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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This note was uploaded on 05/02/2010 for the course ACCT 3756 taught by Professor Leung during the Three '09 term at University of Sydney.

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

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