Ch.12_notes

Ch.12_notes - FOREIGN CURRENCY ACCOUNTING The need for...

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FOREIGN CURRENCY ACCOUNTING The need for accounting standards (GAAP) on foreign currency arises from: 1. Transactions between unaffiliated companies located in different countries ( CH. 12 Foreign Currency Transactions ) 2. Domestic (U.S.) firms with ownership interests (i.e., parent/subsidiary relation) in foreign countries (CH 13. Translation of Foreign Financial Statements ) CH. 12 Foreign Currency Transactions I. Introduction to Foreign Currency Concepts A. Currency Exchange Rates - is the ratio between a unit of one currency and the amount of another currency for which the unit can be exchanged. 1. Direct Quotation - exchange rate is expressed in U.S. dollars. 2. Indirect Quotation - exchange rate is expressed in foreign currency (fc). (Quotes are published daily in the Wall Street Journal ) If 5 and 99/1000 Norwegian Krones can be exchanged for one U.S. dollar: Direct = 1 = $ .196 (1 Krone = 19.6 cents) Quote 5.099 Indirect = 5.099 = 5.099 ($ 1 = 5.099 Krones) Quote 1 B. Types of Exchange Rates Spot Rate - The exchange rate for immediate delivery of the currencies exchanged (i.e., within two business days). Forward (Future) rate - The exchange rate established for the future delivery of currencies (specified in the forward exchange contract). Current Rate - Exchange rate on the balance sheet date or on the date of transaction. 1
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Floating Exchange Rates Under our "floating" exchange rate system, currency exchange rates fluctuate in response to changes in market conditions, including: (1) levels of inflation, (2) changes in interest rates, (3) trade surplus and deficits, (4) federal deficits, and (5) imminence of civil disorder and wars. D. Foreign Currency Translation Foreign Transaction - a transaction between firms in different countries. Foreign Currency Transaction - a foreign transaction where the terms are stated (denominated) in a foreign currency. Foreign Currency Translation - the process of expressing monetary amounts denominated in foreign currency into U.S. dollars. changes in exchange rates do not affect transactions that are denominated in U.S. dollars. changes in exchange rates will result in gains or losses if the transaction is denominated in a foreign currency (unless the firm hedges). II. Accounting for Foreign Currency Transactions According to SFAS No. 52: i. At the date of each transaction, each asset, liability, revenue or expense arising from the transaction should be measured and recorded in dollars by multiplying the units of foreign currency by the current exchange rate (i.e., the spot rate on the date-of-transaction). ii. At each balance sheet date, recorded balances that are denominated in a foreign currency are adjusted to reflect the current exchange rate (i.e., the spot rate on the balance sheet date). [See Exercise 12-8]
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Ch.12_notes - FOREIGN CURRENCY ACCOUNTING The need for...

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