Feet First plc (FF) manufactures an iconic brand of footwear in the UK. FF has a financial year ending 31 December 2022. In March 2023, as part of an international expansion, FF intends to buy a new factory in France. The building will cost 5,000,000. FFs CEO is concerned about the foreign currency risk and wants to know for certain how much sterling FF will need in March 2023.

On 1 September 2022, FF proposes to enter into a forward currency contract. Assume that the following apply to the contract:

On 1 March 2023 FF will buy 5,000,000 at a forward rate of 1 = 1.10

At the inception of the contract, the fair value of the contract will be nil.

At 31 December 2022, a similar contract for 5,000,000 could be bought at a forward rate for settlement on 1 March 2023 at 1 = 1.25.

FF has decided to use hedge accounting.

Question i) Set out and explain the financial reporting adjustments for the forward currency contract in the financial statements for FF for the year ending 31 December 2022 under three alternative scenarios; a) As a cashflow hedge b) As a fair value hedge; and c) Hedge accounting is not applied. Include journal entries. ( 16 points)

q2) Explain the accounting policy choice for FF in respect of the forward currency contract above. (4 points)

q3) Power (2010) critiques the primacy given by standard setters of fair value in International Financial Reporting Standards (IFRS). Using the points raised by Power (2010) and examples from accounting standards you have studied, evaluate the factors which give rise to the dominance of fair value as a measurement for assets and liabilities in (IFRS). (10 points) Reference: Power, M (2010), Fair value accounting, financial economics and the transformation of reliability, Accounting and Business Research, 40 (3), 197-210