evaluate foreign exchange exposure, determine forward rates, assess hedging strategies, and discuss economic exposure significance for Kudi Limited.

You are the Financial Director of Kudi Limited, a Nigerian company that imports raw materials mainly from Tiko (currency: T$) and exports finished products to Katuga (currency: K$). Kudi is partly financed by a loan raised in the domestic market and usually hedges its foreign currency exposure using forward or money markets. Most customers are allowed a 3-month credit. The company recently sold products to a customer in Katuga for K$20 million.

Available Information:

Exchange Rate K$ per N T$ per N
Spot Rate 1.9600 1.4600
1 Month Forward 1.9580 1.4579
Central Bank Base Rate Per Annum Nigeria Katuga Tiko
Rate (%) 5.5% 4.25% 3.75%

Required:

(a) Comment on the Interest Rate Parity (IRP) and Purchasing Power Parity (PPP) methods for estimating exchange rates. (6 Marks)

In answering the following questions, include relevant calculations:

  1. Given that interest rates are higher in Nigeria than in Tiko, should T$ be depreciating against the naira and thus trading at a discount? (3 Marks)
  2. Determine the 3-month K$ forward rate of exchange implied by the given information and calculate the naira receipts expected in 3 months from the customer in Katuga. (3 Marks)
  3. Assess whether buying T$ on the spot market now and placing it on deposit would be a sensible policy for Kudi. (3 Marks)

(b) Discuss the concept and significance of foreign exchange economic exposure for a multinational company. (5 Marks)

(Total 20 Marks)

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  • 10 Marks

CR – May 2020 – L3 – Q3a – Foreign Currency Transactions

Foreign currency transactions related to purchases, sales, and investment property with exchange rate variations and reporting implications.

Medina Power Ltd has carried out certain transactions denominated in foreign currency during its financial year ended 31 October 2019 and has also conducted foreign operations through a foreign entity. Medina Power Ltd.’s functional and presentation currency is the cedi.

On 31 July 2019, Medina Power Ltd purchased goods from a foreign supplier for 16 million dinars. At 31 October 2019, the supplier had not yet been paid and the goods were still held in inventory by Medina Power Ltd.

On 31 July, Medina Power Ltd sold goods to a foreign customer for 8 million dinars, and it received payment for the goods in dinars on 31 October 2019.

Medina Power Ltd had also purchased an investment property on 1 November 2018 for 56 million dinars. At 31 October 2019, the investment property had a fair value of 48 million dinars. The company uses the fair value model in accounting for investment properties.

Medina Power Ltd wants advice on how to treat these transactions in the financial statements for the year ended 31 October 2019.

question table

Required:
Discuss the accounting treatment of the above transactions in accordance with the advice required by the directors. (You should show detailed workings as well as a discussion of the accounting treatment used.)

 

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  • 10 Marks

SCS – Nov 2019 – L3 – Q2b – Capital structure

Discuss the potential benefits and problems of converting short-term borrowing into long-term loans.

i) Discuss the potential benefits and problems with proposals to convert the company’s short-term borrowings into a longer-term loan.

ii) Pay bigger cash salaries, or add a share option element to the remuneration packages.

iii) Maintain the dividend for 2019 at the 2018 level, or even reduce it further.

iv) Convert any surplus dollar cash into cedis.

(10 marks)

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  • 10 Marks

SCS – Dec 2022 – L3 – Q5 – Financial management

Calculate the required loan, interest earned, and the Cedi gain or loss from a money market hedge.

The Board has directed the CEO to take the necessary steps to arrange with its bankers, a money market hedge for the expected receipts from DMP, to protect the company against the downside risk of expected Cedi appreciation.

Required:
As the Financial Controller of the company, the CEO has asked you to calculate the following relating to money market hedge:

a) The initial dollar amount of loan that TCWL could take from the bank in Cameroon on 1 December 2022 and the cedi equivalent of the initial loan if converted on the same date. (3 marks)
b) The total Cedi amount and interest the company will earn by 31 May 2023, if the converted amount is invested in Ghana for the duration of the money market hedge. (3 marks)
c) The Cedi gain or loss that TCWL would make by hedging. (2 marks)
d) The effective forward rate of the Cedi to U.S. dollar on 31 May 2023. (2 marks)

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  • 1 Marks

BL – MarJul 2020 – L1 – SA – Q8 – Law Relating to Banking

Question testing knowledge of the reporting limits for foreign exchange transactions under the Money Laundering Act.

Under the Money Laundering (Prohibition) Act, what is the limit of foreign exchange in a single transfer that must be reported to the Central Bank of Nigeria?
A. $10,000
B. $20,000
C. $50,000
D. $100,000
E. $500,000

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