Foreign Currency Flashcards
foreign currency translation
conversion of foreign entity’s F/S into domestic currency
foreign currency transaction
transactions with a foreign entity in foreign currency
exchange rate
price of one unit of currency expressed in another currency
expressed as:
- direct method
- indirect method
direct method (exchange rate)
domestic price of another currency
i.e. 1 EUR = 1.47 USD
indirect method (exchange rate)
foreign price of a domestic currency
i.e. 0.68 EUR = 1 USD
current exchange rate
rate at current date, or for immediate delivery of currency
also called spot rate or year end rate
forward exchange rate
exchange rate existing now for exchanging two currencies at a specific future date
“bet” - what we’re betting the rate to be
historical exchange rate
rate in effect at the date of issuance of stock or acquisition of assets
weighted average rate
rate is calculated to take into account exchange rate fluctuations for a certain period
used for I/S
forward exchange contract
agreement to exchange at a future specified date and rate a fixed amount of currencies of different countries
denominated/fixed in a currency
transaction is denominated or fixed in currency used to negotiate and settle transaction
reporting currency
currency of entity ultimately reporting financials of foreign entity
(USD)
functional currency
currency of primary location in which entity OPERATES
usually local or reporting currency
foreign currency translation
restatement of F/S denominated in FUNCTIONAL to REPORTING currency
(functional)
foreign currency remeasurement
restatement of FOREIGN F/S from FOREIGN to entity’s FUNCTIONAL currency in following situations:
- reporting currency = functional currency
- F/S must be restated in entity’s FUNCTIONAL currency prior to translating F/S from FUNCTIONAL to REPORTING
(dysfunctional)
foreign F/S translation
1) convert to GAAP/IFRS (in foreign currency)
2) determine functional currency (local, reporting, other)
3) determine appropriate exchange rates
2) remeasure and/or translate F/S
determining functional currency
GAAP vs IFRS
GAAP:
use either local, reporting or other currency
local qualifies as functional if:
- using country currency
- foreign operations are self-contained/integrated within country
- not using parent bank
- not hyper-inflationary (cumulative 100% over 3 years)
IFRS:
- currency that influences sales prices
- currency of country whose competitive forces/regulations mainly determine sales prices
- currency that mainly influences labor, material, and other costs
determining appropriate exchange rate
functional currency of foreign entity determines exchange rates used for: account balances and treatment of gains/lossess
remeasurement/temporal method
“dysfunctional” (european company using yen)
F/S of foreign subsidiary is in FOREIGN currency
remeasure to parent company’s REPORTING/FUNCTIONAL currency
1) start with B/S
- monetary items = current/year-end rate (fixed)
- nonmonetary items = historical rate (fluctuate)
2) then I/S
- non B/S = weighted average rate
- B/S related = historical rate
(depreciation/PPE, COGS/inventory, amortization/intangibles)
3) remeasurement gain/loss (I/S)
plug currency gain/loss to get NI to amount needed to adjust RE and make B/S balance
remeasurement/temporal method
GAAP vs IFRS
GAAP, required for use when foreign subsidiary operates in highly inflationary economy
IFRS, in highly inflationary economy, foreign subsidiary F/S must be:
- first, restated for effects of inflation
- then, converted from FOREIGN to REPORTING currency using current rate for B/S and I/S
translation/current method
“functional/normal”
F/S of foreign subsidiary is in FUNCTIONAL currency
translated to parent company’s REPORTING currency
1) start with I/S
- all I/S items = weighted average rate
- transfer NI to RE
2) then B/S
- assets: current/year-end rate
- liabilities: current/year-end rate
- common stock/APIC: historical rate
- RE: roll forward
translated RE
= beg translated RE
+ translated NI for current period
- translated dividends declared for current period
3) translation gain/loss (OCI)
plug “translation adjustment” to get OCI
difference b/w debits & credits in translated trial balance
cumulative translation adjustment / CTA account
individual foreign transaction
not settled at B/S date
mark to market adjustment, use spot rate
diff b/w exchange rate used in recording transaction in dollars and
exchange rate at B/S date (current exchange rate) is an unrealized gain/loss on foreign currency translation
valuation of A&L
assets or liabilities resulting from foreign currency transaction should be recorded at historical rate
