Foreign Currency Accounting and Other Financial Statement Presentations Flashcards
Foreign Currency Transactions
Transactions with a foreign entity (buying from and selling to) denominated in (to be settled in) a foreign currency.
Foreign Currency Translation
The conversion of the FS of a foreign entity into FS expressed in the domestic currency.
Exchange Rate
The price of one unit of a currency expressed in unites of another currency; the rate at which two currencies will be exchanged at equal value.
Direct Method - Exchange Rate
The domestic price of one unit of another currency.
One euro costs $1.47
Indirect Method - Exchange Rate
The foreign price of one unit of the domestic currency.
0.68 euro buys $1.00
Current Exchange Rate
The exchange rate at the current date, or for immediate delivery of currency, often referred to as the spot rate. Year end
Forward Exchange Rate
The exchange rate existing now for exchanging two currencies at a specific future date. (bet)
Historical Exchange Rate
The rate in effect at the date of issuance of stock or acquisition of assets. Used for equity.
Weighted Average Rate
Used for Income Statement. Takes into account the exchange rate fluctuations for the period.
Reporting Currency
The currency of the entity ultimately reporting financial results of the foreign entity.
Functional Currency
The currency of the primary economic environment in which the entity operates, usually the local currency or the reporting currency.
Foreign Currency Translation
The restatement of FS denominated in the functional currency to the reporting currency using appropriate rates of exchange. “Functional”
Foreign Currency Remeasurement
The restatement of foreign FS from the foreign currency to the entity’s functional currency in the following situations:
- Reporting currency = functional currency
- FS must be restated in the entity’s functional currency prior to translating the FS from the functional currency to the reporting currency.
“Dysfunctional”
Remeasurement Method (temporal method) "Dysfunctional"
FS of foreign sub are not in the sub’s functional currency, the FS are remeasured to the functional currency starting with the balance sheet.
- Balance Sheet
- Monetary items = current/yr-end rate (fixed)
- Nonmonetary items = historical rate (fluctuate) - Income Statement
- Non-balance sheet related items = weighted avg rate
- Balance Sheet related items = historical rates - Remeasurement Gain/Loss (income statement)
- plug currency G/L to get NI to the required amt needed to adjust RE in order to make the balance sheet balance.
Translation Method (current rate method) "Functional"
FS of the foreign sub are in the sub’s functional currency, the FS are translated to the reporting currency starting with the income statement.
- Income Statement
- All income statement items = weighted avg rate
- Transfer NI to RE - Balance Sheet
- Assets & Liabilities = current/yr-end rate
- Common stock/APIC = historical rate
- Retained earnings = roll forward - Translation Gain/Loss (OCI)
- plug translated adjustment to OCI…cumulative translation adjustment
Foreign Currency Transactions
These G/L occur when a company buys from or sells to a foreign company with whom it has no ownership interest and agrees to pay or accept payment in a foreign currency.
Operating transactions or forward exchange contracts.
Operating Transactions
import, export, borrowing, lending, and investing transactions
Forward Exchange Contracts
agreements to exchange two different currencies at a specific future date and at a specific rate.
Valuation of Assets & Liabilities
Historical Rate
Assets or liabilities resulting from foreign currency transactions should be recorded in the US company’s books using the exchange rate in effect at the date of the transaction.
Other Comprehensive Bases of Accounting (OCBOA)
Non-GAAP presentations that have wide-spread understanding and support.
- Cash basis
- Tax basis
- Definite set of criteria have substantial support that is applied to all material FS elements
- Regulatory basis
Cash Basis of Accounting
Revenues are recognized when cash is received and expenses are recognized when cash is paid.
Non-GAAP
- Statement of Cash and Equity
- Statement of Cash Receipts and Disbursements
Income Tax Basis FS
Prepared based on the methods and principles used to prepare the entity’s tax return. Special accounting treatment must be given to nontaxable revenues and expenses not reported on the tax return.
- Statement of Assets, Liabilities, and Equity OR balance sheet
- Statement of Revenues, Expenses and Retained Earnings OR a Statement of Income
Personal Financial Statements
FS of individuals or groups of related individuals (families) and are generally prepared to organize and plan financial affairs. Used to obtain credit and for tax, estate, and retirement planning purposes.
- Statement of Financial Condition (Balance Sheet)
- Statement of Changes in Net Worth (optional)
- Disclosure
