Вы находитесь на странице: 1из 49

# Slide

12-1
12
Accounting for Foreign Currency
Transactions and Hedging
Foreign Exchange Risk

Slide
12-2
Learning Objectives

“denominated.”

transactions.

## 4. Identify three stages of concern to accountants for

foreign currency transactions, and explain the steps used to
translate foreign currency transactions for each stage.

## 5. Describe a forward exchange contract.

Slide
12-3
Learning Objectives

## 6. Explain the use of forward contracts as a hedge of an

unrecognized firm commitment.

## 7. Identify some of the common situations in which a forward

exchange contract can be used as a hedge.

## 8. Describe a derivative instrument and understand how it may

be used as a hedge.

9. Explain how exchange gains and losses are reported for fair
value hedges and cash flow hedges.

Slide
12-4
Foreign Currency Transactions

## Many U.S. companies engage in international activities

such as:
Exporting or importing goods,

## Holding an equity investment in a foreign company.

Slide
12-5
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.

Slide
12-6
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.

Slide
12-7
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)

Slide
12-8
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).

Slide
12-9
Exchange Rates—Means of Translation
Floating Rates
Relationship between major currencies is determined
by supply and demand factors.

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
Slide
12-10
Measured Versus Denominated

## Transactions are normally measured and recorded in

terms of the currency in which the reporting entity
prepares its financial statements.
Reporting Currency - usually the currency where the
company is located.
Transaction between a U.S. firm and a foreign company:
Companies negotiate whether settlement is to be made in
dollars or in the foreign currency.
If settled by foreign currency, U.S. firm measures the
receivable or payable in dollars, but the transaction is
denominated in the foreign currency.

Slide
12-11
LO 1 Measured versus denominated.
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.

Slide
12-12
LO 2 Foreign Currency Transactions.
Foreign Currency Transactions

## Transaction Balance Settlement

date sheet date date

## 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.

## Slide LO 3 Common transactions.

12-13 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
Slide LO 3 Common transactions.
12-14 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)

Sales 23,400

## Sales price in pesos 8,541,000

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

## Slide LO 3 Common transactions.

12-15 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
Slide
12-16 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

Slide
12-17 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.

12/12/Year 1
U.S. firm
Taiwan firm
(Teletex)
500,000 Taiwan dollars
paid on 1/10/Year 2
Slide LO 3 Common transactions.
12-18 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

## Slide LO 3 Common transactions.

12-19 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
Slide
12-20 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

Slide
12-21 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.
receivable or payable are recorded directly to the
transaction gain or loss and included in net income.

Slide
12-22 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.
Slide
12-23
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.

Slide
12-24 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.

Slide
12-25 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.

Slide
12-26 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge

## 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
Slide
12-27 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

Slide
12-28 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

Slide
12-29 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
Slide
12-30 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)
Slide
12-31 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)
Slide
12-32 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
Slide
12-33 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)

Slide
12-34 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.

Slide
12-35 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.

Slide
12-36 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge

## Fair Value Hedge—Hedging an Unrecognized Foreign

Currency Commitment

##  A U.S. firm, at a date earlier than the transaction date,

may make a commitment to a foreign company to buy or
sell goods at a price established in foreign currency.

##  Changes in the exchange rate between the commitment

date and transaction date would be reflected in the cost
or sales price of the asset.

##  The U.S. firm may enter a forward contract to hedge its

commitment.

Slide
12-37 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Exercise 12-14: Consider the following information:
1. On December 1, 2008, a U.S. firm contracts to sell equipment
(with an asking price of 10,000 pesos) in Mexico. The firm will
take delivery and will pay for the equipment on March 1, 2009.
2. On December 1, 2008, the company enters into a forward
contract to sell 10,000 pesos for \$9.48 on March 1, 2009.
3. Spot rates and the forward rates for March 1, 2009,
settlement were as follows (dollars per peso):
Spot Rate Forward Rate
December 1, 2008 \$9.54 \$9.48
Balance sheet date (12/31/08) 9.49 9.44
March 1, 2009 9.47
4. On March 1, the equipment was sold for 10,000 pesos. The cost
of the equipment was \$40,000.
Slide
12-38 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Exercise 12-14: Prepare all journal entries needed on December
1, December 31, and March 1 to account for the forward contract,
the firm commitment, and the transaction to sell the equipment.

## Dec 1 Receivable from Exchange Dealer* 94,800

FC Payable to Exchange Dealer 94,800

## Dec 31 FC Payable from Exchange Dealer** 400

Foreign Exchange Gain 400

## Foreign Exchange Loss 400

Firm Commitment** 400

## * (10,000 x \$9.48 = \$94,800)

** [(10,000 x (\$9.48 - \$9.44)] = \$400
Slide
12-39 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Exercise 12-14: Prepare all journal entries needed on December
1, December 31, and March 1 to account for the forward contract,
the firm commitment, and the transaction to sell the equipment.

## Mar 1 Foreign Exchange Loss 300

FC Payable from Exchange Dealer* 300

## Firm Commitment* 300

Foreign Exchange Gain 300

Investment in FC 94,700
Firm Commitment 100
Sales (10,000 x 9.48) 94,800

## * [(10,000 ´ (\$9.44 - \$9.47)] =\$300

Slide
12-40 LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Exercise 12-14: Prepare all journal entries needed on December
1, December 31, and March 1 to account for the forward contract,
the firm commitment, and the transaction to sell the equipment.

## Mar 1 Cash 94,800

FC Payable to Exchange Dealer 94,700
Investment in FC 94,700
Dollars Receivable from Exchange Dealer 94,800

## Cost of Goods Sold 40,000

Inventory 40,000

Slide
12-41 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.
Slide
12-42 LO 7 Fair value hedge vs. cash flow hedge.
Using Forward Contracts as a Hedge
Exercise 12-13: Consider the following information:
1. On December 1, 2008, a U.S. firm plans to purchase a piece of
equipment (with an asking price of 100,000 francs) in
Switzerland during January of 2009. The transaction is
probable, and the transaction is to be denominated in euros.
2. On December 1, 2008, the company enters into a forward
contract to buy 100,000 francs for \$1.01 on January 31, 2009.
3. Spot rates and the forward rates for January 31, 2009,
settlement were as follows (dollars per francs):
Spot Rate Forward Rate
December 1, 2008 \$0.99 \$1.01
Balance sheet date (12/31/08) 1.01 1.02
Jan. 31 and Feb. 1, 2009 1.04
4. On Feb. 1, the equipment was purchased for 100,000 francs.
Slide
12-43 LO 7 Fair value hedge vs. cash flow hedge.
Using Forward Contracts as a Hedge
Exercise 12-13: Prepare all journal entries needed on Dec. 1, Dec.
31, Jan. 31, and Feb. 1 to account for the forecasted transaction,
the forward contract, and the transaction to buy the equipment.

## Dec.1 FC Receivable from Exchange Dealer 101,000

Dollars Payable to Exchange Dealer* 101,000

## Dec.31 FC Receivable from Exchange Dealer** 1,000

Foreign Exchange Gain – OCI 1,000

## * (100,000 x \$1.01) = \$101,000

** [(100,000 x (\$1.01- \$1.02)] = \$1,000
Slide
12-44 LO 7 Fair value hedge vs. cash flow hedge.
Using Forward Contracts as a Hedge
Exercise 12-13: Prepare all journal entries needed on Dec. 1, Dec.
31, Jan. 31, and Feb. 1 to account for the forecasted transaction,
the forward contract, and the transaction to buy the equipment.

## Jan.31 FC Receivable from Exchange Dealer 2,000

Foreign Exchange Gain – OCI 2,000
[(100,000 ´ (\$1.02- \$1.04)]

Investment in FC 104,000
Dollars Payable to Exchange Dealer 101,000
Cash 101,000
FC Receivable from Exchange Dealer 104,000
Feb. 1 Equipment 104,000
Investment in FC 104,000
Slide
12-45 LO 7 Fair value hedge vs. cash flow hedge.
Using Forward Contracts as a Hedge

## Economic Hedge of a Net Investment in a

Foreign Entity
 A U.S. firm may enter into a foreign currency transaction
or a nonderivative financial instrument in an effort to
minimize or offset the effects of currency fluctuations
on an equity investment in a foreign company.

##  The gain or loss on the hedging instrument is reported in

the same manner as the translation adjustment, that is,
reported in the cumulative translation adjustment section
under comprehensive income. FASB ASC paragraph 815-
35-35-1
Slide
12-46 LO 7 Fair value hedge vs. cash flow hedge.
Using Forward Contracts as a Hedge

## Forward Contracts Acquired to Speculate in the

Movement of Foreign Currencies
A forward contract may be acquired for speculative purposes
in anticipation of realizing a gain.

## Disclosure Requirements of the Various Hedges

FASB ASC Section 815-20-50 specifies certain minimal
disclosures for derivative instruments and nonderivative
instruments designated as qualifying hedging instruments.

## Slide LO 7 Fair value hedge vs. cash flow hedge.

12-47 LO 3 Common transactions.
Using Forward Contracts as a Hedge

##  Options, give the holder the advantage of right but not

the obligation to buy or sell the currency.

##  If the exchange rate changes in a negative manner, the

firm can simply let the option lapse without a loss.

Slide
12-48 LO 8 Derivatives used as a hedge.