Foreign Currency Accounting Flashcards
Foreign currency transactions
Transactions w/foreign entity denominated in a foreign currency
Foreign currency translation
Conversion of FS of a foreign entity into FS expressed in the domestic currency
Direct method exchange rate
Domestic price of one unit of another currency (i.e. 1 euro = $1.47
Indirect method exchange rate
Foreign price of one unit of domestic currency (i.e. $1 = .68 euros
Currency exchange rate
The exchange rate at the current date, or for immediate delivery of currency, often referred to as the spot rate
Year end/spot rate
Forward exchange rate
The exchange rate existing now for exchanging 2 currencies at a specific future date
“Bet”
Historical exchange rate
Rate in effect at the date of issuance of stock or acquisition of assets
Used for equity
Weighted average rate
Calculated to take into account the exchange rate fluctuations for the period
Used for income statement
Forward exchange contract
Agreement to exchange at a future specified date and rate a fixed amount of currencies of different countries
Reporting currency
Currency of the entity ultimately reporting financial results of the foreign entity
Functional currency
Currency of the primary economic environment in which the entity operates, usually the local currency or the reporting currency
Foreign currency translation
Restatement of financial statements denominated in the functional currency to the reporting currency using appropriate rates of exchange
Functional
Foreign currency remeasurement
Restatement of foreign FS from the foreign currency to the entity’s functional currency in the following situations:
- Reporting currency is the functional currency
- FS must be restated in entity’s functional currency prior to translating FS from functional currency to reporting currency
Steps in restating foreign financial statements
- Prepare in accordance with GAAP/IFRS
- Determine the functional currency
- Determine appropriate exchange rates
- Remeasure and/or translate the FS
Under US GAAP, when does an entity’s local currency qualify as the function currency?
When it is the currency of the primary economic environment in which the company operates, and all of the following conditions exist:
- Foreign operations are relatively self-contained and integrated w/in the country
- Day-to-day operations do not depend on the parent’s or investor’s functional currency
- Local economy of foreign entity in NOT highly inflationary, which is defined as cumulative inflation of 100% over 3 years
Under IFRS, what are the 3 factors that have priority when determining an entity’s functional currency?
- The currency that influences sales prices for goods/services
- The currency of the country whose competitive forces and regulations mainly determine the sales prices of its goods/services
- The currency that mainly influences labor, material, and other costs of providing goods/services
Remeasurement method (temporal method) ["Dysfunctional"]
Remeasure from foreign currency to functional currency
B/S:
- Monetary items = current/year-end rate (fixed)
- Nonmonetary items = historical rate (fluctuate)
I/S:
- Non-balance sheet related items = weighted avg rate
- Balance sheet related items = historical rate
How is remeasurement gain or loss calculated?
Plug “currency gain/loss” to get NI to the required amount need to adjust RE in order to make BS balance
When an entity operates in a highly inflationary economy under IFRS, what must first be done before converting from foreign currency to reporting currency?
The FS must first be restated for the effects of inflation then must be converted to reporting currency using the current/year-end rate for all elements of BS and IS
Translation method (current rate method) ["Functional"/normal]
Translate from functional currency to reporting currency
I/S:
- All IS items = weighted avg rate
- Transfer NI to RE
B/S:
- Asset = current/year-end rate
- Liabilities = current/year-end rate
- Common stock/APIC = Historical rate
- RE = roll forward
Under the translation method, what does translated RE equal?
Translated RE = Beg. translated RE + Translated net income for current period - Translated dividends declared for current period
How is translation gain or loss calculated?
Plug “translation adjustment” to OCI
It is equal to the difference b/w debits and credits in the translated trial balance
Cumulative translation adjustment (CTA)
Types of foreign currency transactions
- Operating transactions (import/export, borrowing/lending)
- Forward exchange contracts
In a foreign currency transaction, when would a gain or loss result?
If the exchange rate changes between the time a purchase/sale in foreign currency is contracted for and the time actual payment is made
What results if there is a difference between the exchange rate used in recording the transaction in dollars and the exchange rate at the balance sheet date (current exchange rate)?
An unrealized gain or loss on the foreign currency transaction
In foreign currency transactions, how should the assets and liabilities resulting from the transactions be recorded?
Using the exchange rate in effect at date of transaction
Under US GAAP, a foreign subsidiary’s functional currency is the currency of what?
Of the environment in which the subsidiary primarily generates and expends cash
Where are gains and losses resulting from foreign exchange transactions that are an “extension” of he parent’s domestic operations included in?
As a component of “income from continuing operations” in the period in which they occur
Where is cumulative foreign exchange translation loss reported?
In a stockholders’ equity contra account (AOCI)
