6. Foreign Operations Flashcards
How are hedges of net investments in foreign operations accounted for under IFRS?
The hedging instruments are reported at fair value, and gains or losses are recognized in OCI.
How are gains and losses from foreign currency transactions accounted for under US GAAP?
They are reported in income in the period during which the exchange rate changes.
Which exchange rates are used to translate the contributed capital accounts of a foreign subsidiary into the currency of the reporting entity?
The historical exchange rates that were in effect when the capital was contributed.
When a foreign subsidiary’s functional currency is the local currency, how are its financial statements consolidated with the US parent’s financial statements?
The subsidiary’s financial statements are translated into US dollars, and the translation adjustment is reported in OCI.
How does an entity account for unrealized foreign exchange gains or losses in its financial statements under US GAAP?
Unrealized foreign exchange gains or losses are reported in income during the period when the change occurred. E.g., A company buys equipment on credit for 200,000 euros on Dec. 1 when the exchange rate is $1.50/euro. Payment is due on Jan. 31. On Dec. 31, the exchange rate is $1.60/euro. On its Dec. 31 income statement, the company recognizes an unrealized foreign exchange loss of $20,000.
On Dec. 1, an entity records a bill that is payable in foreign currency and due on Feb. 28. It enters into a 90-day forward exchange contract to hedge against a rise in the exchange rate. How should the entity recognize any gains or losses from the hedge during the 90-day period?
This is a cash flow hedge. Therefore, until the hedged risk is settled, the entity would recognize any gains or losses from the forward exchange contract in OCI. When the bill is paid, any gain or loss on the hedge, including those recorded in OCI, would be recognized in income.
When an entity enters into a forward exchange contract for speculation, how should it recognize any gains or losses before the contract is settled?
A speculative forward exchange contract is not a cash flow hedge. Therefore, it is like any other speculative derivative, and any gains or losses are recognized in income during the period of the change in exchange rate.
When an entity records a payable or receivable that is denominated in a foreign currency, what exchange rate should it use to translate the amount into its home currency?
The spot rate on the date the payable or receivable is recognized. Forward rates should not be used. If the exchange rate changes between the dates of recognition and realization, the entity will record a gain or loss upon realization.
Under IFRS, what are the proper terms for currencies used by foreign operations?
- Functional currency: currency of the primary economic environment in which the foreign entity operates 2. Foreign currency: any currency other than the functional currency 3. Presentation currency: currency in which the financial statements are presented
What’s a cash flow hedge?
A cash flow hedge is the use of a financial instrument to protect against fluctuations in future cash flows. For example, a company that must pay a bill (or collect a receivable) in a foreign currency within 60 days might buy a foreign exchange contract to protect against fluctuations in the exchange rate by locking in a rate.
How does a company account for changes in fair value of a derivative it uses as a cash flow hedge?
Like all derivatives, a cash flow hedge must be adjusted to its fair value on each balance sheet date. The change in value is reported in OCI and not net income. The amount in OCI is reversed when the effect of the cash flow hedge is recognized on the hedged transaction.
For example, if a company buys a forward exchange contract to pay an upcoming payable in a foreign currency, changes in fair value of the contract are recorded in OCI until the payable is paid. When the payable is paid, the amount in OCI is recognized in income.
What are the differences between
functional currency,
local currency, and
reporting currency?
Functional currency is the currency that has the greatest impact on an entity’s financial performance. Usually, an entity’s functional currency is the local currency of the country in which it operates, but not always. For example, a U.S. company near the Canadian border may prepare its financial statements in U.S. dollars (i.e. its reporting currency, which is also its local currency). But if the company transacts with vendors and customers mostly in Canadian dollars, its functional currency is the Canadian dollar.
What is difference between
remeasurement
and
translation?
Remeasurement converts amounts on the financial statements from the local currency to the functional currency, and the remeasurement adjustment is recognized in income.
Translation converts amounts on the financial statements from the functional currency to the reporting currency, and the translation adjustment is recognized in OCI.
Which section of the ASC covers foreign currency?
830
