Foreign exchange: matching: example of the cover method
Example of the cover method
Comtrek plc holds shares of 1 million Hong Kong dollars in its subsidiary, Comtrek HK Ltd. It also has a HK$1 million borrowing to hedge its investment. In a particular accounting period, there is an exchange gain of £115,000 on retranslation of the shares, and an exchange loss of £115,000 on retranslation of the borrowing. In accordance with SSAP20, the gain and loss are netted off in reserves. Nothing goes through profit and loss account.