Foreign Operations Flashcards
What is the Transactional Currency?
The local, “recording” currency which is usually where books and records are kept.
What is the Functional Currency?
The currency that has the greatest economic impact on the company (the currency in which the entity generates and expends cash)
What is the Reporting Currency?
The currency in which the enterprise prepares its financial statements
What is the local, “recording” currency that is usually where books and records are kept?
Transactional currency
What is the currency that has the greatest economic impact on the company?
Functional currency
What is the currency in which the enterprise prepares its financial statements?
Reporting currency
When a transaction occurs in some currency other than the functional currency, what is the process called to convert it into the functional currency?
Remeasurement (think “as transaction occurs”)
What is the process called to convert from the functional currency to the reporting currency?
Translation (think “at year end”)
What happens if the Transactional, Functional, and Reporting currencies are all different?
The transaction is first “Remeasured” and then “Translated”
Where are unrealized gains and losses on foreign currency hedges recorded?
In Other Comprehensive Income (OCI) since foreign currency hedges are simply types of cash flow hedges
How do transactions denominated in a currency other than a company’s functional currency affect the income statement?
Fluctuations in that currency cause a gain or loss that must be recognized on the income statement as Income from Continuing Operations
What causes a Foreign Currency Transaction gain or loss?
A change in exchange rates between the functional currency and the transaction currency
Where are Foreign Currency Transaction gains or losses recorded?
Income Statement
Where are Foreign Currency Translation gains or losses recorded?
OCI
If the Functional Currency equals the Transactional (Local) Currency, what Exchange Rate is used for translating Assets and Liabilities?
Current Exchange Rate as of the Balance Sheet Date
If the Functional Currency equals the Transactional (Local) Currency, what Exchange Rate is used for translating Revenues and Expenses?
Weighted Average Exchange Rate for the year
What Exchange Rate is used for translating Gains and Losses?
Exchange Rate on the date the gain/loss was realized
If the Functional Currency equals the Transactional Currency, what Exchange Rate is used for translating Contributed Capital?
Historical Exchange Rates
When Translating items for Reporting, which come first: balance sheet items or income statement items?
Income Statement items
When Remeasuring items, which comes first: balance sheet items or income statement items?
Balance Sheet items
Following translation of all balance sheet and income statement items, what is the entry needed to balance the books called? Where is it recognized?
Translation Adjustment. Recognized in OCI
If the Functional Currency equals the Reporting Currency, what Exchange Rate is used for remeasuring Monetary Assets and Liabilities?
Current Exchange Rates as of the Balance Sheet Date
If the Functional Currency equals the Reporting Currency, what Exchange Rate is used for remeasuring Non-monetary Assets and Liabilities (Inventory, PP&E, also Prepayments)?
Historical Exchange Rates
If the Functional Currency equals the Reporting Currency, what Exchange Rate is used for remeasuring Revenues and Expenses?
Weighted Average Exchange Rate for the year
Following remeasurement of all balance sheet and income statement items, what is the entry needed to balance the books called? Where is it recognized?
Remeasurement Adjustment. Recognized on the Income Statement
How are gains and losses on available for sale securities due to fair value hedges recognized?
Instead of OCI (due to AFS), they are recognized as Income since there is an offsetting gain/loss already on the income statement stemming from the fair value hedge (thus, the net effect is zero on the income statement)
How are gains or losses on available for sale securities that stem from both fair value hedges and from non-hedged factors recognized?
Only the portion related to the fair value hedge is reported using hedge accounting
How are monetary and non-monetary assets and liabilities distinguished?
The values of monetary assets and liabilities are fixed in terms of dollar amounts
If the functional currency is in a highly inflationary economy, what happens?
The reporting currency will be considered the functional currency and financial statements will be remeasured as opposed to translated.
