The NZ$ is the functional currency of a New Zealand importer. The importer wants to limit the effect of currency fluctuations in the next year. It expects to purchase US$800,000 of goods on 31 December 2018, and it expects to pay its creditor on 30 June 2019. Therefore, on 30 June 2018 it enters into a 12-month forward contract with the bank to buy US$800,000 and pay the bank an agreed amount of NZ$ on 30 June 2019 at a forward rate of NZ$1 = US$0.60.

This is designated as a cash flow hedge. It is a hedge resulting from the expectation of the purchase of goods in the future. Assume that the goods of US$800,000 were purchased on 31 December 2018 as planned. Also assume that this is an effective cash flow hedge and the change in fair value of the forward contract before the forecast purchase is 100% effective, under NZ IFRS 9.

Relevant exchange rates (i.e., spot rates and forward rates for 30 June 2019 delivery of cash) for transaction dates and balance date are provided in the table below. The exchange rate shows the number of US$ one gets on delivery of NZ$1 (i.e., NZ$1 = US$). You will need to discount the fair value of the forward contract. Assuming an interest rate of 6% per annum over the time period, discount factors are also given in the table below.

	Spot rate	Forward rate	Time to settlement	Discount factor (6% p.a.)
30 June 2018 (Enter into forward)	0.62	0.60	12 months	0.9419
31 December 2018 (Date of purchase)	0.65	0.63	6 months	0.9705
31 March 2019 (Balance date)	0.61	0.59	3 months	0.9851
30 June 2019 (Settlement date)	0.59	0.59	0	1.0000

Required:

Complete WORKSHEET 1, which will assist you with answering the following questions.

In accordance with NZ IFRS 9:

1. Prepare the journal entries (if any) on 30 June 2018 (i.e., the date of entering into the forward contract).

2. Prepare the journal entries (if any) on 31 December 2018 (i.e., the date of purchase of the goods).

3. Prepare the journal entries (if any) on 31 March 2019 (i.e., the balance date).

4. Prepare the journal entries (if any) on 30 June 2019 (i.e., the date of settlement of the forward contract and payment to the creditor).

5. Describe the three criterion for a hedging relationship to qualify for hedge accounting under NZ IFRS 9.

WORKSHEET 1 FORMS PART OF THE ANSWER FOR QUESTION 3 (REMEMBER TO ATTACH THIS WORKSHEET TO YOUR ANSWER)

Date	Forward	Forward Contract Asset and Liability (Contract amount US$800,000)			PV	Fair Value	Change
	Rate	NZ$ Value of Asset	NZ$ Value of Liability	Net (A L)	Factor	of Forward	in Fair Value
30-Jun-18
31-Dec-18
31-Mar-19
30-Jun-19