What is Forward Contract?
A forward contract is a private bilateral agreement between two parties to buy or sell an asset — currency, commodity, security — at a pre-agreed price on a specified future date. It is used mainly for hedging or speculation.
How It Works
- Document the underlying asset, notional amount, maturity date, and forward price.
- Recognise the forward at fair value at inception, typically zero.
- Re-measure to fair value at each reporting date and post gains or losses to profit or loss (or OCI if designated as a cash flow hedge).
- Settle the contract at maturity — physical delivery or net cash settlement.
- Disclose the notional, fair value, and risk metrics in the notes.
Saudi Context
Saudi corporates with USD and EUR exposures use FX forwards through SAMA-licensed banks to hedge import payments and overseas dividends. Under SOCPA-adopted IFRS 9 the entity can elect hedge accounting to align the timing of P&L impact.
Example
An importer buys a USD 1,000,000 forward 3-month at SAR 3.76. At the reporting date the market forward is SAR 3.78. The unrealised gain of about SAR 20,000 is recognised in P&L unless the forward is designated as a cash flow hedge.