AKUNTANSI KEUANGAN

LANJUTAN I
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Dosen: Molina, SE., M.Si., Ak., CA

12
Accounting for Foreign Currency
Transactions and Hedging
Foreign Exchange Risk

Advanced Accounting, Fifth Edition

Foreign Currency Transactions

Recording and reporting problems with foreign currency

transactions:
Transactions in a foreign currency must be translated
(expressed in dollars) before they can be aggregated
with domestic transactions.
Receivables or payables denominated in foreign
currencies are subject to gains and losses.

Companies use hedging strategies with derivatives

to minimize the impact of exchange rate changes.
Exchange Rates—Means of Translation

Translation - process of expressing amounts stated

in a foreign currency in the currency of the reporting
entity by using an appropriate exchange rate.

Exchange rate - ratio between a unit of one

currency and another currency for which that unit
can be exchanged at a particular time.
Exchange Rates—Means of Translation

Direct Exchange Rate

Units of domestic currency that can be converted into
one unit of foreign currency.
Direct rate = 1.517 ($1.517 U.S. for 1 British pound)

Indirect Exchange Rate

Units of foreign currency that can be converted into
one unit of domestic currency.
Indirect rate = 1.00/1.517 = .6592
($1 U.S. for .6592 British pound)
Exchange Rates—Means of Translation

Spot Rate
Rate at which currencies can be exchanged today.

Forward or Future Rate

Rate at which currencies can be exchanged at
some future date.

Forward Exchange Contract

Contract to exchange currencies of different countries
on a stipulated future date, at a specified rate (the
forward rate).
Exchange Rates—Means of Translation

Floating Rates
Relationship between major currencies is determined by
supply and demand factors.

Increase risk to companies doing business with a

foreign company.

Example – Payable to be settled in 100,000 yen

Transaction Change Settlement
Date in Rate Date
Yen 100,000 100,000
Direct rate $ 0.00434 $ 0.00625
Payable $ 434.00 $ 625.00
Foreign Currency Transactions

Foreign Currency Transaction - requires payment or receipt

(settlement) in a foreign currency.
U.S. firm exposed to risk of unfavorable changes in the
exchange rate.

Direct exchange rate More dollars needed to

increasing, or foreign = acquire the foreign
currency unit strengthening. currency units.

Direct exchange rate Fewer dollars needed to

decreasing, or foreign = acquire the foreign
currency unit weakening. currency units.

LO 2 Foreign Currency Transactions.

Foreign Currency Transactions

Importing or Exporting of Goods or Services

Translating Accounts Denominated in Foreign Currency

Transaction Balance Settlement

date sheet date date

Units of foreign currency x Current direct exchange rate

Increase or decrease is generally reported as a foreign currency

transaction gain or loss, sometimes referred to as an exchange gain
or loss, in determining net income for the current period.

LO 3 Common transactions.
LO 4 Three stages of concern.
Importing and Exporting Transactions

Exercise 12-2: During December of the current year,

Teletex Systems, Inc., a company based in Seattle,
Washington, entered into the following transactions:

Dec. 10 Sold seven office computers to a company located in

Colombia for 8,541,000 pesos. On this date, the spot rate
was 365 pesos per U.S. dollar.

Inventory delivered
12/10/Year 1
U.S. firm
Columbia firm
(Teletex)
8,541,000 pesos
received on 1/10/Year 2
LO 3 Common transactions.
LO 4 Three stages of concern.
Importing and Exporting Transactions

Exercise 12-2: Dec. 10, Sold seven office computers to a

company located in Colombia for 8,541,000 pesos. On this
date, the spot rate was 365 pesos per U.S. dollar. Prepare the
journal entry on the books of Teletex Systems, Inc. (periodic
method)

Accounts receivable 23,400

Sales 23,400

Sales price in pesos 8,541,000

Pesos per U.S. dollar / 365
Sales price in U.S. dollars $ 23,400

LO 3 Common transactions.
LO 4 Three stages of concern.
Importing and Exporting Transactions

Exercise 12-2: Prepare journal entry necessary to adjust

the accounts as of December 31. Assume that on December
31 the direct exchange rates was Colombia peso $.00268.

Transaction loss 510

Accounts receivable 510

Receivable in pesos 8,541,000

Direct exchange rate to U.S. dollar $ .00268
Receivable in U.S. dollars $ 22,890
Balance in receivable 23,400
Transaction loss $ 510

LO 3 Common transactions. LO 4 Three stages of concern.

Importing and Exporting Transactions

Exercise 12-2: Prepare journal entry to record settlement of

the account on January 10. Assume that the direct exchange
rate on the settlement date was Colombia peso $.00320.

Cash (8,541,000 x $.00320) 27,331

Accounts receivable ($23,400 - $510) 22,890
Transaction gain 4,441

LO 3 Common transactions. LO 4 Three stages of concern.

Importing and Exporting Transactions

Exercise 12-2: During December of the current year,

Teletex Systems, Inc., a company based in Seattle,
Washington, entered into the following transactions:
Dec. 12 Purchased computer chips from a Taiwan company.
Contract was denominated in 500,000 Taiwan dollars.
Direct exchange rate on this date was $.0391.

Inventory received
12/12/Year 1
U.S. firm
Taiwan firm
(Teletex)
500,000 Taiwan dollars
paid on 1/10/Year 2
LO 3 Common transactions.
LO 4 Three stages of concern.
Importing and Exporting Transactions

Exercise 12-2: Dec. 12, Purchased computer chips from a

company domiciled in Taiwan. The contract was denominated
in 500,000 Taiwan dollars. The direct exchange spot rate on
this date was $.0391. Prepare the journal entry on the books
of Teletex Systems, Inc.

Purchases 19,550
Accounts payable 19,550

Purchase price in Taiwan dollars 500,000

Direct exchange rate to U.S. dollar x $.0391
Purchase price in U.S. dollars $ 19,550

LO 3 Common transactions.
LO 4 Three stages of concern.
Importing and Exporting Transactions

Exercise 12-2: Prepare journal entry necessary to adjust

the account as of December 31. Assume that on December 31
the direct exchange rates was Taiwan dollar $.0351.

Accounts payable 2,000

Transaction gain 2,000

Payable in pesos 500,000

Direct exchange rate to U.S. dollar $ .0351
Payable in U.S. dollars $ 17,550
Balance in payable 19,550
Transaction gain $ 2,000

LO 3 Common transactions. LO 4 Three stages of concern.

Importing and Exporting Transactions

Exercise 12-2: Prepare journal entry to record settlement

of account on January 10. Assume that the direct exchange
rate on the settlement date was Taiwan dollar $.0398.

Transaction loss 2,350

Accounts payable ($19,550 - $2,000) 17,550
Cash (500,000 x $.0398) 19,900

LO 3 Common transactions. LO 4 Three stages of concern.

 Importing and Exporting Transactions

Importing or Exporting of Goods or Services

 Foreign currency transaction gains and losses are
included in net income.
Two-transaction approach:
 The sale or purchase is viewed as a transaction separate

 from the financing arrangement.

 The dollar amount recorded (in Sales or in Purchases) is
determined by the exchange rate on the transaction date.
 Adjustments to the foreign-currency-denominated
receivable or payable are recorded directly to the
transaction gain or loss and included in net income.

LO 3 Common transactions. LO 4 Three stages of concern.

Importing and Exporting Transactions

Hedging Foreign Exchange Rate Risk

Derivative Instrument - a financial instrument that
provides the holder (or writer) with the right (or obligation)
to participate in some or all of the price changes of another
underlying value of measure, but does not require the holder
to own or deliver the underlying value of measure.

Two broad categories: Derivatives are recognized in the

Forward-based balance sheet at their fair value,
Option-based resulting in a payable position for
one party and a receivable
position for the other.

LO 8 Derivatives as a hedge.
Importing and Exporting Transactions

Forward Exchange Contracts

A forward exchange contract (forward contract) is an
agreement to exchange currencies of two different countries
at a specified rate (the forward rate) on a stipulated
future date.

LO 5 Forward exchange contracts.

Importing and Exporting Transactions

Which Kind of Forward Contract to Choose?

1. Forward Contract used as a Hedge of a(n):
a. Foreign currency transaction.
b. Unrecognized firm commitment (a fair value hedge).
c. Foreign-currency-denominated “forecasted”
transaction (a cash flow hedge).
d. Net investment in foreign operations.

2. Speculation
Forward contracts used to speculate changes in foreign
currency.

LO 5 Forward exchange contracts.

Using Forward Contracts as a Hedge

Hedge of a Foreign Currency Exposed Liability

Problem 12-2: Christel Exporting Co. is a U.S. wholesaler
engaged in foreign trade. The following transaction is
representative of its business dealings. The company uses a
periodic inventory system and is on a calendar-year basis. All
exchange rates are direct quotations.

Dec. 1 Christel Exporting purchased merchandise from

Chang’s Ltd., a Hong Kong manufacturer. The invoice was for
210,000 Hong Kong dollars, payable on April 1. On this same
date, Christel Exporting acquired a forward contract to buy
210,000 Hong Kong dollars on April 1 for $.1314.

LO 7 Forward contracts as a hedge.

Using Forward Contracts as a Hedge

Problem 12-2: (additional facts)

April 1 Christel Exporting submitted full payment of

210,000 Hong Kong dollars to Chang’s, Ltd., after obtaining
the 210,000 Hong Kong dollars on its forward contract.
Spot rates and the forward rates for the Hong Kong dollar
were as follows:
Forward Rate for
Spot Rate ($) April 1 Delivery ($)
Dec. 1 .1265 .1314
Dec. 29 .1240 .1305
Dec. 31 .1259 .1308
April 1 .1430
LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge

Problem 12-2: Prepare journal entries for the transactions

including the necessary adjustments on December 31.

Dec 1 Purchases 26,565

Accounts Payable 26,565

Hong Kong dollars 210,000

Dec. 1 Direct Spot Rate $ .1265
Payable in U.S. dollars $ 26,565

LO 7 Forward contracts as a hedge.

Using Forward Contracts as a Hedge

Problem 12-2: Prepare journal entries for the transactions

including the necessary adjustments on December 31.

Dec 1 FC Receivable from Exch. Dealer 27,594

Dollars Payable to Exch. Dealer 27,594

Hong Kong dollars 210,000

Dec. 1 Forward Rate $ .1314
Payable in U.S. dollars $ 27,594

LO 7 Forward contracts as a hedge.

Using Forward Contracts as a Hedge

Problem 12-2: Prepare journal entries for the transactions

including the necessary adjustments on December 31.

Dec 31 Accounts Payable 126

Transaction Gain 126

Hong Kong dollars 210,000

Dec. 31 Spot Rate $ .1259
Payable in U.S. dollars $ 26,439
Payable recorded on Dec. 1 26,565
Transaction gain $ 126

LO 7 Forward contracts as a hedge.

Using Forward Contracts as a Hedge

Problem 12-2: Prepare journal entries for the transactions

including the necessary adjustments on December 31.

Dec 31 Transaction Loss 126

FC Receivable from Exchange Dealer 126

Hong Kong dollars 210,000

Dec. 31 Forward Rate $ .1308
Payable in U.S. dollars $ 27,468
Payable recorded on Dec. 1 27,594
Transaction loss $ (126)

LO 7 Forward contracts as a hedge.

Using Forward Contracts as a Hedge

Problem 12-2: Prepare journal entries for the transactions

including the necessary adjustments on December 31.

Dec 31 Transaction Loss 3,591

Accounts payable 3,591

Hong Kong dollars 210,000

Apr. 1 Spot Rate $ .1430
Payable in U.S. dollars $ 30,030
Payable established on Dec. 31 26,439
Transaction loss $ (3,591)

LO 7 Forward contracts as a hedge.

Using Forward Contracts as a Hedge

Problem 12-2: Prepare journal entries for the transactions

including the necessary adjustments on December 31.

Dec 31 FC Receivable from Exch. Dealer 2,562

Transaction Gain 2,562

Hong Kong dollars 210,000

Apr. 1 Spot Rate $ .1430
Payable in U.S. dollars $ 30,030
Payable established on Dec. 31 27,468
Transaction loss $ 2,562

LO 7 Forward contracts as a hedge.

Using Forward Contracts as a Hedge

Problem 12-2: Prepare journal entries for the transactions

including the necessary adjustments on December 31.

Apr 1 Investment in Foreign Currency 30,030

Dollars Payable to Exch. Dealer 27,594
Cash 27,594
FC Receivable from Exch. Dealer 30,030
(payment to dealer and receipt of 210,000 Hong Kong dollars)

Accounts Payable 30,030

Investment in Foreign Currency 30,030
(payment of liability upon transfer of 210,000 Hong Kong dollars)

LO 7 Forward contracts as a hedge.

Using Forward Contracts as a Hedge

Problem 12-2: Transaction Summary

Transaction Transaction
Hedged Item Balance Gain/(Loss) Hedge Balance Gain/(Loss)
Accounts Payable FC Receivable
Dec. 1 $ 26,565 Dec. 1 $ 27,594
Dec. 31 26,439 $ 126 Dec. 31 27,468 $ (126)
Apr. 1 30,030 (3,591) Apr. 1 30,030 2,562
Total gain/(loss) $ (3,465) $ 2,436

Thus the net effect is a $1,029 loss when the

forward contract is used.

LO 7 Forward contracts as a hedge.

Using Forward Contracts as a Hedge

Hedge of a Foreign Currency Exposed Asset

Accounting for a forward contract entered into as a hedge of
an exposed receivable position is similar to an exposed
liability position.

Because the U.S. firm will be receiving foreign currency in

settlement of the exposed receivable balance, it will enter
into a forward contract to sell foreign currency for U.S.
dollars.

LO 7 Forward contracts as a hedge.

 Using Forward Contracts as a Hedge

Cash Flow Hedge-A Forecasted Transaction

 Cash Flow Hedge - hedging cash flows for future
transactions that have not yet occurred or for which
there are no firm commitments.

 Cash flow hedges may defer the Income statement
recognition of gains and losses on forecasted transactions
if certain criteria are met.

 Amounts in accumulated other comprehensive income are
reclassified into earnings in the same period which the
hedged forecasted transaction affects earnings.

LO 7 Fair value hedge vs. cash flow hedge.