Foreign Currency Flashcards
What are foreign currency transactions?
transactions with a foreign company that requires receipt or payments in a foreign currency.
What is an entity’s functional currency?
the currency that has the greatest economic impact on the entities financial performance. It is “generally” the entity’s “local” currency (the currency in which the entity maintains its books and records)
What factors are considered when identifying an entities functional currency?
- Cash Flows
- Sales prices
- demand for the company’s product or services
- expense
- financing and financing costs
- intra-entity arrangements
What happens when a transaction occurs in a currency other than the functional currency?
It is remeasured and the gains and losses that result are report on the I/S.
What is another name for transactional currency?
Local currency
What is another name for functional currency?
currency that has the greatest economic impact on the company (currency in which entity generates and expends cash)
Note: Differences in the transactional currency and the functional currency are reported in the I/S and are considered a remeasurement and not a translation.
What is the reporting currency?
currency in which the enterprise prepares its financial statements (US). any TRANSLATION gains or losses are reported in the B/S.
How are A/R; A/P or Notes and loans receivables and payables denominated in a foreign currency accounted for?
- the carrying value of the instrument is remeasured based on the “spot rate” on the B/S Date
- Any increases or decreases are generally recognized in “income or loss” as a “foreign currency transaction gain or loss”
What is an example journal entry for a loss on foreign currency that is remeasured at the balance sheet date not the date of settlement.
Debit: Foreign currency exchange loss
Credit: Due to (what ever the name of the company is)
The amount of the journal is the difference in the remeasurement @ the B/S date of the spot (effective) rate and the carrying value of the financial instrument.
What are forward exchange contracts?
an entity agrees to exchange one currency for another at a specific exchange rate a specific future point in time.
What are speculation contracts?
contracts that entered into that are not considered hedge contracts and forward exchange contracts.
What are reporting is required at the initial entry of the speculation contract?
- no journal entry is made
- must be disclosed by both parties in the notes to the financial statements.
- gains/losses are recorded at each time the financial statements are presented.
What are the two types of classifications of hedges that are elected to be reported as hedge reporting
- Fair value hedge
- Cash flow hedge
Where do gains/losses get reported on FV hedges for forward exchange contracts
in the income statement
What is the journal entry for forward exchange contracts?
Debit: Losses on the income statment
Credit: Gains on the income statement
Note: the offsetting account is a balance sheet account either the forward exchange contract or the investment account. Just depends on the transaction involved as to whether its a gain or loss.
Cash Flow Hedges gains/losses are reported where?
In other comprehensive income (OCI)
According the remeasurement rules how are balance sheet items (that are NON-MONETARY) remeasured?
@ historical rates which are the rates that were in effect when the assets were acquired; the liabilities incurred or when contributed capital was actually contributed which includes the following types:
- marketable securities
- inventory
- PP&E and its accumulated depreciation
- Intangibles
- Deferred charges, credits, and deferred income
- preferred stock carried at issuance price and common stock
- revenues and expenses that are nonmentary in nature such as cost of sales, depreciation, and amortization
How are monetary assets and liabilities remeasured?
at the exchange rate @ the B/S date.
Remember remeasurement happens only when the transactional currency and the functional currency are different.
How are revenues and expenses generally remeasured?
at a weighted average exchange rate
At what rate re remeasurement gains/losses reported at?
rates in effect on the dates of the transactions generating the gains & losses.
According the remeasurement rules how are Income statement items (that are NON-MONETARY) remeasured?
they are remeasured using historical rates. Examples of nonmonetary I/S items are:
- cost of sales (remeasured by remeasuring beginning & ending inventory @ their historical rates & purchases @ weighted average)
- depreciation (remeasured at the same rate as the items being depreciated)
- amortization remeasured at the same rate as the items being amortized)
Where are remeasurement adjustments recognized in the F/S?
in the Income Statement
What is the terminology used under IFRS for Foreign currency transactions and translations?
Foreign Currency-Local Currency or Recording Currency
Functional Currency - Greatest economic impact on company
Presentation Currency - currency in which the enterprise prepares its F/S
