• Use of first-in first-out method for fungible assets, rights and obligations

    What is meant by 'fungible assets, rights and obligations'?

    Monetary assets, rights and obligations can be described as 'fungible' because one unit of currency is identical to and interchangeable with any other unit.

    As one unit of foreign currency is functionally identical to every other unit of the same currency in a bank account, it is difficult to identify which particular units of foreign currency are withdrawn from a bank account when a withdrawal is made from an account that is in credit.

    A similar problem arises in identifying the particular units of foreign currency that are repaid when a deposit is made into an account that is in debit.

    Identifying units of foreign currency

    The particular unit of currency that is withdrawn or repaid needs to be identified for the purposes of the forex measures.

    A withdrawal from a foreign currency denominated bank account that has a credit balance will result in the occurrence of forex realisation event 2 (FRE2) in relation to the amount of the foreign currency withdrawn. In this event there will be a cessation of the right to receive the foreign currency that has been withdrawn from the bank with which the account is held.

    A repayment of an amount into an account which is in debit will result in forex realisation event 4 (FRE4). In this event there will be a cessation of an obligation to pay foreign currency.

    Applying the first-in first-out (FIFO) method

    In order to allocate a cost base or value to a particular unit of foreign currency, or a fungible right or part of a right to receive or pay foreign currency, a first-in first-out ('FIFO') ordering rule is normally applied to the units of foreign currency in the account (subsection 775-145(1) of the ITAA 1997)). Any forex realisation event will apply firstly to the first units of fungible currency deposited or borrowed.

    As an alternative to the FIFO method, a taxpayer may be able to make an election to use a weighted average basis providing a retranslation election is not current. Please refer to Foreign exchange (forex): use of weighted average method for fungible rights and obligations for more information.

    Example – Using the FIFO method

    A foreign currency bank account opened on 1 September 2004 had the following transactions:

    Date

    Deposit
    ($US)

    Withdrawal
    ($US)

    Account balance
    ($US)

    Exchange rate
    1$A = $US

    1 September 2004

    $1,000

     

    $1,000

    $0.7200

    15 September 2004

    $2,500

     

    $3,500

    $0.7000

    30 October 2004

     

    $1,000

    $2,500

    $0.7300

    31 December 2004

     

    $3,000

    ($,500)

    $0.7500

    15 March 2005

     

    $1,600

    ($2,100)

    $0.7800

    30 May 2005

    $1,200

     

    ($900)

    $0.7600

    Total

    $4,700

    $5,600

     

     

    Under this method the cost of each withdrawal or deposit is determined on the assumption that the outstanding balance represents the most recent transaction in the account.

    The Australian dollar equivalent (ADE) of the amount deposited and withdrawn from the account is:

    Date

    Conversion

    Deposit
    ($A)

    Withdrawal
    ($A)

    1 September 2004

    1,000   0.7200

    $1,388.89

     

    15 September 2004

    2,500   0.7000

    $3,571.43

     

    30 October 2004

    1,000   0.7300

     

    $1,369.86

    31 December 2004

    3,000   0.7500

     

    $4,000,00

    15 March 2005

    1,600   0.7800

     

    $2,051.28

    30 May 2005

    1,200   0.7600

    $1,578.95

     

    Total

     

    $6,539.27

    $7,421.14

     

    End of example

    Calculation 1 – FRE 2 arising from withdrawal of US$1,000 on 30 October 2004

    Under the FIFO principle, the withdrawal of the US$1,000 is treated as a withdrawal of the deposits on a first-in-first-out basis, such that the amounts deposited at the earlier time are taken to have been withdrawn first. The Australian dollar equivalent (ADE) for this withdrawal is represented by the amount deposited on 1 September 2004 - $1,388.89.

    The amount received in respect of the event happening is $A1,369.86.

    The forex realisation loss brought to account under FRE 2 is

    ADE of withdrawal of $US1,000

    $A1,369.86

    Less: FIFO ADE cost of $US1,000

    $A1,388.89

    Forex loss

    $A 19.03

    Calculation 2 – FRE 2 arising from withdrawal of US$3,000 on 31 December 2004

    A right to receive foreign currency existed to the extent of US$2,500 only. In calculating the forex gain or loss, a comparison is made between the ADE of the amount received and the ADE of the forex cost base of its right to receive US$2,500. The additional amount of US$500 withdrawn (US$3,000-US$2,500), represents an obligation incurred on 31 December 2004 to repay the bank.

    The ADE of the withdrawal is $3,571.43. The amount received is $A3,333.33 (US$2,500   0.7500).

    The forex realisation loss brought to account under FRE 2 is:

    ADE of withdrawal of $US2,500

    $A3,571.43

    Less: FIFO ADE cost of $US2,500

    $A3,333.33

    Forex loss

    $A 238.10

    The ADE cost of the outstanding debit balance in the account is $666.67 (US$500   0.7500)

    Calculation 3 – FRE 4 arising from deposit of US$1,200 on 30 May 2005

    Under the FIFO principle, the deposit of the US$1,200 is treated as a cessation of the obligations incurred each time a withdrawal was made where there was no credit balance. On a first-in first-out basis, the amounts withdrawn at the earlier time are taken to have been repaid first.

    When US$1,200 is repaid, it initially reduces the obligation to pay US$500 incurred on 31 December 2004 and then partly (to the extent of $700) reduces the obligation to repay the withdrawal made on 15 March 2005.

    The ADE of the proceeds of assuming the obligation is:

    Date

    Withdrawal
    ($US)

    Rate

    Withdrawal
    ($A)

    31 December 2004

    $500

    500   0.7500

    $ 666.67

    15 March 2005

    $700

    700   0.7800

    $ 897.44

    Total

     

     

    $1,564.11

    The amount paid is $A1,578.95.

    The forex realisation loss brought to account under FRE 4 is:

    ADE of deposit of $US1,200

    $A1,578.95

    Less: FIFO ADE proceeds of assuming the obligation of $US1,200

    $A1,564.11

    Forex loss

    $A 14.84

      Last modified: 01 Mar 2016QC 18069