Foreign Currency Denominated Transactions Flashcards
- When does a payable or receivable exist on the books?
When title passes
- What is a direct quotation?
A direct quotation, or direct exchange rate, states the domestic price of one unit of a foreign currency.
- where are foreign currency exchange gains and losses reported?
in income from continuing operations (ordinary income)
- what is an entity’s functional currency?
an entity’s functional currency is the currency of the primary economic environment in which the entity operates. Normally, that is the currency of the environment in which the entity primarily generates and expends cash.
- where should gains and losses on foreign currency transactions be reported?
in current income.
Gains and losses resulting from changes in exchange rates are recognized in current earnings in the period in which the exchange rate changes.
Note
Foreign Currency Transaction gains and losses arise from transactions such as receivables and payables denominated in a foreign currency when the transaction date and settlement date are different. These gains and losses are recognized in current income.
Foreign Currency Translation gains/losses = For consolidation purposes, when a foreign entity’s financial statements in functional currency are converted to the reporting currency, the effect of the changes in exchange rates between the two result in foreign currency translation gains and losses. These changes are realized in OCI.
- when does a foreign currency transaction occur?
when a domestic entity agrees to settle a transaction in a foreign currency.
for a us entity a foreign currency transaction will be settled in non-dollars, but measured and recorded on the US entity’s books in bollars
- which would be more likely to result in a foreign currency loss?
- Foreign Currency Forward Exchange Contract
- Foreign Currency Option Contract
-foreign currency forward exchange contract
b/c foreign currency option contract - holder would have the “option” to exercise the contract and would be less likely to exercise when its in a losing position.
Note that both are considered forward contracts for accounting purposes.
Where should the effective and ineffective portion of hedges be classed on the income statement?
effective = OCI
ineffective = current income
- the specific method used to convert f/s’s of a sub expressed in a foreign currency into the domestic currency of the parent depends on?
the functional currency of the sub
