Week 8_Foreign Currency Translation

Week 8_Foreign Currency Translation - Issues in Corporate...

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1 Issues in Corporate Financial Reporting and Analysis (ACCT3563/3573) Foreign Currency Transactions (Excluding Hedging) 2 Next three weeks This Week : Foreign Currency Transactions Financial Instruments Next Week : Foreign Currency Translation of Statements and Introduction to Hedging Week After : Financial Instruments (Hedging)
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3 References Picker, Chapter 5 (parts 5.1 - 5.3.5 …… pp. 126-158) Deegan, Chapter 14 (Sections 14.1 – 14.3 ….. pp. 493-504 and “Compound Instruments” pp. 523-526) Deegan, Chapter 31 (Sections 31.1 – 31.6 ….. pp. 1037-1065) AASB 121, “The Effects of Changes in Foreign Exchange Rates” AASB 132, “Financial Instruments: Disclosure and Presentation” AASB 139 “Financial Instruments: Recognition and Measurement” 4 Learning Objectives – FCT Understand accounting treatment of foreign currency denominated transactions at: date of transaction balance date (if applicable) settlement date Understand how to account for unhedged foreign transactions
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5 Objective of AASB 121 Entities may carry out foreign activities in two ways ……….. (i) transactions in foreign currencies … or (ii) it may have a foreign operation How do you include foreign currency transactions and foreign operations in the financial report of an entity? 6 Objective of AASB 121 Principal issues are ….. (i) which exchange rates to use … and (ii) how to report the effects of changes in exchange rates Focus this week is on transactions …… translation of foreign operations covered next week
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7 Key Aspects of AASB 121 Does not include derivative transactions and balances (refer AASB 139) Does not apply to hedge accounting for foreign currency (refer AASB 139) Does not apply to cash flows arising from foreign currency transactions (refer AASB 107) 8 Key Aspects of AASB 121 Functional currency – the currency of the primary economic environment in which the entity operates Presentation currency – the currency in which the financial report is presented Foreign currency – a currency other than the functional currency of the entity
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9 What is a foreign currency transaction? “A foreign currency transaction is a transaction that is denominated or requires settlement in a foreign currency, ……” (AASB 121 Para 20) 10 What is a foreign currency transaction? Foreign currency transactions include: Buying or selling goods or services…. Borrowing or lending funds when the amount payable or receivable is….. Otherwise acquiring or disposing of assets, or incurring or settling liabilities…… ………denominated in a foreign currency
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11 Reporting foreign currency transactions Firstly ….. some basic points and definitions Quoting exchange rates directly and indirectly Monetary and non-monetary items Spot rates and closing rates Bid price and ask price (buy/sell) 12 Exchange Rates Indirect $A1 = $US0.65/$US0.68 Direct $US1 =$A1.4706/$A1.5385 $US5,000 ÷ 0.65 = $A7,692 $US5,000 x 1.5385 = $A7,692
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13 Monetary items Monetary items are units of currency held and assets and liabilities to be
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