Foreign Currency Accounting

Question 1

Currency transaction vs currency translation

Answer 1

Transaction: Currency conversion on group level (e.g. Siemens AG)
Translation: On group level separate Financial Statements of Siemens entities are translated into group reporting currency (euro)

Question 2

Currency Transaction - 2 Steps

Answer 2

1) Initial measurement, all financial transactions need to be measured at the underlying time. For initial measurement the spot exchange rate at the transaction date (transaction rate) is used. Enables entity to report in functional currency
2) Re-measurement: At each reporting period all monetary items are measured using the spot exchange rate per reporting date (Closing rate).

Question 3

Net Foreign currency position

Answer 3

Monetary balance sheet items, uncompleted or pending transactions, conditional rights to partially satisfied performance obligations and planned sales and POs within 3 months

Question 4

Forward FX contracts mechanism

Answer 4

Avoid currency risk by locking in the exchange rate at a future date

Question 5

Hedging

Answer 5

Aims at reducing or eliminating FX risk

Question 6

Hedge accounting

Answer 6

Specific accounting rules to transfer an economic hedge into financial statements, avoiding earning volatility

Question 7

Forward FX Contract & P&L without hedging

Answer 7

Profit Loss is recognized throughout the reporting dates. Fair value is recognized

Question 8

Cash flow hedge avoids…

Answer 8

Earnings volatility by storing certain fair value changes of the hedging instrument in a special position of equity, OCE

Question 9

Requirements for Hedge accounting (cumulatively, 4)

Answer 9

1) Hedge items are economic transactions causing a currency risk. Hedge items include high probable forecast transactions + firm commitments
2) Hedging instruments are used - all derivative instrument except written options
3) Effectiveness determined by an effectiveness test. Means currency related fair value changes of the hedge item and the hedging instrument offset each other
4) Documentation - extensive documentation requirements have to be met

Question 10

Embedded FX Derivatives

Answer 10

Aims at FX risks in pending sales and purchase contracts denominated in FX. FX-ED linked with pending sales contract via host contract

Question 11

Whether FX-ED needs to be separated from host contract - 4 criteria

Answer 11

1) Materiality threshold - FX-ED only needs to be recognized if volume is above 5m EUR and the term of the contract is > 6 months. No=Not separate
2) Fully consolidated companies. Yes = Not separate
3) Functional currency. Yes-Do not separate
4) Commonly used currency. Yes = Do not separate

Question 12

Actions when FX-ED does not have to be separated from pending contract

Answer 12

No accounting actions.

Question 13

If FX-ED separated - accounting action

Answer 13

FX-ED is treated as a separate item in the financial statement, accounted as stand-alone derivative. Recognized at fair value and remeasured at every reporting period

Question 14

True or False - Most contracts denominated in FX contain an FX-ED

Answer 14

False, ALL contain FX-ED

Question 15

True or False - the FX-ED reflects unrealized gains or losses on the host contract resulting from movements in the foreign exchange rate

Answer 15

True

Question 16

FX and PoC

Answer 16

If costs of a performance obligation are denominated in FX, exchange rate movements affect the PoC

Question 17

Method to eliminate influence of exchange rate movements to the PoC

Answer 17

PG Method, total planned rev and costs denominated in FX are converted using a constant exchange rate referred to as PoC calculation rate.

Question 18

Determining the PoC Calculation Rate

Answer 18

Determined at the beginning of a project, not adjusted. Basis for determination depends on typ of hedging

Question 19

Type of Hedging & PoC Rate (4)

Answer 19

1) Individual hedge (FX contract): PoC Calculation rate equal to hedge rate of contract
2) currency clauses
3) Natural/global hedges: Spot exchange rate at contract inception
4) Unhedged part: If not the whole FX risk is hedged the spot exchange rate at the date of contract inception should be used for unhedged part

If multiple are used: Weighted average of applicable exchange rates

Question 20

FX ED - which criteria are siemens specific reliefs?

Answer 20

First two: Materiality limit + fully consolidated companies

Question 21

Which Hedge accounting type is allowed within Siemens?

Answer 21

Cash Flow Hedge Accounting for currency hedges

Question 22

True or False - it is not permitted to remeasure non-monetary items as of each reporting date

Answer 22

True, only monetary items

Question 23

True or False - all derivative instruments can be designated as hedging instruments into a hedge accounting relationship expect written options

Answer 23

True

Question 24

FX ED besides the host contract - which currency?

Answer 24

Functional currency