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Inland Revenue

Tax Policy


Example: IFRS GAAP treatment of the purchase of a depreciable asset

The example is based on the following assumptions:

The purchase of a depreciable asset for US$100 in 12 months, which is the IFRS GAAP recognition date/tax rights date.

The payments are – US$50 in 6 months (payment A, a non-monetary item for IFRS GAAP), and US$50 at the recognition/rights date in 12 months (payment B).

Both payments are hedged from the beginning with FECs designated as cashflow hedges.

The forward rate for payment A is 0.72 and the forward rate for payment B is 0.65.

The spot rate for payment A is 0.65 and the spot rate for payment B is 0.80.

A balance date falls three months prior to the recognition/rights date when the spot rate is 0.75.

The IFRS GAAP results are set out for three situations: the hedges are designated as cashflow hedges, the hedges are not designated, and there are no hedges at all.

  Designated Not designated No hedges
  P&L B/S P&L B/S P&L B/S
Contract date 0 0 0 0 0 0

Payment A date

Cash (FEC or spot) 0 69 CR   69 CR   77 CR
Prepayment (non-monetary) 0 69 DR   77 DR   77 DR
P&L     8 CR      
Balance date
  Payment B FEC FV to CFHR 0 11 Dr        
  FEC Derivative 0 11 CR 11 DR 11 CR    
Subtotal for 1st year 0 0 3 DR 3 CR 0 0
Payment B: Rights date
  Payment B to asset 0 77 DR 15 DR 62 DR   62 DR
  Cash (FEC or spot) 0 77 CR   77 CR   62 CR
  Reverse CFHR 0 11 CR        
  Reverse FEC derivative 0 11 DR 11 CR 11 DR    
  Reverse prepayment   69 CR   77 CR   77 CR
  Prepayment to asset   69 DR   77 DR   77 DR
Subtotal for 2nd year 0 0 4 DR 4 CR 0 0
Summary of GAAP entries
  Asset 146 DR 139 DR 139 DR
  Cash 146 CR 146 CR 139 CR
  P&L 0 7 DR 0

The asset is capitalised at the forward rates via the FECs (in the designated hedge case) or the spot rates (in the other two cases). Where the hedges are not designated there is a difference between the amount capitalised and the cash paid which is reflected in the P&L. This P&L impact will be spread between income years over the term of the agreement depending on the terms of the FECs hedging the payments.