This document discusses accounting and reporting for foreign currencies. It covers key concepts like foreign exchange rates, foreign currency transactions, accounting for imports and exports, and accounting standards. The two-transaction perspective requires companies to account for foreign currency sales and subsequent cash collections as separate transactions. Exchange differences from changing rates are reported as foreign exchange gains or losses. Journal entries are provided to illustrate accounting for a sample import transaction over multiple periods as the exchange rate fluctuates.
This document provides an overview of Accounting Standard 10 (AS-10) regarding the accounting treatment of fixed assets. It defines fixed assets and outlines their presentation in financial statements using either historical cost or revalued amounts. The document discusses the calculation of historical cost, accounting for self-constructed and exchanged assets, and the treatment of revaluations. It also covers improvements, additions, disposals, and the required disclosures regarding fixed assets. The presentation was created by students at L.J Institute of Management Studies in Ahmedabad, Gujarat to explain AS-10 on accounting for fixed assets.
Ind AS 2 establishes the accounting treatment for inventory. It requires inventory to be measured at the lower of cost or net realizable value. Cost includes all costs of purchase, conversion, and other costs to bring inventory to its present location and condition. Companies must disclose their accounting policies for inventory valuation and provide details on inventory amounts, write-downs, and reversals in the financial statements. Certain biological assets, agricultural products, minerals, and broker-held commodities are exempt from the standard's requirements.
The document defines fair value and outlines the framework for measuring fair value according to IFRS 13. It discusses key aspects such as:
- Fair value is a market-based exit price between market participants at the measurement date.
- The asset or liability is assumed to be exchanged in the principal or most advantageous market.
- Highest and best use must be considered, whether the asset is used individually or in combination with others.
- A fair value hierarchy gives the highest priority to Level 1 inputs and the lowest to Level 3 inputs.
- Valuation techniques use observable inputs where possible and unobservable inputs only when necessary.
The document discusses fund flow statements. It explains that fund flow statements provide information about sources and uses of funds that the balance sheet and income statement do not. It then defines key terms like fund, flow, and working capital. It also shows how to prepare a schedule of changes in working capital and the fund flow statement using an example of Z Ltd.
India's balance of payments witnessed improvements in 2009-10 as the global economic recovery was visible. Exports and imports both increased during the third quarter, with the trade deficit lower than the previous year. The current account deficit was marginally higher for April-December 2009 compared to the same period in 2008, due to a fall in invisibles surplus despite a lower trade deficit. Capital flows remained strong, led by FDI, portfolio investments, and trade credits. Foreign exchange reserves increased by $27.1 billion for the year, reaching $279.1 billion in March 2010. The turnaround in exports and continued capital inflows inflows buoyed India's external sector.
Cash flow statement shows the inflows and outflows of cash and cash equivalents over a period of time. It has three sections - operating, investing, and financing activities. The direct method shows the conversion of income statement items to cash flows directly, while the indirect method adjusts net income for non-cash items like depreciation. While it identifies cash generated from operations, cash flow statement is not equivalent to an income statement since dividend payments do not reflect liquidity and it excludes non-cash transactions. Fund flow statement analyzes changes in working capital and the sources and uses of funds, but lacks originality as it rearranges existing accounting data and only indicates past positions.
The Interest Rate Parity states that the difference between interest rates of two countries equals the difference between the forward and spot exchange rates. It plays an essential role in foreign exchange markets by preventing arbitrage opportunities. When returns on two currencies are equal, interest rate parity prevails. Factors like expected inflation, monetary policy, and economic conditions influence market interest rates. Interest rate parity implies that if the domestic interest rate is lower than the foreign rate, domestic investors will invest abroad to benefit, and vice versa if the domestic rate is higher.
This document provides an overview of Accounting Standard 10 (AS-10) regarding the accounting treatment of fixed assets. It defines fixed assets and outlines their presentation in financial statements using either historical cost or revalued amounts. The document discusses the calculation of historical cost, accounting for self-constructed and exchanged assets, and the treatment of revaluations. It also covers improvements, additions, disposals, and the required disclosures regarding fixed assets. The presentation was created by students at L.J Institute of Management Studies in Ahmedabad, Gujarat to explain AS-10 on accounting for fixed assets.
Ind AS 2 establishes the accounting treatment for inventory. It requires inventory to be measured at the lower of cost or net realizable value. Cost includes all costs of purchase, conversion, and other costs to bring inventory to its present location and condition. Companies must disclose their accounting policies for inventory valuation and provide details on inventory amounts, write-downs, and reversals in the financial statements. Certain biological assets, agricultural products, minerals, and broker-held commodities are exempt from the standard's requirements.
The document defines fair value and outlines the framework for measuring fair value according to IFRS 13. It discusses key aspects such as:
- Fair value is a market-based exit price between market participants at the measurement date.
- The asset or liability is assumed to be exchanged in the principal or most advantageous market.
- Highest and best use must be considered, whether the asset is used individually or in combination with others.
- A fair value hierarchy gives the highest priority to Level 1 inputs and the lowest to Level 3 inputs.
- Valuation techniques use observable inputs where possible and unobservable inputs only when necessary.
The document discusses fund flow statements. It explains that fund flow statements provide information about sources and uses of funds that the balance sheet and income statement do not. It then defines key terms like fund, flow, and working capital. It also shows how to prepare a schedule of changes in working capital and the fund flow statement using an example of Z Ltd.
India's balance of payments witnessed improvements in 2009-10 as the global economic recovery was visible. Exports and imports both increased during the third quarter, with the trade deficit lower than the previous year. The current account deficit was marginally higher for April-December 2009 compared to the same period in 2008, due to a fall in invisibles surplus despite a lower trade deficit. Capital flows remained strong, led by FDI, portfolio investments, and trade credits. Foreign exchange reserves increased by $27.1 billion for the year, reaching $279.1 billion in March 2010. The turnaround in exports and continued capital inflows inflows buoyed India's external sector.
Cash flow statement shows the inflows and outflows of cash and cash equivalents over a period of time. It has three sections - operating, investing, and financing activities. The direct method shows the conversion of income statement items to cash flows directly, while the indirect method adjusts net income for non-cash items like depreciation. While it identifies cash generated from operations, cash flow statement is not equivalent to an income statement since dividend payments do not reflect liquidity and it excludes non-cash transactions. Fund flow statement analyzes changes in working capital and the sources and uses of funds, but lacks originality as it rearranges existing accounting data and only indicates past positions.
The Interest Rate Parity states that the difference between interest rates of two countries equals the difference between the forward and spot exchange rates. It plays an essential role in foreign exchange markets by preventing arbitrage opportunities. When returns on two currencies are equal, interest rate parity prevails. Factors like expected inflation, monetary policy, and economic conditions influence market interest rates. Interest rate parity implies that if the domestic interest rate is lower than the foreign rate, domestic investors will invest abroad to benefit, and vice versa if the domestic rate is higher.
International Financial Management ,International Money Market,International Capital Market,International Bond Market,Bench Marking,Euro currency Market
International financial management deals with planning and managing financial operations of international activities of an organization. It includes managing foreign exchange risks, international taxation, financing decisions, investments in international financial markets, and accounting differences between nations. The key functions are performed by the treasurer, who manages cash and secures financing, and the controller, who handles accounting activities. The scope of international financial management encompasses balance of payments, international institutions like the IMF and World Bank, and financial markets like foreign exchange markets.
The document discusses factors that determine foreign exchange rates, including:
- Fundamental factors like the balance of payments, economic growth rates, fiscal and monetary policy, interest rates, and political stability.
- Technical factors like government control of exchange rates and capital flows between countries.
- Speculation, which can increase exchange rate volatility.
It also examines how market fundamentals, expectations, and capital asset transfers impact exchange rates in the short-term, while economic activity, inflation, investment, trade policy influence long-term exchange rates. Purchasing power parity is discussed as a better way to compare GDP between countries than market exchange rates.
Introduction to international finance and International economyAparrajithaAriyadasa
International economics is a field of study that assesses the implications of international trade, international investment, and international borrowing and lending.
There are two broad sub-fields within the discipline: international trade and international finance
Economic exposure refers to how sensitive a firm's performance and value are to fluctuations in exchange rates. It measures the impact of unexpected exchange rate changes on a firm's expected future cash flows. Managing economic exposure is more important for a firm's long-term success than transaction or translation exposure since it takes into account how exchange rates affect future revenues and costs. Economic exposure can be measured by forecasting how exchange rates will impact items on the income statement and assessing the overall effect on the firm's value. Firms manage economic exposure through initiatives like market selection, product strategy, input mix, and plant location.
Interest Rate Parity and Purchasing Power ParityMAJU
The document discusses interest rate parity (IRP) and purchasing power parity (PPP). IRP states that interest rate differences between countries equal the forward exchange rate minus the spot rate. PPP holds that currency exchange rates adjust so goods cost the same across countries when prices are converted to the same currency. Violations of IRP create arbitrage opportunities. Factors like inflation rates, economic conditions, and monetary policies influence IRP and PPP over time. Formulas are provided for calculating IRP and expected future exchange rates under PPP.
This document discusses foreign exchange risk and exposure. It defines exposure as the sensitivity of a company's value to exchange rate changes, while risk refers to the variability of a firm's value due to uncertain exchange rate changes. Exposure is calculated using regression, while risk uses variance or standard deviation. The document outlines different types of exposures including transaction, translation, and operating exposures. It provides examples of how companies can manage transaction exposure through hedging techniques like forward contracts, options, and money market hedges. Finally, it briefly discusses the relationship between exposure and purchasing power parity.
This document discusses foreign exchange and exchange rates. It defines foreign exchange as currencies other than a country's domestic currency used in international trade. Exchange rates are the prices of currencies expressed in terms of other currencies and can fluctuate based on supply and demand. The document outlines factors that influence exchange rates and why foreign exchange is needed for international trade. It also defines and compares different exchange rate systems and discusses how exchange rates are determined in currency markets through the interaction of demand and supply of foreign currencies.
A detail on forex market is being provided refering to global forex hours and the need of forex market. DAILY TURNOVER OF THE GLOBAL FOREIGN EXCHANGE. Indian forex market is also explaied with reference to usd inr movement. A brief technical analysis is also provided explaning the different chart types
In order to increase the sales, business houses are required to market their products over a larger territory and may generally split their business into certain divisions or parts, if the various certain divisions or parts, if the various parts or divisions are located in different parts of the same city as Chandni chowk, Karol bagh, Connaught place, Nehru place (in delhi) or in different cities of the same country as Calcutta, Chennai, Mumbai, Kanpur and Delhi (in india) or in different countries (in the world) as Canada, USA, England, Japan, U.S.S.R and Germany, these are known as branches, head office contracts the activities of various branches
Foreign exchange refers to foreign currencies and bank deposits denominated in foreign currency. The foreign exchange market allows people to trade one currency for another. The exchange rate between two countries is the price at which their residents trade currencies. Nominal exchange rates are relative prices of currencies, while real exchange rates also account for differences in inflation between countries and the relative prices of goods. Purchasing power parity theory holds that identical goods should have the same price across locations after accounting for exchange rates. The Big Mac Index published by The Economist uses McDonald's Big Mac burgers to estimate real exchange rates between currencies based on purchasing power parity.
Ias 16 property plant and equipment-presentationShadabAhmadFaiq
The document discusses the key aspects of IAS 16 Property, Plant and Equipment including:
- The objective is to prescribe the accounting treatment for property, plant and equipment.
- Scope outlines what is excluded like IFRS 5 and IAS 40.
- Definitions for terms like PPE, carrying amount, depreciation.
- Recognition criteria that future benefits are probable and cost can be reliably measured.
- Measurement includes initial cost and subsequent cost model or revaluation model.
- Depreciation is systematically allocated over useful life.
- Impairment is assessed using IAS 36.
- Derecognition occurs from disposal or no future benefits are expected.
The document discusses sales and production budgets. It states that the sales budget is the first budget prepared as part of the master budget and is based on sales forecasts. The sales budget shows expected sales revenue. The production budget shows the production levels needed to meet the sales budget and end-of-period inventory goals. It is derived from the sales budget and planned finished goods inventory. The production budget then informs other budgets and is a key part of the budgeting process.
1. IND AS 21 outlines the accounting treatment for foreign currency transactions and foreign operations. It addresses how to include such items in financial statements and how to translate financial statements into a presentation currency.
2. The standard establishes guidelines for determining an entity's functional currency. The functional currency is primarily the currency of the primary economic environment in which the entity operates, which is normally the currency that mainly influences sales prices and operating costs.
3. IND AS 21 provides rules for re-measuring foreign currency items into the functional currency, including the use of spot or average exchange rates. It also addresses the translation of financial statements from the functional currency into the presentation currency.
The document discusses the fundamentals of a funds flow statement, including its meaning, objectives, importance, limitations, and preparation. A funds flow statement indicates changes in financial position between two balance sheet dates, showing sources and uses of funds. It aims to analyze changes in working capital and determine causes. While useful for management, shareholders, and financiers, it also has limitations like being historic and ignoring non-fund transactions. Preparing one requires the current and prior year's balance sheets and income statement.
Foreign exchange refers to the exchange of one country's currency for another. The foreign exchange market allows currencies to be traded globally, 24 hours a day. Major participants include banks, brokers, and authorized dealers. Exchange rates are determined by supply and demand in the foreign exchange market. They can be fixed by governments or allowed to float based on market forces. Factors like economic performance, interest rates, trade balances, and political events influence exchange rate movements. Risks from exchange rate fluctuations must be managed through techniques like setting loss limits and controlling overall currency exposure.
The document provides information about balance of payments (BOP):
1. BOP is a systematic record of all economic transactions between a country and the rest of the world over a period of time, recording inflows and outflows of foreign exchange.
2. The BOP account has two sides - credits for inflows of foreign exchange and debits for outflows. It is prepared using double-entry bookkeeping.
3. The current account records trade in goods and services as well as unilateral transfers, while the capital account records changes in financial assets and liabilities with the rest of the world.
4. The BOP always balances as total receipts must equal total payments. Surpluses
The document provides an overview of technical market indicators, classifying them into four main groups: trend indicators, breadth indicators, contrarian indicators, and oscillators. It discusses trend indicators in more detail, defining them as indicators that measure the main direction of the underlying security or market. Trend indicators have the advantage of being stronger than other indicators since markets trend most of the time, allowing trend-following strategies to be profitable. However, trend indicators also have the complication of being lagging rather than leading indicators that only confirm trends after they have occurred.
There are two types of foreign exchange quotations: European and American. European quotations give the price of a currency in terms of units of another currency, while American quotations give the price in terms of dollars per unit of another currency. Direct quotes give the home currency price per unit of foreign currency, while indirect quotes give the opposite. Cross rates can be calculated using exchange rates between two currencies and a third currency. The TT buying rate is used for clean inward or outward remittances, while the bill buying rate factors in exchange and forward margins to account for delays in collection. The bill selling rate adds an exchange margin to the base rate to cover document handling costs.
Accounting for foregn curency 6-1 (2).pptxRobsanAfdal
IAS 21 addresses the accounting and reporting effects of changes in foreign exchange rates. It prescribes how to include foreign currency transactions and foreign operations in financial statements, and how to translate financial statements into the presentation currency. Exchange differences arising from foreign currency transactions and translations are generally recognized in profit or loss. However, some differences may be recognized in other comprehensive income. The functional currency is determined based on the primary economic environment the entity operates in, considering factors like the currency of sales prices and costs.
Used for MBA professional accounting class room presentation and it includes FASB rules and forex currency dealings details for purchase and sale of goods and services with foreign party.
International Financial Management ,International Money Market,International Capital Market,International Bond Market,Bench Marking,Euro currency Market
International financial management deals with planning and managing financial operations of international activities of an organization. It includes managing foreign exchange risks, international taxation, financing decisions, investments in international financial markets, and accounting differences between nations. The key functions are performed by the treasurer, who manages cash and secures financing, and the controller, who handles accounting activities. The scope of international financial management encompasses balance of payments, international institutions like the IMF and World Bank, and financial markets like foreign exchange markets.
The document discusses factors that determine foreign exchange rates, including:
- Fundamental factors like the balance of payments, economic growth rates, fiscal and monetary policy, interest rates, and political stability.
- Technical factors like government control of exchange rates and capital flows between countries.
- Speculation, which can increase exchange rate volatility.
It also examines how market fundamentals, expectations, and capital asset transfers impact exchange rates in the short-term, while economic activity, inflation, investment, trade policy influence long-term exchange rates. Purchasing power parity is discussed as a better way to compare GDP between countries than market exchange rates.
Introduction to international finance and International economyAparrajithaAriyadasa
International economics is a field of study that assesses the implications of international trade, international investment, and international borrowing and lending.
There are two broad sub-fields within the discipline: international trade and international finance
Economic exposure refers to how sensitive a firm's performance and value are to fluctuations in exchange rates. It measures the impact of unexpected exchange rate changes on a firm's expected future cash flows. Managing economic exposure is more important for a firm's long-term success than transaction or translation exposure since it takes into account how exchange rates affect future revenues and costs. Economic exposure can be measured by forecasting how exchange rates will impact items on the income statement and assessing the overall effect on the firm's value. Firms manage economic exposure through initiatives like market selection, product strategy, input mix, and plant location.
Interest Rate Parity and Purchasing Power ParityMAJU
The document discusses interest rate parity (IRP) and purchasing power parity (PPP). IRP states that interest rate differences between countries equal the forward exchange rate minus the spot rate. PPP holds that currency exchange rates adjust so goods cost the same across countries when prices are converted to the same currency. Violations of IRP create arbitrage opportunities. Factors like inflation rates, economic conditions, and monetary policies influence IRP and PPP over time. Formulas are provided for calculating IRP and expected future exchange rates under PPP.
This document discusses foreign exchange risk and exposure. It defines exposure as the sensitivity of a company's value to exchange rate changes, while risk refers to the variability of a firm's value due to uncertain exchange rate changes. Exposure is calculated using regression, while risk uses variance or standard deviation. The document outlines different types of exposures including transaction, translation, and operating exposures. It provides examples of how companies can manage transaction exposure through hedging techniques like forward contracts, options, and money market hedges. Finally, it briefly discusses the relationship between exposure and purchasing power parity.
This document discusses foreign exchange and exchange rates. It defines foreign exchange as currencies other than a country's domestic currency used in international trade. Exchange rates are the prices of currencies expressed in terms of other currencies and can fluctuate based on supply and demand. The document outlines factors that influence exchange rates and why foreign exchange is needed for international trade. It also defines and compares different exchange rate systems and discusses how exchange rates are determined in currency markets through the interaction of demand and supply of foreign currencies.
A detail on forex market is being provided refering to global forex hours and the need of forex market. DAILY TURNOVER OF THE GLOBAL FOREIGN EXCHANGE. Indian forex market is also explaied with reference to usd inr movement. A brief technical analysis is also provided explaning the different chart types
In order to increase the sales, business houses are required to market their products over a larger territory and may generally split their business into certain divisions or parts, if the various certain divisions or parts, if the various parts or divisions are located in different parts of the same city as Chandni chowk, Karol bagh, Connaught place, Nehru place (in delhi) or in different cities of the same country as Calcutta, Chennai, Mumbai, Kanpur and Delhi (in india) or in different countries (in the world) as Canada, USA, England, Japan, U.S.S.R and Germany, these are known as branches, head office contracts the activities of various branches
Foreign exchange refers to foreign currencies and bank deposits denominated in foreign currency. The foreign exchange market allows people to trade one currency for another. The exchange rate between two countries is the price at which their residents trade currencies. Nominal exchange rates are relative prices of currencies, while real exchange rates also account for differences in inflation between countries and the relative prices of goods. Purchasing power parity theory holds that identical goods should have the same price across locations after accounting for exchange rates. The Big Mac Index published by The Economist uses McDonald's Big Mac burgers to estimate real exchange rates between currencies based on purchasing power parity.
Ias 16 property plant and equipment-presentationShadabAhmadFaiq
The document discusses the key aspects of IAS 16 Property, Plant and Equipment including:
- The objective is to prescribe the accounting treatment for property, plant and equipment.
- Scope outlines what is excluded like IFRS 5 and IAS 40.
- Definitions for terms like PPE, carrying amount, depreciation.
- Recognition criteria that future benefits are probable and cost can be reliably measured.
- Measurement includes initial cost and subsequent cost model or revaluation model.
- Depreciation is systematically allocated over useful life.
- Impairment is assessed using IAS 36.
- Derecognition occurs from disposal or no future benefits are expected.
The document discusses sales and production budgets. It states that the sales budget is the first budget prepared as part of the master budget and is based on sales forecasts. The sales budget shows expected sales revenue. The production budget shows the production levels needed to meet the sales budget and end-of-period inventory goals. It is derived from the sales budget and planned finished goods inventory. The production budget then informs other budgets and is a key part of the budgeting process.
1. IND AS 21 outlines the accounting treatment for foreign currency transactions and foreign operations. It addresses how to include such items in financial statements and how to translate financial statements into a presentation currency.
2. The standard establishes guidelines for determining an entity's functional currency. The functional currency is primarily the currency of the primary economic environment in which the entity operates, which is normally the currency that mainly influences sales prices and operating costs.
3. IND AS 21 provides rules for re-measuring foreign currency items into the functional currency, including the use of spot or average exchange rates. It also addresses the translation of financial statements from the functional currency into the presentation currency.
The document discusses the fundamentals of a funds flow statement, including its meaning, objectives, importance, limitations, and preparation. A funds flow statement indicates changes in financial position between two balance sheet dates, showing sources and uses of funds. It aims to analyze changes in working capital and determine causes. While useful for management, shareholders, and financiers, it also has limitations like being historic and ignoring non-fund transactions. Preparing one requires the current and prior year's balance sheets and income statement.
Foreign exchange refers to the exchange of one country's currency for another. The foreign exchange market allows currencies to be traded globally, 24 hours a day. Major participants include banks, brokers, and authorized dealers. Exchange rates are determined by supply and demand in the foreign exchange market. They can be fixed by governments or allowed to float based on market forces. Factors like economic performance, interest rates, trade balances, and political events influence exchange rate movements. Risks from exchange rate fluctuations must be managed through techniques like setting loss limits and controlling overall currency exposure.
The document provides information about balance of payments (BOP):
1. BOP is a systematic record of all economic transactions between a country and the rest of the world over a period of time, recording inflows and outflows of foreign exchange.
2. The BOP account has two sides - credits for inflows of foreign exchange and debits for outflows. It is prepared using double-entry bookkeeping.
3. The current account records trade in goods and services as well as unilateral transfers, while the capital account records changes in financial assets and liabilities with the rest of the world.
4. The BOP always balances as total receipts must equal total payments. Surpluses
The document provides an overview of technical market indicators, classifying them into four main groups: trend indicators, breadth indicators, contrarian indicators, and oscillators. It discusses trend indicators in more detail, defining them as indicators that measure the main direction of the underlying security or market. Trend indicators have the advantage of being stronger than other indicators since markets trend most of the time, allowing trend-following strategies to be profitable. However, trend indicators also have the complication of being lagging rather than leading indicators that only confirm trends after they have occurred.
There are two types of foreign exchange quotations: European and American. European quotations give the price of a currency in terms of units of another currency, while American quotations give the price in terms of dollars per unit of another currency. Direct quotes give the home currency price per unit of foreign currency, while indirect quotes give the opposite. Cross rates can be calculated using exchange rates between two currencies and a third currency. The TT buying rate is used for clean inward or outward remittances, while the bill buying rate factors in exchange and forward margins to account for delays in collection. The bill selling rate adds an exchange margin to the base rate to cover document handling costs.
Accounting for foregn curency 6-1 (2).pptxRobsanAfdal
IAS 21 addresses the accounting and reporting effects of changes in foreign exchange rates. It prescribes how to include foreign currency transactions and foreign operations in financial statements, and how to translate financial statements into the presentation currency. Exchange differences arising from foreign currency transactions and translations are generally recognized in profit or loss. However, some differences may be recognized in other comprehensive income. The functional currency is determined based on the primary economic environment the entity operates in, considering factors like the currency of sales prices and costs.
Used for MBA professional accounting class room presentation and it includes FASB rules and forex currency dealings details for purchase and sale of goods and services with foreign party.
The document discusses India's balance of payments. It includes:
1. The current account which covers merchandise (exports and imports) and invisibles (services, transfers, investment income).
2. The capital account which includes foreign investment, loans, banking capital, and other capital flows.
3. Errors and omissions and the overall balance which is the sum of the current account, capital account and errors/omissions.
This document discusses multinational corporations and the foreign exchange market. It provides details on:
1. The characteristics and criteria of multinational corporations, including operating in multiple countries, local subsidiaries managed by nationals, and centralized global management.
2. Factors that influence foreign exchange rates, such as trends in foreign trade, capital movements, speculative activities, and government control.
3. Components of a country's balance of payments, including the current account of exports/imports and invisibles, and the capital account of long-term and short-term capital flows.
This document discusses multinational corporations and foreign exchange markets. It defines multinational corporations as companies that operate in multiple countries, with managerial headquarters in one home country and operations through subsidiaries in host countries. Foreign exchange markets allow for the exchange of currencies between countries and participants include individuals, companies, banks, brokers, and central banks. Factors that influence exchange rates include trade balances, capital flows, speculative activities, monetary policies, and government controls.
The document discusses the balance of payments (BOP) and its relationship to key macroeconomic variables. It defines BOP as a systematic record of economic transactions between residents of a country and foreign countries. The BOP includes current account, capital account, and financial account balances. It interacts with GDP, exchange rates, interest rates, and inflation. A BOP deficit or surplus can impact the exchange rate, and central banks may intervene to address imbalances. Inflation can also negatively affect the BOP by impacting export competitiveness and demand for a country's currency.
The document discusses the difference between the current rate translation method and the temporal method for foreign currency translation. It also discusses the differences between FASB Statements No. 8 and No. 52 regarding translation methods.
The key differences between the current rate method and temporal method are:
- The current rate method translates assets/liabilities at current rates and revenues/expenses at average rates, while the temporal method translates some accounts at historical rates.
- FAS 52 allows more flexibility in selecting the functional currency compared to FAS 8, but it also provides more scope for manipulation and reduces comparability between firms.
FAS 52 uses the current rate method as the basic rule for subsidiaries in low inflation
This document discusses accounting principles for balance of payments (BOP) accounting. It outlines that BOP accounting follows double-entry bookkeeping, with debits equal to credits. Transactions are recorded based on whether they represent payments from or receipts to a country. Exports are credited on the current account and debited on the capital account. Imports are debited on the current account and credited on the capital account. The BOP consists of the current account balance, capital and financial account balance, and official settlements account balance. Valuation and timing of recording transactions can pose challenges to uniform BOP accounting practices.
This ppt covers Foreign exchange rate Fluctuation in this the topics covered are Appreciation (or strengthening) of a currency, Spot transaction-Spot rate, forward market, forward transaction, currency option, currency swap, Exposure, Transaction exposure, forward exchange contract, Accounting treatment of forward contract
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https://www.youtube.com/channel/UCjzpit_cXjdnzER_165mIiw
The document provides an overview of foreign exchange including:
1. It defines foreign exchange as the conversion of one country's currency into another. It also discusses how foreign exchange is important for paying import bills.
2. It outlines some fundamentals of foreign exchange including that each country has its own currency and conversions occur through banks and credit instruments.
3. It discusses factors that influence foreign exchange rates such as supply and demand, interest rates, inflation rates, balance of trade, government debt, and political/economic stability.
The document discusses India's balance of payments (BoP). It defines BoP as a systematic record of all economic transactions between residents of a country and foreign countries over a period. India's BoP includes a current account for trade in goods/services and transfers, and a capital account for financial flows. In the early 1990s, India faced a BoP crisis due to rising oil prices and falling equity prices. To address this, India introduced economic reforms like decontrolling the rupee and liberalizing foreign investment and trade. These reforms expanded India's foreign trade and improved its BoP position over time.
Balance of Payments and Exchange Rate PPT.pptxHimaanHarish1
Balance of Payments , Components of BOP, Current account; Causes of disequilibrium in Balance of Payments, Foreign Exchange rate,Devaluation, Appreciation , Revaluation and Depreciation,
International foreign exchange transactions involve two steps: 1) purchasing foreign currency and 2) using that foreign currency to purchase goods or services abroad. Foreign exchange refers to foreign currencies and the exchange of one currency for another. The foreign exchange market exists globally to facilitate international trade and investment needs, trading over $1.5 trillion daily between central banks, corporations, banks, and individuals.
This document discusses various derivative instruments used to manage foreign exchange risk, including options, futures, and swaps. It defines these instruments and provides examples of how they work. Options give the holder the right to buy or sell currency at a preset price on or before expiry. Futures are standardized contracts to exchange currencies at a specified rate. Swaps allow an exchange of interest rate or currency payment obligations between two counterparties. These derivatives help companies and investors hedge and manage their foreign currency risk exposures.
3) When translating from the functional currency to the presentation currency, assets and liabilities are translated using the closing rate, income and expenses are translated using transaction date rates, and resulting
The document discusses foreign currency concepts and transactions accounting. It introduces key definitions like functional currency, spot rates, and foreign currency transactions. It explains how to account for purchases and sales denominated in foreign currencies, including translating the transactions at the spot rate on the transaction date and adjusting for changes in rates until settlement. It also covers accounting for foreign currency derivatives like forward contracts, including their use for hedging and speculation purposes.
This document contains answers to 4 questions regarding international financial management. It defines the balance of payments and distinguishes between current account and capital account convertibility. It explains two-way and three-way arbitrage opportunities in currency exchange markets. It also provides an example of calculating a 3-month forward exchange rate and discusses various capital budgeting methods used by multinational corporations such as discounted cash flow analysis, adjusted present value approach, and others.
This chapter discusses accounting issues related to foreign currency transactions and financial instruments for multinational companies. It covers how to record and report transactions involving foreign currencies, the different types of exchange rates used to translate balances, and how to account for imports/exports and hedging strategies using financial instruments. The key aspects are translating foreign currency transactions and balances to the reporting currency, managing foreign currency risk, and designating hedges as either fair value, cash flow, or net investment hedges for accounting purposes.
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This document outlines accounting standards for foreign exchange rates. It discusses how to account for transactions in foreign currencies and translating financial statements of foreign operations. For transactions, the exchange rate on the transaction date is used. Monetary items in financial statements are translated at the closing rate, while non-monetary items are translated at historical rates. Exchange differences are generally recognized as income/expenses, except for differences related to net investments in non-integral foreign operations, which are accumulated in a foreign currency translation reserve until disposal of the net investment. Financial statements of integral foreign operations are translated as if their transactions were the reporting entity's, while non-integral operations use closing rates for assets/liabilities and transaction date rates for income/ex
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2. LEARNING OBJECTIVES
After studying this chapter, you should be able to:
Understand concepts related to foreign currency, exchange rates,
and foreign exchange risk.
Account for foreign currency transactions using the two-
transaction perspective, accrual approach.
Understand how foreign currency forward contracts and foreign
currency options can be used to hedge foreign exchange risk.
Account for forward contracts and options used as hedges of
foreign currency denominated assets and liabilities, firm
commitments and forecasted foreign currency transactions.
How to prepare journal entries to account for foreign currency,
borrowings and loans.
Compiled by Wubeshet Kifle
3. Accounting and Reporting for
Foreign Currencies
Why is there a need?
Many companies engage in international
transactions such as:
1. Importing and exporting goods,
2. Establishing branches in another countries,
3. Holding investment in foreign companies.
Compiled by Wubeshet Kifle
4. Each country uses its own currency as the unit of value for the
purchase and sale of goods and services.
The foreign exchange rate is the price at which the foreign
currency can be acquired.
A variety of factors determine the exchange rate between
two currencies, unfortunately for those engaged in
international business the exchange rate can fluctuate over
time
Between 1945 and 1973, countries fixed the par value of their
currency in terms of the U.S. dollar.
Since 1973, exchange rates have been allowed to float in
value.
Several currency arrangements exist.
Foreign Exchange Market
Compiled by Wubeshet Kifle
5. Different Currency Mechanisms
Three Different Currency Mechanisms :-
Independent float: the currency is allowed to fluctuate
according to market forces.
A fixed exchange-rate system(Pegged to another
currency):- the currency’s value is fixed in terms of a
particular foreign currency and the central bank
intervenes to maintain the fixed value.
European Monetary System:- common currency (the euro)
is used in multiple countries.
Compiled by Wubeshet Kifle
6. What is a Foreign Currency Transaction
• It is a transaction to be settled in a currency other than the
local currency
• A foreign transaction must be expressed in terms of our local
currency before they can be recorded in the books.
Compiled by Wubeshet Kifle
7. Exchange Rate
It is the price of one currency in terms of another currency.
An exchange rate is the cost of one currency in terms of
another,
The difference between the rates at which a bank is willing
to buy and sell currency is known as the “spread.”
Foreign Currency Quotes :
Direct quotation - indicate the number of domestic
currency needed to purchase one unit of foreign currency.
- How much is 1 foreign currency unit(FCU) in terms of
local currency unit(LCU)
Example : $1 = ETB 48.15
Compiled by Wubeshet Kifle
8. Presentation of exchange…cont’d
Indirect quotation - indicate the number of foreign
currency units that could be purchased with one
unit of domestic currency.
- How much is 1 LCU in terms of FCU?
Example : ETB 1 = $ 0.02
Accounting Principle
1. What kind of exchange rate(s) to use?
2. How to report the effects of change in exchange rates in the
financial statements?
Compiled by Wubeshet Kifle
9. Foreign Currency Trades
Foreign currency trades can be executed on a spot or forward
basis.
I. Spot rate
Is the price at which a foreign currency can be purchased or
sold today.
The exchange rate for immediate delivery.
II. Forward (or Future ) rate
Is the price available today at which foreign currency can be
purchased or sold in the future.
The exchange rate at which the currency can be exchanged at
a future date.
Compiled by Wubeshet Kifle
10. Foreign Currency Trades cont’d
If forward rates exceed spot rates on any given date, the
foreign currency is said to be selling at a premium in the
forward market.
If forward rates are less than spot rates, the currency is
said to be selling at a discount.
Initial Recognition
A foreign currency is initially recognized by translating the
foreign currency amount into local currency using the spot
exchange rate at the date of transaction.
Compiled by Wubeshet Kifle
11. Option Contracts Foreign Exchange
Foreign currency options give the holder of an option the right
but not the obligation to trade foreign currency in the future.
Put options allow for the sale of foreign currency by the
option holder.
Call options allow for the purchase of foreign currency by
the option holder.
A strike price is the exchange rate at which options will be
executed if option holders decide to exercise options.
Compiled by Wubeshet Kifle
12. Accounting for foreign currency transactions
Export sales and import purchases are international
transactions; they are components of what is called
trade.
The companies involved must decide which currency will
be used to settle the transaction, and whether the
transaction will be denominated (payment will be made) in
domestic or foreign currency.
If a company receives foreign currency to settle the
transaction, it must restate the amount of foreign currency
received into domestic currency.
Compiled by Wubeshet Kifle
13. Transaction Exposure
Export sale:
Exposure exists when an exporter allows a buyer to pay
in a foreign currency after the sale has been made.
The exporter is exposed to the risk that the foreign
currency might depreciate between the sale and payment
dates.
Import purchase:
Exposure exists when the importer is required to pay in foreign
currency sometime after the purchase.
The importer is exposed to the risk that the foreign currency
might appreciate between the purchase and payment dates,
increasing the domestic currency paid.
Compiled by Wubeshet Kifle
14. A major issue in accounting for foreign currency
Transactions are how to account for the:
Change in the domestic currency value of the
sales revenue and account receivable resulting
from the export when the foreign currency
changes in value.
Change in the domestic currency value of the
account payable and goods being acquired in an
import purchase.
Exchange difference (or exchange gains and
losses) are recognized in profit or loss.
Compiled by Wubeshet Kifle
15. Accounting Alternatives
Conceptually, the two methods of accounting for changes
in the value of a foreign currency transaction are the one-
transaction perspective and the two-transaction
perspective.
The one transaction perspective assumes that an export
sale is not complete until the foreign currency
receivable has been collected and converted.
Compiled by Wubeshet Kifle
16. Cont’d Accounting Alternatives
Instead, U.S. GAAP requires companies to use a two-
transaction perspective in accounting for foreign currency
transactions.
This perspective treats the export sale and the subsequent
collection of cash as two separate transactions.
Because management has made two decisions:-
1. to make the export sale and
2. to extend credit in foreign currency to the customer—the
company should report the income effect from each of
these decisions separately
Compiled by Wubeshet Kifle
17. Accounting standard
IAS 21 the effects of change in foreign exchange rates
Similar to U.S. GAAP, IAS 21, “The Effects of
Changes in Foreign Exchange Rates ” requires the
use of a two-transaction perspective to account for
foreign currency transactions with unrealized
foreign exchange gains and losses accrued in net
income in the period of exchange rate change.
There are no substantive differences between U.S.
GAAP and IFRS in accounting for foreign currency
transactions.
Compiled by Wubeshet Kifle
18. Accounting for Foreign Currency - import
Import purchases denominated in a foreign currency
and the subsequent cash payment must be accounted
for separately.
The goods purchased is recorded at the date of
purchase, with no subsequent adjustments to the cost of
the goods.
Any difference between the exchange rate have been
purchased date and the actual amount paid on the
payment date due to a change in the exchange rate is
treated as a foreign exchange gain or loss.
Compiled by Wubeshet Kifle
19. Guidelines
1. Inventory: at the spot rate at the date the inventory was
purchased,
2. Cost of Goods Sold: at the spot rate at the date the
inventory was purchased,
3. Sales: at the spot rate at the date of sale,
4. Account Receivable: at the spot rate at the balance sheet
date,
5. Account Payable: at the spot rate at the balance sheet date
and
6. Cash: at the spot rate when collected and the spot rate
when paid.
Compiled by Wubeshet Kifle
20. Other Considerations
FOB shipping terms are also considered
FOB shipping point:
transaction date - the date of shipment
FOB destination
transaction date - the date of receiving the goods
Compiled by Wubeshet Kifle
21. Treatment of Exchange Differences
Example for Importing transaction
Problem 2.1
On November 01, 2020 Abba Buna, an Ethiopian
Company, order goods from China’s Supplier for
$400,000. The inventory was shipped and invoiced
on December 01, 2020, to be paid in US dollars on
March 31, 2021.
Compiled by Wubeshet Kifle
22. Cont’d import transaction
Please prepare the
journal entries to
record the above
transaction in the
books of Abba Buna
Company.
The spot rates for US dollars are as
follow:
Selling Spot Buying Spot
Rates Rates
November 01, 2020 46.50 45.50
December 01, 2020 47.80 47.20
December 31, 2020 48.60 48.10
March 31, 2021 47.90 47.00
Compiled by Wubeshet Kifle
23. Cont’d import transaction
A . On November 01, 2020 - No entry
recorded
B . On December 01, 2020
Purchase………………19,120,000.00
Account payable…………..19,120,000.00
To record 400,000*47.80
C . Selling spot rate Dec 31, 2020 48.60
Selling spot rate Dec 01, 2020 47.80
Increase in selling spot rate 0.80
Foreign currency units 400,000
Foreign exchange loss
(400,000*0.80)…………….320,000.00
Selling Spot Buying Spot
Rates Rates
Nov 01, 2020 46.50 45.50
Dec 01, 2020 47.80 47.20
Dec 31, 2020 48.60 48.10
Mar 31, 2021 47.90 47.00
Compiled by Wubeshet Kifle
24. Cont’d import transaction
December 31, 2020 entry
Foreign exchange loss………. 320, 000.00
Account Payable………… 320, 000.00
D. Selling spot on March 31, 2021….……...47.90
Selling spot on December 31, 2020……..48.60
Decrease in selling spot rate …………….0.70
Foreign currency units . ………..400,000
Foreign exchange gain(400,000*0.70)……..….280,000.00
March 31, 2021 entry
Account payable…………………280,000.00
Foreign exchange gain………. 280,000.00
A/Payable($400,000*47.90)….19,160,000.00
. Cash……………………….19,160,000.00
Selling Spot Buying Spot
Rates Rates
Nov 01, 2020 46.50 45.50
Dec 01, 2020 47.80 47.20
Dec 31, 2020 48.60 48.10
Mar 31, 2021 47.90 47.00
Compiled by Wubeshet Kifle
25. Cont’d import transaction
Summary
The cost of delaying the
payment is ETB 40,000.00
($400,000.00 x(47.90-47.80)
reported in the following
manner:
ETB 320,000.00 F. exch. Loss
in 2020
ETB 280,000.00 F. exch. Gain
in 2021
Selling Spot Buying Spot
Rates Rates
Nov 01, 2020 46.50 45.50
Dec 01, 2020 47.80 47.20
Dec 31, 2020 48.60 48.10
Mar 31, 2021 47.90 47.00
Compiled by Wubeshet Kifle
26. Possible questions may arises:
1. At what amount the merchandise
purchased be reported in 2020?
2. What amount should be reported as a
liability to the supplier (A/P) on
December 31, 2020
3. What amount of foreign exchange
gain or loss should be recorded on
December 31, 2020?
4. What amount of foreign exchange
gain or loss should be recorded on
March 31, 2021?
5. How much ETB will it cost Abba
Buna Company to finally pay the
account on March 31, 2021?
Selling Spot Buying Spot
Rates Rates
Nov 01, 2020 46.50 45.50
Dec 01, 2020 47.80 47.20
Dec 31, 2020 48.60 48.10
Mar 31, 2021 47.90 47.00
Compiled by Wubeshet Kifle
27. Possible questions – Answer
1. Answer for Qs # 1. ETB
19,120,000.00 ($400,000.00 x ETB
47.80)
2. Answer for Qs # 2. ETB
19,440,000.00 ($400,000.00 x ETB
48.60)
3. Answer for Qs # 3. ETB
320,000.00 foreign exchange loss
4. Answer for Qs # 4. ETB 40,000.00
foreign exchange loss
5. Answer for Qs # 5. ETB
19,160,000.0($400,000.00 x 47.90)
1. At what amount the merchandise
purchased be reported in 2020
2. What amount should be reported
as a liability to the supplier (A/P)
on December 31, 2020
3. What amount of foreign exchange
gain or loss should be recorded on
December 31, 2020?
4. What amount of foreign exchange
gain or loss should be recorded on
March 31, 2021?
5. How much ETB will it cost Abba
Buna Company to finally pay the
account on March 31, 2021?
Compiled by Wubeshet Kifle
28. Accounting for Foreign Currency-Sales
Foreign Currency Transactions requires the two
transaction perspective and treats the sale and
collection of cash as two separate transactions.
Account for the original sale at the date of sale. No
subsequent adjustments are required.
Changes in currency are accounted for as
gains/losses from exchange rate fluctuations
reported separately from sales in the income
statement
Compiled by Wubeshet Kifle
29. Example for Exporting transaction
Problem 2.2
On November 01, 2020 Abba Buna, an Ethiopian Company,
received an order goods from Chinese supplier for $400,000.
Abba Buna company shipped inventory and billed the
Chinese company on December 01, 2020.The foreign
company in this case Chinese company will settle its account
on march 31, 2021 by remitting its payments in US Dollars.
The spot rates for US dollars are the same used in problem
2.1 above.
Compiled by Wubeshet Kifle
30. Example for Exporting transaction
Please prepare the
journal entries to record
the above transaction in
the books of Abba Buna
Company.
The spot rates for US dollars are as
follow:
Selling Spot Buying Spot
Rates Rates
November 01, 2020 46.50 45.50
December 01, 2020 47.80 47.20
December 31, 2020 48.60 48.10
March 31, 2021 47.90 47.00
Compiled by Wubeshet Kifle
31. Example for Exporting transaction
A . On November 01, 2020
No entry recorded
B . On December 01, 2020
A/Rec.…... 18,880,000.00
Sales ……....…18,880,000.00
($400,000 x 47.20)
Buying spot rate Dec 31, 2020 48.10
Buying spot rate Dec 01, 2020 47.20
Incr. in Buying spot rate 0.90
Foreign currency units 400,000
Foreign exchange gain
(400,000*0.90)…………….360,000.00
The spot rates for US dollars are as
follow:
Selling Spot Buying Spot
Rates Rates
November 01, 2020 46.50 45.50
December 01, 2020 47.80 47.20
December 31, 2020 48.60 48.10
March 31, 2021 47.90 47.00
Compiled by Wubeshet Kifle
32. Example for Exporting transaction
On December 31, 2020
A/receivable …………360,000.00
For. Exchange gain……360,000.00
March 31, 2021
Buying spot on Mar 31, 2021……... 47.00
Buying spot on Dec 31, 2020…..….. 48.10
Decr. in buying spot rate ……...…….1.10
Foreign currency units 400,000
Foreign exchange loss
(400,000*1.10)……….….440,000.00
The spot rates for US dollars are
as follow:
Selling Spot Buying Spot
Rates Rates
November 01, 2020 46.50 45.50
December 01, 2020 47.80 47.20
December 31, 2020 48.60 48.10
March 31, 2021 47.90 47.00
Compiled by Wubeshet Kifle
33. Example for Exporting transaction
Entry on March 31, 2021 would be:
For. exchange loss………. 440,000.00
A/Receivable ……..……..440,000.00
Cash foreign currency...18,800.000.00
A/receivable…..……18,800.000.00
($400,000 x 47.00)
Cash………………….18,800,000.00
Cash foreign currency..18,800.000.00
The spot rates for US dollars are as
follow:
Selling Spot Buying Spot
Rates Rates
November 01, 2020 46.50 45.50
December 01, 2020 47.80 47.20
December 31, 2020 48.60 48.10
March 31, 2021 47.90 47.00
Compiled by Wubeshet Kifle
34. Summary Exporting transaction
The benefit of delaying the collection is ETB 80,000.00
(400,000.00*{47-47.20}) reported in the following
manner
ETB 360,000.00 foreign exchange gain in 2020
ETB 440,000.00 foreign exchange loss in 2021
Compiled by Wubeshet Kifle
35. Example for Exporting transaction
Entry on March 31, 2021 would be:
For. exchange loss………. 440,000.00
A/Receivable ……..……..440,000.00
Cash foreign currency...18,800.000.00
A/receivable…..……18,800.000.00
($400,000 x 47.00)
Cash………………….18,800,000.00
Cash foreign currency..18,800.000.00
The spot rates for US dollars are as
follow:
Selling Spot Buying Spot
Rates Rates
November 01, 2020 46.50 45.50
December 01, 2020 47.80 47.20
December 31, 2020 48.60 48.10
March 31, 2021 47.90 47.00
Compiled by Wubeshet Kifle
36. Possible questions may arises on
Exporting Transaction
1. What amount of sales should be reported in 2020?
2. What amount should be reported as receivable from
foreign customer(A/R) on December 31, 2020
3. What amount of foreign exchange gain or loss should
be recorded on December 31, 2020?
4. What amount of foreign exchange gain or loss should
be recorded on March 31, 2021?
5. How much ETB will did Abba Buna Company
received on March 31, 2021?
Compiled by Wubeshet Kifle
37. Answers for Possible questions on
Exporting Transaction
1. What amount of sales should be
reported in 2020?
2. What amount should be
reported as receivable from
foreign customer(A/R) on
December 31, 2020
3. What amount of foreign
exchange gain or loss should be
recorded on December 31, 2020?
4. What amount of foreign
exchange gain or loss should be
recorded on March 31, 2021?
5. How much ETB will did Abba
Buna Company received on
March 31, 2021?
Qs # 1. ETB 18,880,000.00 ($400,000.00
x ETB 47.20)
Qs # 2. ETB 19,240,000.00 ($400,000.00
x ETB 48.10)
Qs # 3. ETB 360,000.00 foreign
exchange gain
Qs # 4. ETB 40,000.00 foreign exchange
loss
Qs # 5. ETB 18,880,000.0($400,000.00 x
47.00)
Other consideration are the same as
import foreign transaction
Compiled by Wubeshet Kifle
38. Summary of Exchange Rates and Foreign
Exchange Gains and Losses
Summary of the relationship between fluctuations
in exchange rates and foreign exchange gains and
losses:
Foreign currency receivables from an export sale
create an asset exposure to foreign exchange risk.
Foreign currency payables from an import
purchase create a liability exposure to foreign
exchange risk.
Compiled by Wubeshet Kifle
39. Closing Summary
Transaction Type of exchange rate Exchange rate Exchange rate
Importing Selling spot rate FX loss FX gain
Exporting Buying spot rate FX gain FX loss
Compiled by Wubeshet Kifle
40. Balance Sheet Date before Date of Payment
Authoritative accounting literature requires foreign
currency balances foreign currency receivables or
foreign currency payables to be revalued at the
balance sheet date to account for change in exchange
rates.
Consistent with accrual accounting, under the two
transaction perspective, a foreign exchange gain or
loss arises at the balance sheet date.
Compiled by Wubeshet Kifle
41. Foreign Currency Borrowings
Companies often must account for foreign currency
borrowings, another type of foreign currency transaction.
Companies borrow foreign currency from foreign lenders to
finance foreign operations or to take advantage of more
favorable interest rates.
The principal and interest are denominated in foreign currency
and create an exposure to foreign exchange risk which
complicate accounting for a foreign currency borrowing
42. Foreign Currency Loans
Companies lend foreign currency to related parties,
creating the opposite situation from a foreign currency
borrowing.
The company must keep track of a note receivable and
interest receivable, both of which are denominated in
foreign currency.
Exchange gains and losses that would be included in
income.
Compiled by Wubeshet Kifle
43. Problem 2.3
Abba Bunna Company borrowed 300,000 Dollars on May
1, 2020 for one year at an interest rate of 5% per annum.
Abba Bunna must make its first interest payment on the
loan on November 1, 2020, and will make a second interest
payment on April 30, 2021, when the loan is repaid.
December is 31, 2020 year-end .
Prepare all journal entries related to this foreign currency
borrowing.
Assuming the following exchange rates for 1 Dollars:
May 1, 2020 ETB 51.20
November 1, 2020 ETB 51.24
December 31, 2020 ETB 51.26
April 30, 2021 ETB 51.28
44. Cont’d - Problem 2.3
Prepare journal entries for a foreign currency borrowing Solution
5/1/20 Cash 15,360,000
Note Payable 15,360,000
[300,000 @ 51.10]
11/1/20 Interest Expense 384,300
Cash 384,300
[300,000 x 5% x 6/12 x ETB51.24] 384,300
12/31/20 Interest Expense 128,150
Interest
Payable
128,150
{300,000 x 5% x 2/12 x $51.26] 12,815
Foreign Exchange Loss 18,000.00
Note Payable (euro) 18,800.00
Compiled by Wubeshet Kifle
45. Cont’d - Problem 2.3
April 30, 2021 Interest Expense 256,400.00
Interest Payable (euro) 128,150
Foreign Exchange Loss 50
Cash 384,600
[300,000 x 5% x 4/12 x ETB 51.28] 256,400
[300,000 x 5% x 2/12 x (ETB51.28 – $51.26)] 50
[300,000 x 5% x 6/12 x ETB51.28] 384,600
Note Payable 378,000
Foreign Exchange Loss 6,000
Cash 384,000
[300,000 x ($1.28 - $1.26)] 6,000
Compiled by Wubeshet Kifle
46. Derivatives and Hedging Transactions
A financial instrument or other contract that drives its value from changes
in value of some underlying.
It is used to Manage Risk
Type of Derivatives
1. Forward (or Futures) contract
A contract that gives the holder the obligation to buy or sell an asset at a set price at a future
date.
2. Option contract
A contract that gives the holder the right, but not the obligation, to buy or sell an asset at a set
price at a future date.
3. Swap Agreement
A contract between two parties to exchange in the future.
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47. HEDGE ACCOUNTING
Companies enter into hedging relationships to minimize the adverse effect that changes in
exchange rates have on cash flows and net income.
As such, companies would like to account for hedges in such a way to recognize the gain
or loss from the hedge in net income in the same period as the loss or gain on the risk being
hedged. This approach is known as hedge accounting.
IFRS 9, “Financial Instruments,” provides guidance on the accounting for hedging
instruments including those used to hedge foreign exchange risk. IFRS 9 rules and
procedures related to foreign currency hedge accounting generally are consistent with
GAAP.
U.S.GAAP allows hedge accounting for foreign currency derivatives only if three
conditions are satisfied:
The derivative is used to hedge either a fair-value exposure or cash flow exposure to
foreign exchange risk.
The derivative is highly effective in offsetting changes in the fair value or cash flows
related to the hedged item.
The derivative is properly documented as a hedge
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48. Cont’d Type of Derivatives
Measurement of Derivatives - all derivatives are measured at fair value.
Use of Derivatives
For Speculation
For hedging
Speculation involves trying to make a profit from a security's price
change, whereas hedging attempts to reduce the amount of risk, or
volatility, associated with a security's price change.
Hedging – is a risk management strategy to minimize or offset the risk of any
adverse price movements.
Its objective is to reduce potential loss arising from transaction exposure
Components of Hedging Relationship
1. Hedged item
2. Hedging instrument
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49. Hedged Item
Defined as:
Recognized asset or liability
Firm commitment
Highly probable forecasted transaction
Net investment in a foreign transaction
The exposes the entity to risk of exchange in fair value or
future cash flows and is designated as being hedged.
Hedging Instruments
A designated derivative or non-derivative financial asset or liability whose
fair value or cash flows are expected to offset changes in fair value or cash
flows of a designated hedge item. Examples: Forward contracts, Option
contracts and Swap agreements.
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50. Types of Hedge
Fair value hedge
Hedge of the exposure to changes in fair value of a recognized asset or liability or
of unrecognized commitment.
Cash flow hedge
Hedge of the exposure to variability in future cash flows.
Qualifications of Hedged Items
Fair Value Hedge Cash Flow Hedge
Hedged item Change in P/L
Normal accounting
procedures
Hedging instrument Change in P/L Change in OCI
Compiled by Wubeshet Kifle
51. Problem 2.4. – Hedging an exposed
liability Position
AZ Coffee Exporter Corporation purchased goods from MK
General Inc.(Foreign Company). for ETB 600,000.00. The
merchandise was received on November 01, 2021, with
payment due in ETB on January 30, 2022. Also on November
01, 2021 AZ Coffee exporter Corporation entered into a
forward contract with CBE to purchase the necessary
600,000.00 ETB for delivery of January 30, 2022 to hedge the
purchase transaction. The hedge is accounted for as fair value
hedge. The following direct exchange rates were provided:
53. Cont’d Problem – Hedging an exposed
liability Position
Required:
Please prepare all the necessary journal entries to record the
foregoing transactions, based on the above givens.
54. Solution for Problem 2.4.
Hedged Item
1 Nov 2021 Purchase)………. 28,890,000.00
Account payable…….… 28,890,000.00
To record purchase of
(600,000@48.15)
31 Dec 2021Spot rate - selling 49.15
1 Nov 2021Spot rate - selling 48.15
Incr. in selling price spot
rate 1.00
X:FC unites 600,000.00
Foreign exchange loss 600,000.00
31 Dec 2021 Foreign exchange loss 600,000.00
Accounts payable 600,000.00
Hedging instrument
1 Nov 21
Foreign currency
receivable…… 29,280,000.00
ETB Payable………… 29,280,000.00
FC Units…………. 600,000.00
X:forward rate-selling
(90 days)
48.80
Nocked price
29,280,000.
00
Forward rate - selling
(30-days), 12/31/2021
48.90
Forward rate - selling
(90-days), 11/01/2021
48.80
Increase in selling
price forward rate 0.10
FC Units…………. 600,000.00
Gain on forward
contract 60,000.00
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55. Cont’d Solution for Problem 2.4.
Hedged Item Hedging instrument
31 December 2021 Foreign currency receivable………. 60,000.00
Gain on forward contract……… 60,000.00
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56. Cont’d Solution for Problem 2.4.
Hedged Item
31 Jan 22 Spot rate - selling 50.05
31 Dec 21 Spot rate - selling 49.15
Increase in selling
price spot rate 0.90
X:FC units 600,000.00
Foreign exchange
loss 540,000.00
31 Jan 22
Foreign exchange
loss 540,000.00
Accounts payable 540,000.00
Account payable 30,030,000.00
Cash -foreign
currency 30,030,000.00
Hedging instrument
31 Jan 2022 Spot rate selling 50.05
Forward rate - selling
(30-days), 12/31/2021
48.90
Increase in exchange rate 1.15
FC Units…………. 600,000.00
Gain on forward contract 690,000.00
31 Jan 2022
Foreign currency
receivable………. 690,000.00
Gain on forward contract………. 690,000.00
Cash -foreign
currency(600000*50.05) 30,030,000.00
Foreign currency receivable 30,030,000.00
Compiled by Wubeshet Kifle
57. Cont’d Solution for Problem 2.4.
Hedged Item
Hedging instrument
31 Jan 2022ETB payable 28,890,000.00
Cash 28,890,000.00
600,000@48.15
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58. Possible Questions
1. What is the fair value of the forward contract on November 1,
2021?
2. How much is the gain or loss to be recognized with resect to the
hedged item on December 31, 2021?
3. How much is the gain or loss to be recognized with resect to the
hedged instrument on December 31, 2021?
4. How much is the gain or loss to be recognized with resect to the
hedged item on January 31, 2022?
5. How much is the gain or loss to be recognized with resect to the
hedged instrument on January 31, 2022?
6. What is the fair value of the forward contract on January 31,
2022?
7. What is the net impact on the company’s income in 2022 as a
result of this hedge?
59. Problem 2.5. – Hedging an exposed
Asset Position
ABC Exporter sold Merchandise to XYZ Corporation for on December
01, 2021 for $50,000.00. Payment will be received on March 01, 2022.
ABC Exporter entered into forward exchange contracts to hedge the
transaction on December 01, 2021. The following rates available on
various dates are as follows:
Dec 1, 2021 Dec 31, 2021 March 01, 2022
Spot rate – selling ETB 50.75 51.00 51.25
Spot rate – buying 50.00 50.25 50.50
30-date forward –selling 50.35 50.70 51.40
30-date forward –buying 50.10 50.35 50.55
60-date forward –selling 50.90 51.10 51.25
60-date forward –Buying 50.20 50.40 50.65
90-date forward –selling 50.85 50.75 51.00
90-date forward –buying 50.30 50.45 50.60
60. Cont’d Problem 2.5 – Hedging an
exposed Asset Position
Required:
Please prepare all the necessary journal entries to record
the foregoing transactions, based on the following
givens.
61. To record Problem 2.5 – Hedging
Hedged Item Hedging instrument
1 Dec 2021 Account payable($50,000 * 50)… 2,500,000.00
Sales 2,500,000.00
1 Dec 2021ETB Receivable……… 2,515,000.00
ETB Payable… 2,515,000.00
FC Units………….
50,000.00
X:forward rate-buying
(90 days), Dec1, 2021 50.30
Nocked price 2,515,000.00
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62. Cont’d Problem 2.5 – Hedging
Hedged Item Hedging instrument
31 Dec 2021Spot rate - Buying 50.25
1 Dec 2021
Spot rate - Buying
50.00
Increase in selling price spot rate 0.25
X:FC unites 50,000.00
Foreign exchange loss 12,500.00
31 Dec 2021Account receivable 12,500.00
Foreign exchange gain 12,500.00
Forward rate - Buying
(60-days), Dec 31, 2021
50.40
Forward rate - Buying
(90-days), Dec 01, 2021
50.30
Increase in forward rate 0.10
FC Units…………. 50,000.00
Loss on forward contract 5,000.00
31 Dec 2021Loss on forward contract … 5,000.00
Foreign currency
payable………. 5,000.00
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63. Cont’d Problem 2.5 – Hedging
Hedged Item Hedging instrument
1 March 2022 Foreign currency payable 2,525,000.00
Cash -foreign currency(50,000*50.50) 2,525,000.00
Cash 2,515,000.00
ETB Receivable 2,515,000.00
Compiled by Wubeshet Kifle
64. Possible Questions
1. What is the fair value of the forward contract on December
1, 2021? Answer: Zero
2. How much is the gain or loss to be recognized with resect to
the hedged item on December 31, 2021? Answer: 12,500.00
FX Loss
3. How much is the gain or loss to be recognized with resect to
the hedged instrument on December 31, 2021? Ans: 5000.00
Loss
4. How much is the gain or loss to be recognized with resect to
the hedged item on March 01, 2022? Answer: 12,500.00 FX
gain
5. How much is the gain or loss to be recognized with resect to the
hedged instrument on March 01, 2022? Ans: 5000.00 Loss
65. Cont’d: Possible Questions
6. What is the fair value of the forward contract on March
01, 2022? Answer: 10,0000.000 liability
7. What is the net impact on the company’s income in
2022 as a result of this hedge? Answer: 7,500.00 gain
8. How much ETB did the company ultimately realized
from the exporting transaction? Answer 2,515,000.00
66. Firm Commitment
A binding agreement to purchase or sell an asset at a set
price on a future date.
When an unrecognized firm commitment is designed as a
hedger item, the subsequent cumulative change in the fair
value of the firm commitment is recognized as an asset or
liability with a corresponding gain or loss recognized in
profit or loss.
The initial carrying amount of the asset or liability that
arises from a firm commitment is a adjusted to include the
cumulative change in the fair value of the firm
commitment.
67. Problem 2.6
On December 15, 2021, Parrot Company committed to
purchase goods from a foreign company for $20,000. The
company was concerned about the fluctuation in the US
Dollars, so this date, the company entered into a 30-day
forward contract to purchase $20,000.
Relevant rates as follows:
Dec 15, 21 Dec 31, 21 Jan 14, 22
Spot rate 48.40 48.52 48.60
Forward rate 48.48 48.54 48.60
Required: Please prepare all the necessary journal entries to
record the foreign transaction.
68. Problem 2.6 solution
Hedged Item Hedging Instrument
Dec 15, 2021 Foreign Currency
receivable($20,000*48.48
969,600
ETB Payable 969,600
Forward rate 12/31/2021 48.54
Forward rate 12/15/2021 48.48
Incr. in forward rate 0.06
X:FC units 20,000
Gain on forward contract 1,200
12/31/21 Foreign Currency receivable 1,200
Gain on forward contract 1,200
Cash-foreign currency 972,000
Foreign currency receivable 972,000
ETB- Payable 969,600
12/31/21 Cash 969,600
12/15/20221 No entry
12/31/21 Loss for firm
commitment
1,200
firm
commitment
1,200
Purchase(20000X
48.60)
972,000
Cash-foreign
currency
972,000
Firm
Commitment
2,4000
Purchase 2,400
Compiled by Wubeshet Kifle
This accounting concept answer through illustrations on the next pages
What are call options?
A call option is a contract between a buyer and a seller to purchase a certain stock at a certain price up until a defined expiration date. The buyer of a call has the right, not the obligation, to exercise the call and purchase the stocks. On the other hand, the seller of the call has the obligation and not the right to deliver the stock if assigned by the buyer.
Transaction exposure is the level of uncertainty businesses involved in international trade face. Specifically, it is the risk that currency exchange rates will fluctuate after a firm has already undertaken a financial obligation.
FOB Shipping Point or ‘Free on Board Shipping Point’ or ‘FOB Origin’ is a shipping term indicating that a buyer must pay for the delivery of the goods. This means that the title of the goods passes to the buyer as soon as the shipment leaves the seller’s warehouse (or shipping dock). It also means that the seller should record the sale when the goods leave the warehouse.
"FOB destination" means the seller retains the risk of loss until the goods reach the buyer.
Note: 400,000*47.80
A forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. A forward contract, often shortened to just forward, is a contract agreement to buy or sell an asset at a specific price on a specified date in the future. Since the forward contract refers to the underlying asset that will be delivered on the specified date, it is considered a type of derivative.
An options contract is an agreement between two parties to facilitate a potential transaction involving an asset at a preset price and date. ... Buying an option offers the right, but not the obligation, to purchase or sell the underlying asset.
A hedged item is an asset, liability, commitment, highly probable transaction, or investment in a foreign operation that exposes an entity to changes in fair value or cash flows, and is designated as being hedged.
A hedging instrument is a financial derivative, usually a forward contract, used in FX hedging. When currency rates change, the hedging instrument creates an offsetting financial position that compensates the corresponding change in the hedged currency exposure.