Foreign Currency Transactions


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This presentation reveals the steps and what must be accounted for in recording transactions involving foreign currency.

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Foreign Currency Transactions

  1. 1. Foreign Currency Transactions<br />By: Ryan Huelsmann<br />
  2. 2. Options for foreign currency transactions occurring<br />Importing/exporting<br />Loans payable and receivable to a foreign currency<br />Contract that forward the purchase or sale of foreign currency<br />Purchase and sale of foreign currency directly<br />
  3. 3. FASB Statement 52Foreign Currency Translation<br />December 1981 and replaces FASB 8<br />Adjustments that do not affect cash flows excluded<br />Translation adjustments<br />Adjustments that affect cash flow are included in net income<br />Extension of parent’s operations <br />Gains and losses are included<br />
  4. 4. FASB Statement 52 continued <br />Translation adjustments <br />Although not included in net income, must be reported in the consolidated equity section<br />Transaction Gains and Losses<br />Example: U.S may borrow Mexican pesos or have receivable to Germany in Euros<br />Included unless it is a hedge<br />Intercompany investments do not give rise to gains and losses<br />
  5. 5. FASB Statement 133Accounting for Derivative Instruments and Hedging Activities<br />June 1998 & works in conjunction with FASB 52<br />“contracts, transactions, or balances that are, in fact, effective hedges of foreign exchange risk will be accounted for as hedges without regard to their form”<br />3 forms of hedges are listed but we will only focus on the third hedge for that one focuses on foreign currency<br />
  6. 6. FASB Statement133 Continued <br />Further subdivided<br />Hedging foreign currency exposure for net investment<br />Hedging foreign currency exposure of unrecognized firm’s commitment<br />Hedging foreign currency exposure of an available-for-sale security<br />Hedging foreign currency exposure of foreign-currency-denominated forecasted transaction<br />
  7. 7. Functional Currency <br />Functional Currency is the primary currency where most of the economic activities.<br />U.S. dollar for U.S. Co. operating in U.S.<br />This is also the reporting currency on financial statements<br />If self contained and integrated, functional currency is the currency of that country<br />If dependent on parent and affect cash flows, then parent’s currency is functional currency<br />
  8. 8. Spot Rate, Current Rate, and Valueing<br />Spot rate is the rate at which transactions occurred<br />Current Rate is the one found on balance sheet<br />Direct Exchange Rate<br />DER=(U.S. dollar-equivalent value)/ 1 FCU<br />Indirect Exchange Rate<br />IER=1 FCU/ (U.S. dollar-equivalent value)<br />
  9. 9. Tables & Computing Gains and Loss<br /><br />Functional= foreign currency units * DER<br />At time of transaction<br />Then do it again when you prepare financial reports<br />If there is a difference record the gain or loss<br />
  10. 10. Jerry Brown’s Crusade<br />Don’t make this mistake <br />California Attorney General Jerry Brown is suing the State Street Bank & Trust for overcharging the state’s two biggest pension funds<br />Highest rate of the day instead of the rate the transactions took place.<br />Believed to been done for 8 years with $56 million in overcharges<br />Suit asks for three times as much <br />
  11. 11. Transactions for Receivables and Payables<br />The two transaction approach <br />1. The Transaction date- record the purchase or sale at functional currency<br />2. The Balance Sheet date-adjust the payable of receivable to Balance Sheet date and record any gains or losses<br />3. Settlement Date-First adjust the currency payable or receivable for any change in ER. Record gain or loss acquired and record the settlement<br />
  12. 12. Works cited <br />Baker, Richard E., Valdean C. Lembke, Thomas E. King, and Cynthia G. Jeffrey. Advanced Financial Accounting. 8th ed. New York: McGraw-Hill/Irwin, 2009. Print. <br />FASB: Financial Accounting Standards Board. Web. 31 Mar. 2010. <>.<br />Maurer, Harry, and Cristina Linblaid, eds. "Jerry Brown's Crusade." BusinessWeek 2 Nov. 2009: 10. LexisNexis. Web. 20 Feb. 2010.<br />Opdyke, Jeff D. "Weekend Investor--- The New Basics---Running with Scissors: The Carry Trade Can be Unforgiving." The Wall Street Journal [New York] 20 Feb. 2010: 9. ProQuest. Web. 20 Feb. 2010.<br />