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Chapter 9
Translation Of
Foreign Currency Transactions
The Need For Translation

Foreign Currency Transaction
– Buying or selling goods or services
– Borrowing or lending money denominated in a
foreign currency
– Acquiring investments that must be paid for in
a foreign currency
– Hedging transaction
© 2008 Clarence Byrd Inc.
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The Need For Translation

Foreign Currency Financial Statements
– Significantly influenced companies
– Subsidiaries
 Integrated
 Self-sustaining
– Joint ventures
© 2008 Clarence Byrd Inc.
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Terminology

SPOT RATE: The term spot rate is
used to refer to the exchange rate at
a particular point in time.
In accounting literature, the most
relevant spot rate is the one that
prevails at the Balance Sheet date
and, in this context, it is generally
referred to as the current rate.

There are at least two “spot” rates
at any point in time
– Bid rate
– Ask rate
© 2008 Clarence Byrd Inc.
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Terminology

HISTORIC RATE:
This term is used to refer to
the exchange rate that
prevailed at the time a
particular Balance Sheet item
was:
- acquired (asset) or
- incurred (liability).
© 2008 Clarence Byrd Inc.
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Alternative Methods of Translation

Current / Non-Current Method

Monetary / Non-Monetary Method

Temporal Method

Current Rate Method
© 2008 Clarence Byrd Inc.
Completely
Discredited
6
The Temporal Method

The Concept
– Items valued at current values
are translated using current
exchange rates.
– Items valued at historic values
are translated using historic
exchange rates.
© 2008 Clarence Byrd Inc.
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The Temporal Method

Example
– Inventories carried at cost
would be translated at historic
rates
– Inventories carried at net
realizable value would be
translated at current rates
© 2008 Clarence Byrd Inc.
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Temporal As Per
CICA Handbook

Paragraph 1651.03(c)(i) The temporal method is a method of
translation that translates assets, liabilities, revenues and expenses
in a manner that retains their bases of measurement in terms of the
Canadian dollar (i.e., it uses the Canadian dollar as the unit of
measure). In particular:
– monetary items are translated at the exchange rate in effect at the
balance sheet date;
– non-monetary items are translated at historical exchange rates, unless
such items are carried at market, in which case they are translated at
the exchange rate in effect at the balance sheet date;
– revenue and expense items are translated at the exchange rate in effect
on the dates they occur;
– depreciation or amortization of assets translated at historical exchange
rates is translated at the same exchange rates as the assets to which it
relates.
© 2008 Clarence Byrd Inc.
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Temporal As Per
CICA Handbook

Monetary Items Defined
Paragraph 1651.03(b) Monetary items are money
and claims to money the value of which, in terms of
the monetary unit, whether foreign or domestic, is
fixed by contract or otherwise. Future Income tax
liabilities and assets are classified as monetary items.
© 2008 Clarence Byrd Inc.
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Temporal As Per
CICA Handbook

Items specified as non-monetary
–
–
–
–
–
–
–
–
–
–
–
–
Investments in equity instruments carried at cost
Inventories carried at cost
Prepaid items
Property, plant and equipment and accumulated amortization
Patents, trademarks, licenses and formulas
Goodwill
Other intangible assets (including deferred charges)
Deferred income
Share capital (see Paragraph 9-31)
Revenue and expenses related to non-monetary items, including:
Cost of goods sold
Depreciation and amortization (including amortization of deferred
income)
© 2008 Clarence Byrd Inc.
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Temporal As Per
CICA Handbook

Other Guidance On Monetary Items
– Paragraph 1651.47 Preference shares of a
foreign operation held by the reporting enterprise
are translated in the same manner as common
shares (i.e., at historical rates) unless redemption is
either required or imminent, in which case the
current rate is used. ...
– Paragraph 1651.52 Future income tax liabilities
and assets are monetary items and, as such, are
translated at the current rate.
© 2008 Clarence Byrd Inc.
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Conceptual Definition Vs. CICA

The two approaches
provide identical results

References to monetary
confuse temporal with
monetary vs. nonmonetary
© 2008 Clarence Byrd Inc.
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Temporal Method and
FC Transactions

Paragraph 1651.14 At the transaction date,
each asset, liability, revenue or expense arising
from a foreign currency transaction of the
reporting enterprise should be translated into
Canadian dollars by the use of the exchange
rate in effect at that date. [October, 2006]

Use Of Averages If
– Transactions occur uniformly over the period
– Exchange rate changes uniformly over the period
© 2008 Clarence Byrd Inc.
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Temporal Method and
FC Transactions

Paragraph 1651.16 At each balance sheet date,
monetary items denominated in a foreign currency
should be adjusted to reflect the exchange rate in effect
at the balance sheet date. (July, 1983)

Paragraph 1651.18 At each balance sheet date, for
non-monetary assets of the reporting enterprise that are
carried at market, the Canadian dollar equivalent should
be determined by applying the exchange rate in effect at
the balance sheet date to the foreign currency market
price. (July, 1983)
© 2008 Clarence Byrd Inc.
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Exchange Gains And Losses

Source
– Some items are
translated at current
rates
– As the rate changes,
gains and losses arise
© 2008 Clarence Byrd Inc.
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Exchange Gains And Losses
Balance Sheet
Item
Exchange Rate
Movement
Effect on
Income
Asset
Increase
Gain
Asset
Decrease
Loss
Liability
Increase
Loss
Liability
Decrease
Gain
© 2008 Clarence Byrd Inc.
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Required Treatment of
Gains and Losses

Paragraph 1651.120 An exchange gain or
loss of the reporting enterprise that arises on
translation or settlement of a foreign currencydenominated monetary item or a non-monetary
item carried at market should be included in the
determination of net income for the current
period. (January, 2002)
© 2008 Clarence Byrd Inc.
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Required Treatment of
Gains and Losses

An Exception
– Changes in fair value on available-for-sale
investments to Other Comprehensive Income
– Exchange gains and losses receive
comparable treatment
© 2008 Clarence Byrd Inc.
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Required Treatment of
Gains and Losses

Foreign Currency
Financial Statements
receive different
treatment
(see Chapter 10)
© 2008 Clarence Byrd Inc.
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Disclosure

Paragraph 1651.37 The amount of
exchange gain or loss included in net income
should be disclosed (see paragraphs 1651.20,
1651.24 and 1651.31). An entity may exclude
from this amount those exchange gains or
losses arising on financial instruments
classified as held for trading in accordance
with "Financial Instruments — Recognition
And Measurement", Section 3855.
An entity may also exclude from this amount
exchange gains or losses on available-for-sale
financial assets and cash flow hedges (see
"Hedges", Section 3865) included in any gains
or losses removed from accumulated other
comprehensive income and included in net
income for the period. (October, 2006)
© 2008 Clarence Byrd Inc.
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Disclosure
 Paragraph
1520.03
contains an identical
recommendation
© 2008 Clarence Byrd Inc.
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Foreign Currency
Purchases and Sales

Two transaction approach
required
– Transaction recorded at current
rate
– Exchange gains and losses into
income as they arise
© 2008 Clarence Byrd Inc.
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Foreign Currency
Purchases and Sales
On December 12, 2007, a Canadian company
purchases Inventory in Switzerland for 100,000
Swiss Francs (SF, hereafter). At this time
SF1 = $0.94.
When the company closes its books on
December 31, 2007, the Inventory is still on hand
and the Accounts Payable has not been paid.
On this later date SF1 = $0.96.
© 2008 Clarence Byrd Inc.
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Foreign Currency
Purchases and Sales
December 12, 2007
Inventory [(SF)($100,000)($0.94)]
$94,000
Accounts Payable
$94,000
December 31, 2007
Exchange Loss
[(SF100,000)($0.96 - $0.94)]
Accounts Payable
© 2008 Clarence Byrd Inc.
$2,000
$2,000
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Foreign Currency
Capital Transaction
Example
On December 31, 2008, a Canadian Company
with a December 31 year end borrows
€1,000,000. At this time €1 = $1.40.
On December 31, 2009, the rate for the Euro is
€1 = $1.50 and on December 31, 2010, the rate
is €1 - $1.55. On this latter date the loan is
repaid.
Ignore interest payments.
© 2008 Clarence Byrd Inc.
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Foreign Currency
Capital Transaction
December 31, 2008
Cash [(€1,000,000)($1.40)]
$1,400,000
Liabilities
$1,400,000
December 31, 2009
Exchange Loss
[(€ 1,000,000)($1.50 - $1.40)
Liabilities
© 2008 Clarence Byrd Inc.
$100,000
$100,000
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Foreign Currency Capital
Transaction
December 31, 2010
Exchange Loss
[(€1,000,000)($1.55 - $1.50)]
$50,000
Liabilities
$50,000
December 31, 2010
Liabilities [€1,000,000)($1.55)]
Cash
© 2008 Clarence Byrd Inc.
$1,550,000
$1,550,000
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Held-To-Maturity Investments
Example
On January 1, 2008, Empire Inc. acquires
£200,000 in long-term debt of a British company.
At this time £1 = $2.15.
On December 31, 2008, when Empire Inc. closes
its books, the exchange rate is £1 = $2.25.
© 2008 Clarence Byrd Inc.
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Held-To-Maturity Investments
January 1, 2008
Bonds [(£200,000)($2.15)]
$430,000
Cash
$430,000
December 31, 2008
Bonds [(£200,000)($2.25 - $2.15)]
Exchange Gain
© 2008 Clarence Byrd Inc.
$20,000
$20,000
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Available-For-Sale At Cost
Investments
Example
On January 1, 2008, Empire Inc. acquires
£200,000 in equity securities of a British
company.
At this time £1 = $2.15. The investment is
classified as available for sale and the shares do
not have a quoted market price.
On December 31, 2008, when Empire Inc. closes
its books, the exchange rate is £1 = $2.25.
© 2008 Clarence Byrd Inc.
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Available-For-Sale At Cost
Investments
January 1, 2008
Shares [(£200,000)($2.15)]
Cash
$430,000
$430,000
December 31, 2008
No Entry Is Required
© 2008 Clarence Byrd Inc.
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Held-For-Trading Investments
Example
On January 1, 2008, Empire Inc. acquires
£200,000 in equity securities of a British
company.
At this time £1 = $2.15. The investment is
classified as held for trading.
On December 31, 2008, when Empire Inc. closes
its books, the market value of the securities has
increased to £215,000 and the exchange rate is
£1 = $2.25.
© 2008 Clarence Byrd Inc.
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Held-For-Trading Investments
January 1, 2008
Shares [(£200,000)($2.15)]
$430,000
Cash
$430,000
December 31, 2008
Shares [(£215,000)($2.25) - $430,000]
Fair Value Gain – Net Income
[(£215,000 - £200,000)($2.25)]
Exchange Gain – Net Income
[(£200,000)($2.25 - $2.15)]
© 2008 Clarence Byrd Inc.
$53,750
$33,750
20,000
34
Available-For-Sale At Fair Value
Investments
Example
On January 1, 2008, Empire Inc. acquires
£200,000 in equity securities of a British
company.
At this time £1 = $2.15. The investment is
classified as available for sale.
On December 31, 2008, when Empire Inc. closes
its books, the market value of the securities has
increased to £215,000 and the exchange rate is
£1 = $2.25.
© 2008 Clarence Byrd Inc.
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Available-For-Sale At Fair Value
Investments
January 1, 2008
Shares [(£200,000)($2.15)]
$430,000
Cash
$430,000
December 31, 2008
Shares [(£215,000)($2.25) - $430,000]
Fair Value Gain – OCI
[(£215,000 - £200,000)($2.25)]
Exchange Gain - OCI
[(£200,000)($2.25 - $2.15)]
© 2008 Clarence Byrd Inc.
$53,750
$33,750
20,000
36
Available-For-Sale At Fair Value
Investments

Reclassification
If investments are sold, the
Other Comprehensive Income
amounts will be reclassified
into Net Income
© 2008 Clarence Byrd Inc.
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Hedging

An extremely complex
area

Our coverage is limited to
simple applications in the
area of foreign exchange
risk
© 2008 Clarence Byrd Inc.
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Hedging

Paragraph 3865.02
Hedging is an activity
designed to modify an
entity's exposure to one or
more risks by creating an
offset between changes in
the fair value of, or the cash
flows attributable to, the
hedged item and the
hedging item (or changes
resulting from a particular
risk exposure relating to
those items).
© 2008 Clarence Byrd Inc.
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Hedged Items In General

Paragraph 3865.07(c) A hedged item is all or a
specified portion of a recognized asset, a recognized
liability, an anticipated transaction, or a net investment
in a self-sustaining foreign operation, or a group of
similar recognized assets, recognized liabilities or
anticipated transactions, having an identified risk
exposure that an entity has taken steps to modify.
© 2008 Clarence Byrd Inc.
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Hedged Items:
Foreign Currency Applications
Foreign currency denominated monetary
assets or monetary liabilities
 Anticipated Transactions

– Firm commitments
– Forecasted transactions

Investments in self-sustaining foreign
operations
© 2008 Clarence Byrd Inc.
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Hedging Items In General

Paragraph 3065.07(d) A hedging item is all or a
specified percentage of a derivative, or all or a
specified percentage of a group of derivatives
offsetting a risk exposure identified in the hedged
item. All or a specified percentage of:
– (i) a non-derivative financial asset;
– (ii) a non-derivative financial liability; or
– (iii) a group of non-derivative financial assets or nonderivative financial liabilities, provided that all non-derivative
items in a group are similar;

may be designated as a hedging item only for a
hedge of a foreign currency risk exposure.
© 2008 Clarence Byrd Inc.
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Hedging Items:
Foreign Currency Applications
Example
On July 1, 2008, a Canadian
company purchases merchandise in
France for €200,000.
At this time €1 = $1.40.
The merchandise must be paid for
on December 31, 2008.
© 2008 Clarence Byrd Inc.
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Hedging Items:
Foreign Currency Applications

Purchase Euros on July 1, 2008
– Effective but costly (no return on funds)

Purchase financial asset denominated in
Euros
– Some rate of return
– Low rates on short term investments
© 2008 Clarence Byrd Inc.
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Hedging Items:
Foreign Currency Applications

Purchase non-financial assets
denominated in Euros
– Inconvenient
– May or may not be effective

Forward contract to take delivery of Euros
on December 31, 2008
– Effective
– Requires no investment of funds
© 2008 Clarence Byrd Inc.
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A Derivatives Primer




Paragraph 3855.19(e) A derivative is a financial instrument or
other contract within the scope of this Section with all three of the
following characteristics:
(i) its value changes in response to the change in a specified
interest rate, financial instrument price, commodity price, foreign
exchange rate, index of prices or rates, a credit rating or credit
index, or other variable (sometimes called the "underlying"),
provided in the case of a non-financial variable that the variable is
not specific to a party to the contract;
(ii) it requires no initial net investment or an initial net investment
that is smaller than would be required for other types of contracts
that would be expected to have a similar response to changes in
market factors; and
(iii) it is settled at a future date.
© 2008 Clarence Byrd Inc.
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A Derivatives Primer

Types
– Contracts
 Forwards
 Futures
 Both parties must perform
– Options
 Only one party required to perform
© 2008 Clarence Byrd Inc.
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A Derivatives Primer

Accounting procedures
– Initial recognition at fair value (often nil)
– Subsequent measurement at fair value
– Gains and losses to Net Income (in general)
© 2008 Clarence Byrd Inc.
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Forward Exchange Contracts
Example
(From Text Paragraph 9-99)
On January 1, 2007, Sandor Inc., a
Canadian public company, enters into a
forward exchange contract to take
delivery of £100,000 on December 31,
2007 at a rate of £1 = $2.30.
On January 1, 2007, the exchange rate is
£1 = $2.26.
© 2008 Clarence Byrd Inc.
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Forward Exchange Contracts

Initial Recognition
– No consideration for contract
– Fair value = nil
– No recognition in the financial statements
© 2008 Clarence Byrd Inc.
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Forward Exchange Contracts

Settlement on December 31, 2007 when rate is
£1 = $2.33.
December 31, 2007
Cash [(£100,000)($2.33)]
Cash [(£100,000)($2.30)]
Gain On Contract
© 2008 Clarence Byrd Inc.
$233,000
$230,000
3,000
51
Forward Exchange Contracts
If Balance Sheet date occurred
prior to settlement of the
contract, the fair value of the
contract would have to be
recorded in the Balance Sheet.
This would result in a gain or
loss to be included in Net
Income.
© 2008 Clarence Byrd Inc.
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Hedge Accounting
Objective
Hedge accounting is a method for recognizing the gains,
losses, revenues and expenses associated with the items in
a hedging relationship such that those gains, losses,
revenues and expenses are recognized in net income in the
same period when they would otherwise be recognized in
different periods.
© 2008 Clarence Byrd Inc.
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Hedge Accounting

Its use is optional
– Often not necessary
(e.g., contract hedging a monetary
asset)
– Sometimes cannot qualify
– Management may decide not to
use
© 2008 Clarence Byrd Inc.
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Hedge Accounting

Qualification
– Designation
– Documentation
– Evaluation for effectiveness
(Beyond the scope of this text)
© 2008 Clarence Byrd Inc.
55
Fair Value Hedges

Under this approach, gains and
losses on the hedging item must
be included in Net Income.
Gains and losses on the hedged
item that are attributable to the
hedged risk must also be
included in Net Income.
© 2008 Clarence Byrd Inc.
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Fair Value Hedges

Fair value hedge accounting can be used when
the hedge is a hedge of the exposure to
changes in the fair value of:
– a recognized asset or liability;
– an unrecognized firm commitment; or
– an identified portion of such an asset, liability, or
firm commitment.
© 2008 Clarence Byrd Inc.
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Cash Flow Hedge Accounting

Cash Flow Hedge Accounting
Under this approach, gains and losses on
the hedging item are treated as items of
Other Comprehensive Income, rather
than as items to be included in the
determination of Net Income.
© 2008 Clarence Byrd Inc.
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Cash Flow Hedge Accounting

Cash flow hedge accounting can be
used when the hedge is a hedge of the
exposure to variability in cash flows
associated with:
– a recognized asset or liability;
– a forecasted transaction; or
– the foreign currency risk in an
unrecognized firm commitment.
© 2008 Clarence Byrd Inc.
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Hedge Of Exposed Monetary Balance
Example
On November 1, 2008, Torcan Ltd.
a Canadian company with a
December 31 year end, sells
merchandise in Switzerland for
1,000,000 Swiss Francs (SF,
hereafter). Assume that, at this
time, the exchange rate is SF1 =
$0.90.
On December 31, 2008, the
exchange rate is SF1 = $0.92.
The merchandise is paid for on
February 1, 2009 when the
exchange rate is SF1 = $0.95.
© 2008 Clarence Byrd Inc.
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Example – No Hedge Accounting
November 1, 2008
Receivable [(SF1,000,000)($0.90)]
$900,000
Sales
$900,000
December 31, 2008
Receivable [(SF1,000,000)($0.92 - $0.90)]
Exchange Gain
© 2008 Clarence Byrd Inc.
$20,000
$20,000
61
Example – No Hedge Accounting
February 1, 2009
Receivable [(SF1,000,000)($0.95 - $0.92)]
$30,000
Exchange Gain
Cash
$30,000
$950,000
Receivable
© 2008 Clarence Byrd Inc.
$950,000
62
Example –
Hedge With Forward Contract
Example
Hedge
On November 1, 2008, Torcan Ltd. a
Canadian company with a December
31 year end, sells merchandise in
Switzerland for 1,000,000 Swiss
Francs (SF, hereafter). Assume that,
at this time, the exchange rate is SF1
= $0.90.
On December 31, 2008, the
exchange rate is SF1 = $0.92.
The merchandise is paid for on
February 1, 2009 when the exchange
rate is SF1 = $0.95.
On November 1, 2008, Torcan
enters a contract to deliver
SF1,000,000 on February 1,
2009 at a rate of SF1 = $0.92.
© 2008 Clarence Byrd Inc.
On December 31, 2008 the
one month forward rate is SF1
= $0.93, resulting in a fair
value for the contract of
$9,950.
63
Example –
Hedge With Forward Contract
© 2008 Clarence Byrd Inc.
64
Example –
Hedge With Forward Contract
November 1, 2008
Receivable [(SF1,000,000)($0.90)]
$900,000
Sales
$900,000
December 31, 2008
Receivable [(SF1,000,000)($0.92 - $0.90)]
$20,000
Exchange Gain
Exchange Loss
Forward Contract (Liability)
© 2008 Clarence Byrd Inc.
$20,000
$9,950
$9,950
65
Example –
Hedge With Forward Contract
February 1, 2009
Receivable [(SF1,000,000)($0.95 - $0.92)]
$30,000
Exchange Gain
Exchange Loss –
[(SF1,000,000)($0.95 - $0.92) - $9,950)]
Forward Contract
© 2008 Clarence Byrd Inc.
$30,000
$20,050
$20,050
66
Example –
Hedge With Forward Contract
February 1, 2009
Cash
$950,000
Receivable
Cash [(SF1,000,000)($0.92)]
Forward Contract ($9,950 + $20,050)
Cash [(SF1,000,000)($0.95)]
© 2008 Clarence Byrd Inc.
$950,000
$920,000
30,000
$950,000
67
Hedge Of Exposed Monetary Balance
Example
On October 1, 2008, Ardin Ltd. commits to
purchasing merchandise in Germany at a cost of
€500,000. At this time the spot rate for Euros is €1
= $1.57. The merchandise is to be delivered and
paid for on May 1, 2009.
On October 1, 2008, Ardin also acquires a term
deposit with a maturity value of €500,000 (ignore
the interest that would accrue on this asset).
On December 31, 2008, when Ardin closes its
books, the exchange rate has decreased to €1 =
$1.55. On May 1, 2009, the rate is €1 = $1.52.
© 2008 Clarence Byrd Inc.
68
Example – No Hedge Accounting
October 1, 2008
Term Deposit [(€500,000)($1.57)]
$785,000
Cash
$785,000
December 31, 2008
Exchange Loss [(€500,000)($1.55 - $1.57)]
Term Deposit
© 2008 Clarence Byrd Inc.
$10,000
$10,000
69
Example – No Hedge Accounting
May 1, 2009
Exchange Loss [(€500,000)($1.55 - $1.52)]
$15,000
Term Deposit
Cash [(€500,000)($1.52)]
$15,000
$760,000
Term Deposit
Merchandise [(€500,000)($1.52)]
Cash
© 2008 Clarence Byrd Inc.
$760,000
$760,000
$760,000
70
Example – No Hedge Accounting
The economic gain on the commitment
(i.e., the purchase will now cost less)
cannot be recognized.
© 2008 Clarence Byrd Inc.
71
Hedge Of Exposed Monetary Balance
Example
On October 1, 2008, Ardin Ltd. commits to
purchasing merchandise in Germany at a cost of
€500,000. At this time the spot rate for Euros is €1
= $1.57. The merchandise is to be delivered and
paid for on May 1, 2009.
On October 1, 2008, Ardin also acquires a term
deposit with a maturity value of €500,000 (ignore
the interest that would accrue on this asset).
Document the
hedging
relationship and
use Cash Flow
Hedge
Accounting.
On December 31, 2008, when Ardin closes its
books, the exchange rate has decreased to €1 =
$1.55. On May 1, 2009, the rate is €1 = $1.52.
© 2008 Clarence Byrd Inc.
72
Example –
Cash Flow Hedge Accounting
October 1, 2008
Term Deposit [(€500,000)($1.57)]
$785,000
Cash
$785,000
December 31, 2008
OCI - Exchange Loss [(€500,000)($1.55 - $1.57)]
Term Deposit
© 2008 Clarence Byrd Inc.
$10,000
$10,000
73
Example –
Cash Flow Hedge Accounting
May 1, 2009
OCI - Exchange Loss [(€500,000)($1.55 - $1.52)]
$15,000
Term Deposit
Cash [(€500,000)($1.52)]
$15,000
$760,000
Term Deposit
Merchandise [(€500,000)($1.52)]
Cash
© 2008 Clarence Byrd Inc.
$760,000
$760,000
$760,000
74
Example –
Cash Flow Hedge Accounting

Alternative 1 – Reclassify Immediately
May 1, 2009
Merchandise
OCI – Reclassification Adjustment
© 2008 Clarence Byrd Inc.
$25,000
$25,000
75
Example –
Cash Flow Hedge Accounting

Alternative 2 – Reclassify When Merchandise Sold
January 1, 2010
Cost Of Goods Sold
$760,000
Merchandise
Cost Of Goods Sold
OCI – Reclassification Adjustment
© 2008 Clarence Byrd Inc.
$760,000
$25,000
$25,000
76
Hedge Of Net Investment
In Self-Sustaining Operation

Paragraph 3865.58 A hedge of a net investment in a self-sustaining
foreign operation, including a hedge of a monetary item that is accounted
for as part of the net investment (see “Foreign Currency Translation”,
Section 1651), should be accounted for as follows:
– (a) the portion of the gain or loss on the hedging item that is
determined to be an effective hedge (see paragraphs 3865.08 -.45)
should be recognized in other comprehensive income (see
“Comprehensive Income”, Section 1530); and
– (b) the ineffective portion of the gain or loss on the hedging item
should be recognized in net income.

The gain or loss on the hedging item relating to the effective portion of the
hedge that has been recognized in other comprehensive income should be
recognized in net income in the same period during which corresponding
exchange gains or losses arising from the translation of the financial
statements of the self-sustaining foreign operation are recognized in net
income. (October, 2006)
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Hedge Of Net Investment
In Self-Sustaining Operation
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Hedge Of Net Investment
In Self-Sustaining Operation

Reduction In Net Investment
– Paragraph 1651.31 An appropriate
portion of the exchange gains and losses
accumulated in the separate component of
accumulated other comprehensive income
should be included in the determination of net
income when there is a reduction in the net
investment. (October, 2006)
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Discontinuance Of
Hedge Accounting

Discontinue If:
– The hedging item ceases to exist
– The hedged item ceases to exist
– It becomes probable that an anticipated transaction
will not occur
– The entity terminates the hedging designation
– The hedging relationship ceases to be effective
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International Convergence

Hedging covered in IAS No.
39, Financial Instruments
– No differences that impact on
the material covered in this text

Other foreign currency issues
in Chapter 10
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