Professional Documents
Culture Documents
Translation Of
Foreign Currency Transactions
Currency Transaction
Currency Financial
Statements
Significantly influenced companies
Subsidiaries
Integrated
Self-sustaining
Joint ventures
Terminology
Terminology
HISTORIC RATE:
This term is used to refer
to the exchange rate that
prevailed at the time a
particular Balance Sheet
item was:
- acquired (asset) or
- incurred (liability).
Alternative Methods of
Translation
Current
/ Non-Current Method
Completely
Discredited
Monetary
/ Non-Monetary Method
Temporal
Method
Current
Rate Method
Concept
Temporal As Per
CICA Handbook
Temporal As Per
CICA Handbook
Monetary
Items Defined
10
Temporal As Per
CICA Handbook
11
Temporal As Per
CICA Handbook
12
References to
monetary confuse
temporal with
monetary vs. nonmonetary
13
Use Of Averages If
14
15
Source
Some items are
translated at
current rates
As the rate
changes, gains and
losses arise
16
Exchange
Rate
Movement
Effect on
Income
Asset
Increase
Gain
Asset
Decrease
Loss
Liability
Increase
Loss
Liability
Decrease
Gain
17
Required Treatment of
Gains and Losses
18
Required Treatment of
Gains and Losses
An
Exception
19
Required Treatment of
Gains and Losses
Foreign
Currency
Financial
Statements receive
different treatment
(see Chapter 10)
20
Disclosure
21
Disclosure
Paragraph
1520.03 contains
an identical
recommendation
22
Foreign Currency
Purchases and Sales
Two
transaction approach
required
Transaction recorded at
current rate
Exchange gains and losses
into income as they arise
23
Foreign Currency
Purchases and Sales
On December 12, 2007, a Canadian company
purchases Inventory in Switzerland for 100,000
Swiss Francs (SF, hereafter). At this time
SF1 = $0.94.
When the company closes its books on
December 31, 2007, the Inventory is still on hand
and the Accounts Payable has not been paid.
On this later date SF1 = $0.96.
24
Foreign Currency
Purchases and Sales
December 12, 2007
Inventory [(SF)($100,000)($0.94)]
$94,000
Accounts Payable
$94,000
$2,000
$2,000
25
Foreign Currency
Capital Transaction
Example
On December 31, 2008, a Canadian Company
with a December 31 year end borrows
1,000,000. At this time 1 = $1.40.
On December 31, 2009, the rate for the Euro is
1 = $1.50 and on December 31, 2010, the rate
is 1 - $1.55. On this latter date the loan is
repaid.
Ignore interest payments.
26
Foreign Currency
Capital Transaction
December 31, 2008
Cash [(1,000,000)($1.40)]
$1,400,00
0
$1,400,0
00
Liabilities
December 31, 2009
Exchange Loss
[( 1,000,000)($1.50 - $1.40)
Liabilities
$100,000
$100,000
27
$50,000
Liabilities
$50,000
December 31, 2010
Liabilities [1,000,000)($1.55)]
Cash
$1,550,00
0
$1,550,00
0
28
Held-To-Maturity
Investments
Example
On January 1, 2008, Empire Inc. acquires
200,000 in long-term debt of a British company.
At this time 1 = $2.15.
On December 31, 2008, when Empire Inc. closes
its books, the exchange rate is 1 = $2.25.
29
Held-To-Maturity
Investments
January 1, 2008
Bonds [(200,000)($2.15)]
$430,000
Cash
$430,000
$20,000
$20,000
30
Available-For-Sale At Cost
Investments
Example
On January 1, 2008, Empire Inc. acquires
200,000 in equity securities of a British
company.
At this time 1 = $2.15. The investment is
classified as available for sale and the shares do
not have a quoted market price.
On December 31, 2008, when Empire Inc. closes
its books, the exchange rate is 1 = $2.25.
31
Available-For-Sale At Cost
Investments
January 1, 2008
Shares [(200,000)($2.15)]
$430,000
Cash
$430,000
32
Held-For-Trading
Investments
Example
On January 1, 2008, Empire Inc. acquires
200,000 in equity securities of a British
company.
At this time 1 = $2.15. The investment is
classified as held for trading.
On December 31, 2008, when Empire Inc. closes
its books, the market value of the securities has
increased to 215,000 and the exchange rate is
1 = $2.25.
33
Held-For-Trading
Investments
January 1, 2008
Shares [(200,000)($2.15)]
$430,000
$430,00
0
Cash
December 31, 2008
Shares [(215,000)($2.25) - $430,000]
Fair Value Gain Net Income
[(215,000 - 200,000)
($2.25)]
Exchange Gain Net Income
[(200,000)($2.25 - $2.15)]
2008 Clarence Byrd Inc
.
$53,750
$33,75
0
20,000
34
35
$430,000
Cash
$430,000
December 31, 2008
$53,750
$33,750
20,000
36
37
Hedging
An
extremely complex
area
Our
coverage is limited
to simple applications
in the area of foreign
exchange risk
38
Hedging
Paragraph 3865.02
Hedging is an activity
designed to modify an
entity's exposure to one
or more risks by creating
an offset between
changes in the fair value
of, or the cash flows
attributable to, the
hedged item and the
hedging item (or changes
resulting from a
particular risk exposure
relating to those items).
39
40
Hedged Items:
Foreign Currency Applications
Foreign
currency denominated
monetary assets or monetary
liabilities
Anticipated Transactions
Firm commitments
Forecasted transactions
Investments
operations
in self-sustaining foreign
41
42
Hedging Items:
Foreign Currency Applications
Example
On July 1, 2008, a Canadian
company purchases merchandise in
France for 200,000.
At this time 1 = $1.40.
The merchandise must be paid for
on December 31, 2008.
43
Hedging Items:
Foreign Currency Applications
Purchase
financial asset
denominated in Euros
Some rate of return
Low rates on short term investments
44
Hedging Items:
Foreign Currency Applications
Purchase
non-financial assets
denominated in Euros
Inconvenient
May or may not be effective
Forward
45
A Derivatives Primer
46
A Derivatives Primer
Types
Contracts
Forwards
Futures
Both parties must perform
Options
Only one party required to perform
47
A Derivatives Primer
Accounting procedures
48
49
Recognition
50
Cash [(100,000)($2.33)]
Cash [(100,000)($2.30)]
Gain On Contract
$233,000
$230,000
3,000
51
52
Hedge Accounting
Objective
Hedge accounting is a method for recognizing the gains,
losses, revenues and expenses associated with the items in
a hedging relationship such that those gains, losses,
revenues and expenses are recognized in net income in the
same period when they would otherwise be recognized in
different periods.
53
Hedge Accounting
54
Hedge Accounting
Qualification
Designation
Documentation
Evaluation for effectiveness
(Beyond the scope of this text)
55
56
57
58
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60
Example No Hedge
Accounting
November 1, 2008
Receivable [(SF1,000,000)($0.90)]
$900,000
Sales
$900,000
December 31, 2008
$20,000
$20,000
61
Example No Hedge
Accounting
February 1, 2009
Receivable [(SF1,000,000)($0.95 $0.92)]
$30,000
Exchange Gain
Cash
$30,000
$950,000
Receivable
$950,000
62
Example
Hedge With Forward Contract
Example
Hedge
63
Example
Hedge With Forward Contract
64
Example
Hedge With Forward Contract
November 1, 2008
Receivable [(SF1,000,000)($0.90)]
$900,00
0
Sales
$900,000
December 31, 2008
$20,000
Exchange Gain
Exchange Loss
Forward Contract (Liability)
$20,000
$9,950
$9,950 65
Example
Hedge With Forward Contract
February 1, 2009
Receivable [(SF1,000,000)($0.95 $0.92)]
$30,000
Exchange Gain
Exchange Loss
[(SF1,000,000)($0.95 - $0.92) $9,950)]
Forward Contract
$30,000
$20,050
$20,050
66
Example
Hedge With Forward Contract
February 1, 2009
Cash
$950,000
Receivable
Cash [(SF1,000,000)($0.92)]
Forward Contract ($9,950 + $20,050)
Cash [(SF1,000,000)($0.95)]
$950,000
$920,000
30,000
$950,000
67
68
Example No Hedge
Accounting
October 1, 2008
Term Deposit [(500,000)($1.57)]
$785,000
Cash
$785,000
December 31, 2008
$10,000
$10,000
69
Example No Hedge
Accounting
May 1, 2009
Exchange Loss [(500,000)($1.55 $1.52)]
$15,000
Term Deposit
Cash [(500,000)($1.52)]
$15,000
$760,000
Term Deposit
Merchandise [(500,000)($1.52)]
Cash
2008 Clarence Byrd Inc
.
$760,000
$760,000
$760,000
70
Example No Hedge
Accounting
71
Document the
hedging
relationship and
use Cash Flow
Hedge
Accounting.
72
Example
Cash Flow Hedge Accounting
October 1, 2008
Term Deposit [(500,000)($1.57)]
$785,000
$785,00
0
Cash
December 31, 2008
OCI - Exchange Loss [(500,000)($1.55 $1.57)]
Term Deposit
$10,000
$10,000
73
Example
Cash Flow Hedge Accounting
May 1, 2009
OCI - Exchange Loss [(500,000)($1.55 $1.52)]
$15,000
Term Deposit
Cash [(500,000)($1.52)]
$15,000
$760,00
0
$760,00
0
Term Deposit
Merchandise [(500,000)($1.52)]
Cash
2008 Clarence Byrd Inc
.
$760,00
0
$760,00
0
74
Example
Cash Flow Hedge Accounting
Alternative
1 Reclassify Immediately
May 1, 2009
Merchandise
OCI Reclassification Adjustment
$25,000
$25,000
75
Example
Cash Flow Hedge Accounting
January 1, 2010
Cost Of Goods Sold
$760,00
0
Merchandise
$760,00
0
$25,000
$25,000
76
The gain or loss on the hedging item relating to the effective portion
of the hedge that has been recognized in other comprehensive
income should be recognized in net income in the same period during
which corresponding exchange gains or losses arising from the
translation of the financial statements of the self-sustaining foreign
operation are recognized in net income. (October, 2006)
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78
In Net Investment
79
Discontinuance Of
Hedge Accounting
Discontinue If:
80
International Convergence
81
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