Foreign Currency Balances Flashcards
An entity has a payable in a foreign currency, due in 90 days. To hedge the payable, the entity acquires a 90-day forward exchange contract to receive the amount of foreign currency due to be paid.
How would one report the payable and the forward exchange contract?
the payable comes from a historical transaction. Because the payable is actually on the entity’s records, it will be reported in US dollars based on the spot rate of the currency. There changes increase or decrease net income.
the forward exchange contract is a derivative and it must be reported on the balance sheet at its FV. The FV of the contract is created by changes in the forward exchange rate. These changes also increase or decrease net income.
An entity has made a firm commitment in a foreign currency that will result in a transaction in 90 days. The entity acquires a 90-day forward contract which meets the criteria as a hedge for the commitment and provides for the entity to receive the same amount of currency as is to be paid.
At what value will the forward exchange contract be reported? Because commitments are typically not reported, how is the effect of an exchange rate change shown?
The forward exchange contract is a derivative and must be reported on the balance sheet as an asset or a liability at its FV. Each period, fair value is adjusted for changes in the forward exchange contract by using the forward rate at the F/S date. These changes in the asset or liability also increase or decrease net income.
Although commitments are not normally reported because the hedge has been acquired to offset any exchange gains and losses, a gain or loss that is equal and opposite to the above income effect is also recognized. In other words, if a $200 gain is recognized on the forward exchange contract, a $200 loss is recognized on the commitment. In this way, the hedge has eliminated the income effect.
IN a translation, all assets and liabilities of the subsidiary are updated periodically to the new current exchange rate. What impact is cause by these adjustments?
the impact is measured and reported as a translation adjustment
How is a translation adjustment reported in a consolidated set of financial statement?
current method - a translation adjustment is accumulated from year to year and reported in consolidated stockholders’ equity. It does not have an impact on the computation of net income but rather other comprehensive income.
Temporal method - a remeasurement adjustment is reported as a gain or loss in net income
Monetary accounts recorded at FV that are denominated in a currency other than the functional currency of the reporting entity are updated periodically to current exchange rates for reporting purposes.
What is the financial statement impact of changes in reported value?
Changes in account balances that result from the remeasurement process are reported as gains or losses in net income
An entity has a receivable denominated in a currency outside of the US dollar. On Dec 1, year 1, the receivable is remeasured as $5,000; on Dec 31, it is remeasured as $6,000; and on Jan 9, year 2 when collected, it is remeasured as $5,800.
What is the impact on net income of the remeasurement process?
The entity has $1,000 gain to report in year 1 because the remeasured receivable went from $5,000 to $6,000. However, in year 2, the entity reports a $200 loss impacting net income as the remeasured receivable drops in value from $6,000 to $5,800.
Below are several accounts. For each one, tell whether the historical rate or the current rate is applicable for a remeasurement (temporal method) and then for a translation (current rate method)
Inventory
Common stock
Sales
Note payable long-term
Accounts Receivable
Building
Remeasurement Translation
Inventory historic current
common
stock historic historic
Sales historic historic
Note payable
long-term Current Current
Accounts
Receivable Current Current
Building Historic Current
An entity has a payable in a foreign currency that will come due in 90 days. To avoid problems created by changes in the exchange rate, the entity acquires a 90-day forward exchange contract to hedge the payable, receiving the same amount of foreign currency as is scheduled to be paid.
How is the forward exchange contract reported?
The forward exchange contract is a derivative. As such, it must be reported on the balance sheet as either an asset or a liability at its FV determined by the current forward exchange rate. As the value of the contract changes, the amount reported on the balance sheet will either increase or decrease.
What is meant by reporting currency?
Reporting currency is the currency in which an entity prepares its financial statements
What is meant by an entity’s functional currency?
the functional currency of an entity is its cash flow currency - the currency in which it tends to denominate most of its transactions. The functional currency is typically the local or reporting currency.
If an entity is not certain as to the identity of its functional currency, how can it be determined?
the currency in which it makes sales
the currency in which it gets its financing
the currency in which it pays its employees
the currency in which it buys its materials
A US entity has a subsidiary in Mexico. For reporting purposes, the entity must consolidate this entity in its F/S in US dollars.
What are the two different procedures that may be used to determine the value of this account to be reported in US dollars?
If the subsidiary’s functional currency and reporting currency are the Mexican peso, the F/S are translated into the parent’s reporting currency, the US dollar
If the subsidiary’s functional currency is the US dollar but its reporting currency is the Mexican peso, the F/S must be remeasured to the Functional currency.
When is the current rate method used to convert foreign currency balances of a subsidiary into a parents functional currency?
the current rate method is appropriate in consolidation if a parent entity identifies one currency as its reporting and functional currency, while its subsidiary prepares its financial statements in a different currency, its functional currency.
When is the temporal method used to convert foreign currency balances of a subsidiary into a parent’s functional currency?
the temporal method is appropriate if a parent and the subsidiary have the same functional currency, but the subsidiary’s F/S are denominated in the Mexican peso. The subsidiary’s F/S are remeasured into the functional currency.
On, Monday an entity reports an account balance stated in a currency outside of its functional currency. By Friday, the relative value of this currency has changed to a new spot rate.
For reporting individual foreign currency transactions, when is the rate from Monday used for reporting purposes and when should the Friday rate be used for reporting purposes?
the assets and liabilities must be reported at the current rate. Therefore if this account is an asset or a liability, it will have to be updated on Friday to the new rate.
