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Foreign Currency Transactions Explained

This document discusses foreign currency transactions and accounting. It outlines when foreign exchange gains and losses occur between the transaction date, reporting date, and settlement date. It also describes direct and indirect exchange rates, spot rates, forward rates, and historical rates. The document discusses the foreign currency translation method where monetary items use the closing rate, non-monetary historical cost items use the historical rate, and non-monetary fair value items use the spot rate. It also covers speculative forward exchange contracts, hedging, and the net and gross methods for recording forward contracts.

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41 views3 pages

Foreign Currency Transactions Explained

This document discusses foreign currency transactions and accounting. It outlines when foreign exchange gains and losses occur between the transaction date, reporting date, and settlement date. It also describes direct and indirect exchange rates, spot rates, forward rates, and historical rates. The document discusses the foreign currency translation method where monetary items use the closing rate, non-monetary historical cost items use the historical rate, and non-monetary fair value items use the spot rate. It also covers speculative forward exchange contracts, hedging, and the net and gross methods for recording forward contracts.

Uploaded by

lilian.doan98
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 10: Foreign Currency Transactions

Issues Arises when the value of the Canadian Dollar has changed relative to the value of the foreign
currency between:

 Time the transaction occurs &


 Date at which the financial statements are reported with foreign-currency-denominated
receivable or payable, &
 The date of the receipt or payment

Transactions> Report >Settle

Exchange Rate Quotations

An Exchange rate: Quoted Directed or Indirectly

 Direct rate is cost of CAD to purchase one unite of foreign currency


 EUR = 1.3825 Cad
 Indirect rate is cost in a foreign currency to purchase 1 CAD
 1 CAD = 0.7233

Spot Rate: Rate to exchange currency today

Foreword Exchange contract: Agreement between bank and customer to exchange currencies on a
specified future date at a specific rate

Foreword Rate: Rate agreed to today for exchanging currency at a future date
Historical Rate: Rate on the date of the transaction

Closing Rate: Rate at the end of the reporting period

 Individual transaction must be translated into functional currency at historical rate

FTC Method

A) Foreign currency monetary items must be translated using the closing rate
B) Non-monetary items that are measured in terms of historical costs in a foreign currency must be
translated using the historical rate
C) Non-monetary items that are measured at FV in a foreign currency must be translated using the
spot exchange rate at the date FV was determined

Transactions Gains or Losses from Noncurrent Monetary Items

 Interest expense is translated at the average of the historical rates to produce a historical price
in Canadian dollars.
 Exchange gains or losses occur on items translated at the closing rate

Speculative Forward Exchange Contracts

 Forward exchange contracts: Two parties agree today to exchange currencies at a future date at
a specified exchange rate
 When the forward rate changes, fair value of forward contract changes
 Under net method, no journal entry needed when signed.
 FV measured at reporting date

Two Methods to Record Forward Contracts: Net Method or Gross Method.

Gross Method: A/R from bank and payable to the bank are recorded separately at FV

Net Method: Receivable and payable are netted against each other and only net receivable is recorded.

Either method is acceptable for recording, however on statements only net amount is shown.

Hedges

 Hedging: Offsetting risk exposure rising from foreign exchange (or interest rate or price)
fluctuations from those who wish to avoid it to those who are willing to assume it
 Hedging instrument is the item used to offset risk to exposure
 Hedge accounting is optional
 FV Hedge can recognized asset, liabilities, unrecognized firm commitment or a highly probable
future transaction
 Currency risk FV hedge or Cash flow hedge
 Under hedge accounting, the exchange gains or losses on the hedging instrument will be
reported in income in the same period of the exchange gains or losses on the hedge item

Personal Notes for Journal Entries:

Hedge with Bank (Payable is always the same, it’s the receivable that changes)

Purchase (Payable changes)

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