Kaimai Valley Honey Ltd: a USD receivable, a yen request and a bank covenant
Kaimai Valley Honey Ltd is a New Zealand producer that sells mānuka honey to distributors in Japan and the United States. It reports in NZD with a 31 March balance date and prepares general purpose financial statements under NZ IFRS.
On 15 March 2025 it invoiced a US distributor USD 80,000, payable 30 April 2025. The spot rate on 15 March was NZD1 = USD0.6050; at 31 March it was NZD1 = USD0.5820. Management did not take out a forward exchange contract.
A new Japanese customer has asked to be invoiced in Japanese yen rather than NZD, saying it is easier for their accounts team. The sales manager is keen to agree because the customer is large.
Separately, the accountant has noted that export sales carry 0% GST while domestic sales carry 15% GST, and a board member has asked whether GST should have been added to the honey sold to the US distributor.
The bank covenant requires foreign-currency exposure below NZD150,000 at balance date.
1. Calculate the foreign exchange gain or loss on the USD receivable at 31 March 2025 and explain how it is recognised and reported. State whether the bank covenant is met.
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Workings
- Initial recognition (spot rate on transaction date, NZ IAS 21): USD80,000 ÷ 0.6050 = NZD132,231
- Closing translation: USD80,000 ÷ 0.5820 = NZD137,457
- Difference: 137,457 − 132,231 = NZD5,226 gain
Reasoning
An accounts receivable is a monetary item, so it is retranslated at the closing rate at each balance date. The rate has moved from USD0.6050 to USD0.5820 per NZD1 - each NZD now buys fewer USD, so the NZD has weakened and the USD receivable is worth more NZD. That is a foreign exchange gain, even though no cash has been received: the gain is unrealised but still recognised.
Reporting
- Journal at 31 March: Dr Accounts receivable 5,226 / Cr Foreign exchange gain 5,226.
- It is recognised in surplus or deficit (statement of profit or loss) as a foreign exchange gain - not in other comprehensive income. A realised gain or loss will arise on 30 April when the USD is actually converted, measured against the 31 March carrying amount.
Covenant
Exposure is NZD137,457, below NZD150,000, so it is met - but only by about NZD12,500, and a second USD invoice of similar size before year end would breach it. The treasury policy, not just this year's number, is the real issue.
2. Advise whether Kaimai should agree to invoice the Japanese customer in yen. Who bears the exchange risk in each case, and what could the company do about it?
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Who bears the risk
The transaction risk falls on the party whose functional currency differs from the invoice currency.
- Invoiced in NZD: the Japanese customer bears it. They must buy NZD, so their yen cost varies. They will know this and may either seek a price concession to compensate, or place the order elsewhere.
- Invoiced in JPY: Kaimai bears it. Its NZD revenue from a fixed yen price becomes uncertain, and its gross margin (honey, jars, freight, wages are largely NZD costs) moves with the rate.
Considerations
- How large is the order relative to total sales? A one-off trial order is a different risk from an annual contract.
- Japanese distributors often expect yen invoicing; refusing may lose the customer.
- Kaimai currently uses no hedging, so its exposure is already open.
Options
- Invoice in JPY but hedge with a forward exchange contract - locks the NZD amount. Downside: it is a commitment, so if the rate moves favourably Kaimai forgoes the benefit, and there may be margin requirements.
- Create a natural hedge - e.g. incur some costs in JPY (Japanese agent commission, freight) so yen receipts offset yen payments.
- Invoice in NZD and price the risk in, accepting the customer may negotiate.
Recommendation
Agree to yen invoicing only if a forward contract or natural hedge is in place, and write a treasury policy that caps unhedged exposure well inside the NZD150,000 covenant. Agreeing to yen with no hedge doubles the open position while the covenant is already close to breach.
3. Explain the GST treatment of the export sale to the US distributor. Why does the invoice show no GST, and is this different from a domestic sale?
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Answer
Export sales are zero-rated, not exempt and not 'no GST'. Under the Goods and Services Tax Act 1985 a supply of goods that are exported is charged at 0%, provided the supplier holds the required export documentation. So the USD80,000 invoice correctly shows GST of $0.
Why zero-rating rather than 15%
GST is a tax on consumption in New Zealand. The honey is consumed in the United States, so New Zealand does not tax it - otherwise the product would be taxed twice (once here, once at the US border) and would be uncompetitive. The US distributor could not claim a New Zealand GST credit, so 15% GST would simply be a 15% price increase.
Contrast with domestic sales
Domestic sales carry 15% GST, which Kaimai collects on behalf of Inland Revenue. That GST is not Kaimai's income and not a cost: domestic receivables include GST, export receivables do not. Input GST on costs is still claimable in full, so a mostly-exporting business typically sits in a GST refund position - worth checking that the returns are being filed to recover it rather than letting it accumulate.
Common error to avoid
Zero-rating depends on evidence of export; if goods are sold to a New Zealand-based agent who on-sells offshore, the zero-rating conditions may not be met and 15% may apply. The board member's question should be answered with 'zero-rated, supported by export documentation', not 'overseas sales are exempt'.