ch 11 advance accting

ch 11 advance accting - CHAPTER 11 Foreign currency...

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CHAPTER 11 Foreign currency transactions of a US company include sales, purchases, and other transactions giving rise to a transfer of foreign currency or the recording of receivables or payables that are denominated (numerically specified to be settled) in a foreign currency o Transactions in other currency must be transferred in US $ o FASB STMT # 52 – serves as the primary guide for acting for accts rec and accts payable foreign currency-denominated transactions that require payment or receipt of foreign currency o Fasb stmt # 133- guides the acting for fin instruments specified as derivatives for the purpose of hedging certain items FOREIGN CURRENCY EXCHANGE RATES Before 1972 currency was valued based on gold standard After 1972 all countries signed an agreement to permit the values of their currencies to “float” based on the supply and demand for them Foreign currency exchange rates are established daily by foreign exchange brokers that serve as agents for individuals or countries wishing to deal in foreign currencies. o If nation is experiencing high levels of inflation, purchasing power decreases (currency depreciates) o Another factor affecting exchange rates is the nation’s balance of payments, changes in a cty’s interest rate and investment levels, and the stability and process of governance o Direct exchange rate- number of local currency units needed to acquire one foreign currency unit. (US dollar cost of foreign currency unit) DER= (US $ - EQUIVALENT VALUE)/1 FCU EXAMPLE: 1.2$ can acquire 1euro. 1.2/1=1.2 direct exchange rate o Indirect exchange rate- reciprocal of the direct exchange rate IER= 1 FCU / (US $ - EQUIVALENT VALUE) EXAMPLE: 1 EURO / 1.2$ = .833 EURO This shows how much foreign currency can be obtained for 1 $ o US DOLLAR EQUIVALENT VALUE= FOREIGN CURRENCY UNITS * DIRECT EXCHANGE RATE Spot rates vs. Current Rates o Spot rate- exchange rate for immediate delivery of currencies o Current rate- the spot rate on the entity’s balance sheet Forward exchange rates- maintained for companies wishing to either receive or deliver major international currencies. This is not the same as a spot rate on a different day . Expectations about the value of currencies are built into the forward rate. o Spread- the difference between the forward rate and the spot rate. This gives you an idea about the strength or weaknesses of currencies. o By entering into the forward contract, the US company gives up the chance of receiving a better exchange rate but also avoids the possibility of an exchange rate loss. This reduces the risk for the US company. FOREIGN CURRENCY TRANSACTIONS FCT are economic activities denominated in a currency other than the entity’s recording currency.
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CHAPTER 11 1. Purchases or sales of goods or services, the prices of which are stated in a foreign currency 2. Loans payable or receivable in a foreign currency 3. Purchase or sale of foreign currency forward exchange contracts
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ch 11 advance accting - CHAPTER 11 Foreign currency...

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