Foreign Operations

Question 1

How is a forward exchange contract handled?

Answer 1

Forward exchange contracts are derivatives and are reported at fair value on every balance sheet date.
Unrealized gains and losses are recognized in the period of the change in the exchange rate.

Question 2

If functional currency is foreign currency, what is the financial statement treatment?

Answer 2

Financial statements will be translated into US dollars and the translation adjustment is reported in OCI, not on the IS

Question 3

If functional currency is the US dollar, what is the financial statement treatment?

Answer 3

Financial statements are remeasured and the re measurement adjustment is included in income. (IS)

Question 4

What is a company required to comply with in order to account for a contract as a fair value hedge?

Answer 4

Company is required to:

1. Document the relationship between the hedge and the hedged risk
2. Indicate that the hedge is expected to be highly effective
3. Provide an explanation as to how effectiveness will be measured.

Question 5

What currency exchange rate should a company use to convert its income statements to US dollars at year end?

Answer 5

Average rate

This is because revenues and expenses occur throughout the year.

Question 6

What currency exchange rate should a company use to convert its balance sheet to US dollars at year end?

Answer 6

Current rate

This is because the balance sheet is an “as of” statement