ACCT 434- Mod 8 (Pereversoff)

Question 1

For exchange rates, what is direct quotation?

Answer 1

# of Canadian dollars to purchase 1 unit of foreign currency.
EX: $1 USD = $1.41 CDN

Question 2

For exchange rates, what is indirect quotation?

Answer 2

of foreign currency units to purchase 1 CDN

EX: $1 CDN = $0.71 USD

Question 3

What happens at transaction date when recording foreign exchange transactions?

Answer 3

Foreign currency is translated into the functional currency of the reporting entity at exchange rate of that date

Question 4

What is functional currency?

Answer 4

The currency of the primary economic environment. Usually the currency of where the entity primarily operates.

Question 5

What is foreign currency?

Answer 5

Any currency other than the functional currency

Question 6

What does IFRS say must happen to foreign denominated monetary assets and liabilities?

Answer 6

Must be translated at closing rate on the balance sheet date

Gains/Losses are recognized in net income

Question 7

What are the 5 indicators for choosing functional currency?

Answer 7

Sales prices

Operating Costs

Competition and regulation

Financing

Operating surpluses

(Page 617)

Question 8

What must happen to non-monetary items in foreign exchange transactions?

Answer 8

Amount paid is translated into $CDN at purchase date

This becomes the historical cost

No further adjustments are required

Question 9

What must happen to monetary and non-monetary items at each reporting period?

Answer 9

Monetary
-Foreign currency items must be translated using the closing rate

Non-monetary
-Items measured at historical cost in foreign currency must be translated using the historical rate

-Items measured at FV in a foreign currency must be translated using the spot exchange rate

Question 10

What is the purpose of hedging?

Answer 10

Limits any possible gain or loss to a known amount

Question 11

What is the Hedged item?

Answer 11

Item with the risk exposure that the entity is trying to mitigate

Question 12

What is a Hedging Instrument?

Answer 12

Item used to offset the risk

EX: forward contract or option

Question 13

How do you know if you are hedging at a premium or a discount?

Answer 13

Fwd rate > Spot Rate = Premium

Fwd rate < Spot Rate= Discount

Question 14

What are the two types of hedge accounting?

Answer 14

Fair Value Hedge

Cash Flow Hedge

Question 15

Describe a fair value hedge and when would it be used? And where are gains/losses reported

Answer 15

You hedge against the fluctuations in fair value of the hedged item

Used when the hedged item would be measured at fair value

Gains/losses reported in Net Income

Question 16

Describe a cash flow hedge and where are gains/losses reported

Answer 16

you hedge against the fluctuation of the Canadian dollar

Gains/losses reported in OCI

Question 17

What is the Spread?

Answer 17

Difference between FWD rate and Spot Rate