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Slide 9-1 Chapter Nine Foreign Currency Transactions and Hedging Foreign Exchange Risk McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-2 Foreign Exchange Markets McGraw-Hill/Irwin Each country uses its own currency for internal economic transactions. To make transactions in another country, units of that country’s currency must be acquired. The cost of those currencies is called the exchange rate. © The McGraw-Hill Companies, Inc., 2004 Slide 9-3 Exchange Rate Mechanisms McGraw-Hill/Irwin Prior to 1973, currency values were generally fixed. The US $ was based on the Gold Standard. Since 1973, exchange rates have been allowed to fluctuate. Several valuation models exist. © The McGraw-Hill Companies, Inc., 2004 Slide 9-4 Foreign Exchange Rates Exchange rates are published daily in the Wall Street Journal. These are “end-of- day” rates. As of 4:00pm Eastern time Remember – Rates change constantly during the day McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-5 Foreign Exchange Rates As the relative strength of a country’s economy changes . . . . . . the exchange rate of the local currency relative to other currencies also fluctuates. McGraw-Hill/Irwin ¥ = $? © The McGraw-Hill Companies, Inc., 2004 Slide 9-6 Foreign Exchange Rates McGraw-Hill/Irwin Spot Rates The exchange rate that is available today. Forward Rates The exchange rate that can be locked in today for an expected future exchange transaction. The actual spot rate at the future date may differ from today’s forward rate. © The McGraw-Hill Companies, Inc., 2004 Slide 9-7 Foreign Exchange Forward Contracts A forward contract requires the purchase of currency units at a future date at the contracted exchange rate. This forward contract allows us to purchase 1,000,000 ¥ at a price of $.0080 US in 30 days. McGraw-Hill/Irwin But if the spot rate is $.0069 US in 30 days, we still have to pay $.0080 US and we lose $1,100! © The McGraw-Hill Companies, Inc., 2004 Slide 9-8 Foreign Exchange Options Contracts An options contract gives the holder the option of buying the currency units at a future date at the contracted “strike” price. An alternative is an option contract to purchase 1,000,000 ¥ at $.0080 US in 30 days. But it costs $.00002 per ¥. McGraw-Hill/Irwin That way, if the spot rate is $.0069 in 30 days, we only lose the $20 cost of the option contract! © The McGraw-Hill Companies, Inc., 2004 Slide 9-9 Foreign Currency Transactions A U.S. company buys or sells goods or services to a party in another country. The transaction is often denominated in the currency of the foreign party. McGraw-Hill/Irwin The major accounting issue: How do we account for the changes in the value of the foreign currency? © The McGraw-Hill Companies, Inc., 2004 Slide 9-10 Foreign Currency Transactions FASB No. 52 Requires a two-transaction perspective. (1) Account for the original sale in US $ (2) Account for gains/losses from exchange rate fluctuations. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-11 Foreign Currency Transactions When a transaction occurs on one date (for example a credit sale) . . . . . . but the cash flow is at a later date . . . 12/10/05 1 £ = $1.5750 US 1/9/05 1 £ = $1.5800 US ? . . . fluctuating exchange rates can result in exchange rate gains or losses. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-12 Foreign Currency Transactions When the rate is expressed as the US $ equivalent of 1 unit of foreign currency, the rate is called a “DIRECT QUOTE” McGraw-Hill/Irwin 12/10/05 1 £ = $1.5750 US 1/9/05 1 £ = $1.5800 US ? © The McGraw-Hill Companies, Inc., 2004 Slide 9-13 Foreign Currency Transactions When the rate is expressed as the US $ equivalent of 1 unit of foreign currency, the rate is called a “DIRECT QUOTE” When the rate is expressed as the number of foreign currency units that $1 will buy, the rate is called an “INDIRECT QUOTE” McGraw-Hill/Irwin 12/10/05 1 £ = $1.5750 US 1/9/05 1 £ = $1.5800 US 12/10/05 .6349 £ = $1 US 1/9/05 .6329 £ = $1 US © The McGraw-Hill Companies, Inc., 2004 Slide 9-14 Foreign Exchange Transaction Example On 12/1/04, BobCo sells inventory to Coventry Corp. on credit. Coventry will pay BobCo 10,000 British pounds in 90 days. The current exchange rate is $1 = .6425 £. Prepare BobCo’s journal entry. BOBCO's GENERAL JOURNAL Date Dec Description 1 A/R (to be collected in £) Sales 10,000£ ÷ .6425 = 15,564 amounts rounded McGraw-Hill/Irwin Page Debit 34 Credit 15,564 15,564 © The McGraw-Hill Companies, Inc., 2004 Slide 9-15 Foreign Exchange Transaction Example On 12/31/04, the exchange rate is $1 = .6400 £. At the balance sheet date we have to “remeasure”, or adjust, the original A/R to the current exchange rate. BOBCO's GENERAL JOURNAL Date Description Dec 31 A/R Foreign Exchange Gain 15,564 - (10,000£ ÷ .6400) amounts rounded McGraw-Hill/Irwin Page Debit 34 Credit 61 61 © The McGraw-Hill Companies, Inc., 2004 Slide 9-16 Foreign Exchange Transaction Example On 3/1/05, Coventry Corp. pays BobCo the 10,000 £ for the 12/1/04 sale. The exchange rate on 3/1/05, was $1 = .6500 £. On 3/1/05, we have to do TWO things. First, we have to “remeasure” the A/R. BOBCO's GENERAL JOURNAL Date Mar Description 1 Foreign Exchange Loss A/R 15,625 - (10,000£ ÷ .6500) amounts rounded McGraw-Hill/Irwin Page Debit 34 Credit 240 240 © The McGraw-Hill Companies, Inc., 2004 Slide 9-17 Foreign Exchange Transaction Example On 3/1/05, Coventry Corp. pays BobCo the 10,000 £ for the 12/1/04 sale. The exchange rate on 3/1/05, was $1 = .6500 £. On 3/1/05, we have to do TWO things. Second, we have record the receipt of the £. BOBCO's GENERAL JOURNAL Date Mar 1 Cash A/R McGraw-Hill/Irwin Description Page Debit 34 Credit 15,385 15,385 © The McGraw-Hill Companies, Inc., 2004 Slide 9-18 Hedging Foreign Exchange Risk To control for the risk of exchange rate fluctuation, a forward contract for currency can be purchased. McGraw-Hill/Irwin Hedging effectively reduces the uncertainty associated with fluctuating exchange rates. © The McGraw-Hill Companies, Inc., 2004 Slide 9-19 Hedging Foreign Exchange Risk To hedge a foreign currency transaction, companies use foreign currency derivatives Two most common tools: Foreign currency forward contracts Foreign currency options McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-20 Accounting for Derivatives SFAS 133 provides guidance for hedges of four types of foreign exchange risk. Recognized foreign currency denominated assets & liabilities. Unrecognized foreign currency firm commitments. McGraw-Hill/Irwin Forecasted foreign currency denominated transactions. Net investments in foreign operations (Chapter 10). © The McGraw-Hill Companies, Inc., 2004 Slide 9-21 Accounting for Derivatives McGraw-Hill/Irwin Often a transaction involving a credit sale/purchase is denominated in a foreign currency. On the transaction date, the foreign currency receivable/payable is recorded. If a forward contract is entered into to hedge the transaction, SFAS No. 133 requires the forward contract be carried at FAIR VALUE. ? © The McGraw-Hill Companies, Inc., 2004 Slide 9-22 Determining the Value of Derivatives To determine the value of foreign currency derivatives, the company needs 3 basic pieces of information: (1) The forward rate when the forward contract was entered into. (2) The current forward rate for a contract that matures on the same date as the forward contract. (3) A discount rate. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-23 Accounting for Hedges As the Fair Value of a forward contract changes, gains or losses are recorded. On 12/31/03, Bob has a forward contract to deliver 500,000¥ to Inuwashi Company on 1/31/04 at 120¥ = $1. The available 31day forward rate on 12/31/03 is 122.50¥ = $1. Bob uses a discount rate of 6%. What is the value of the forward contract on 12/31/03 McGraw-Hill/Irwin $-value of the 500,000¥ at the currently available forward rate $-value of the 500,000¥ at the contracted rate Loss on Forward Contract ? The present value at 12/31/03 $ 4,082 4,167 $ 85 $ 84.6110 © The McGraw-Hill Companies, Inc., 2004 Slide 9-24 Accounting for Hedges There are two ways that a foreign currency hedge can be accounted for. Cash Flow Hedge Fair Value Hedge Gains/losses are recorded to Comprehensive Income Gains/losses are recorded to the Income Statement McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-25 Let’s try a Cash Flow Hedge Example McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-26 Cash Flow Hedge - Date of Transaction Example On 4/1/04, MPG, Inc., a U.S. maker of auto parts, purchases parts from Aguila Company in Mexico 100,000 Pesos on credit. Payment is due in 180 days (October 8, 2004). The current exchange rate is $1 = 9.5000 pesos. Prepare MPG’s journal entry on 4/1/04. MPG, Inc. General Journal Date Apr 1 McGraw-Hill/Irwin Description Purchases A/P Amounts rounded Page Debit 18 Credit 10,526 10,526 © The McGraw-Hill Companies, Inc., 2004 Slide 9-27 Cash Flow Hedge - Date of Transaction Example Assume that MPG takes a 180-day forward contract to buy 100,000 pesos. The forward contract rate is 9.7400 pesos = $1. MPG, Inc. General Journal Date Description Page Debit 18 Credit This is an executory contract, so no entry is made on the contract date. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-28 Cash Flow Hedge - Interim Reporting Date Example At MPG’s year-end, 6/30/04, the value of the foreign currency payable must be remeasured, or adjusted, based on the 6/30/04 spot rate of $1 = 9.5250 pesos. 1. Remeasure the original payable: MPG, Inc. General Journal Date Description Jun 30 A/P (pesos) Foreign Exchange Gain 100,000 ÷ 9.525 = $10,499 $10,526 - $10,499 = 27 Amounts rounded McGraw-Hill/Irwin Page Debit 25 Credit 27.00 27.00 © The McGraw-Hill Companies, Inc., 2004 Slide 9-29 Cash Flow Hedge - Interim Reporting Date Example 2. In addition, we record an entry to Accumulated Other Comprehensive Income (AOCI) to offset the exchange gain/loss associated with the original transaction. MPG, Inc. General Journal Date Description Jun 30 Foreign Exchange Loss AOCI McGraw-Hill/Irwin Page Debit 25 Credit 27.00 27.00 © The McGraw-Hill Companies, Inc., 2004 Slide 9-30 Cash Flow Hedge - Interim Reporting Date Example Also, on 6/30/04, the forward contract must be recorded. The available forward rate to October 8, 2004 is $1 = 9.6200 pesos. MPG uses a 6% discount rate. 3. Record the forward contract: MPG, Inc. General Journal Date Description Jun 30 Forward Contract AOCI at the 90-Day Rate = $10,395 at the Contract Rate = $10,267 PV factor = .9851 McGraw-Hill/Irwin Page Debit 25 Credit 126.09 126.09 © The McGraw-Hill Companies, Inc., 2004 Slide 9-31 Cash Flow Hedge - Interim Reporting Date Example 4. Finally, we have to amortize the discount from the original transaction date. In the original transaction, we had a discount of $11 ($10,267 - $10,256). Amortize the discount using the straight-line method. MPG, Inc. General Journal Date Description Jun 30 Discount Expense AOCI McGraw-Hill/Irwin Page Debit 25 Credit 5.50 5.50 © The McGraw-Hill Companies, Inc., 2004 Slide 9-32 Cash Flow Hedge - Date of Collection Example On 10/8/04, both the original receivable and the exchange contract come due. The 10/8/04 exchange rate is $1 = 9.4000 pesos. 1. Remeasure the Accounts Payable: MPG, Inc. General Journal Date Oct Description 8 Foreign Exchange Loss Accounts Payable 100,000 ÷ 9.4000 = $10,638 $10,638 - $10,499 = $139 McGraw-Hill/Irwin Page Debit 40 Credit 139 139 © The McGraw-Hill Companies, Inc., 2004 Slide 9-33 Cash Flow Hedge - Date of Collection Example 2. As at year-end, MPG must record an entry to offset the foreign exchange loss of $139. MPG, Inc. General Journal Date Oct Description 8 AOCI Foreign Exchange Gain McGraw-Hill/Irwin Page Debit 25 Credit 139 139 © The McGraw-Hill Companies, Inc., 2004 Slide 9-34 Cash Flow Hedge - Date of Collection Example On 10/8/04, both the original payable and the exchange contract come due. The 10/8/04 exchange rate is $1 = 9.4000 pesos. . 3. Adjust the Forward Contract: MPG, Inc. General Journal Date Oct Description Page Debit 8 Forward Contract 244.91 AOCI at the Current Rate = $10,638 at the Contract Rate = $10,267 Current Forward Contract = $126.09 McGraw-Hill/Irwin 25 Credit 244.91 © The McGraw-Hill Companies, Inc., 2004 Slide 9-35 Cash Flow Hedge - Date of Collection Example 4. Finally, we have to amortize the rest of the discount from the original transaction date. In the original transaction, we had a discount of $11 ($10,267 - $10,256). Amortize the discount using the straight-line method. MPG, Inc. General Journal Date Oct Description 8 Discount Expense AOCI McGraw-Hill/Irwin Page Debit 25 Credit 5.50 5.50 © The McGraw-Hill Companies, Inc., 2004 Slide 9-36 Cash Flow Hedge - Date of Collection Example On 10/8/04, both the original payable and the exchange contract come due. The 10/8/04 exchange rate is $1 = 9.4000 pesos. 5. Purchase the 100,000 pesos: MPG, Inc. General Journal Date Oct Description 8 Foreign Currency (pesos) Cash McGraw-Hill/Irwin Page Debit 40 Credit 10,267 10,267 © The McGraw-Hill Companies, Inc., 2004 Slide 9-37 Cash Flow Hedge - Date of Collection Example On 10/8/04, both the original payable and the exchange contract come due. The 10/8/04 exchange rate is $1 = 9.4000 pesos. 6. Complete the Forward Contract Payable: MPG, Inc. General Journal Date Oct Description 8 A/P (pesos) Forward Contract Foreign Currency (€) McGraw-Hill/Irwin Page Debit 40 Credit 10,638 371 10,267 © The McGraw-Hill Companies, Inc., 2004 Slide 9-38 Now, let’s try a Fair Value Hedge. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-39 Fair Value Hedge - Date of Transaction Example On 12/1/04, Balloon Co., a U.S. balloon manufacturer sells balloons to Maison Rue., a french company, for 20,000 Euro’s (€) on credit. Payment is due in 90 days (March 1, 2005). The current exchange rate is $.9700 = 1 €. Prepare Balloon Co.’s journal entry. BALLOON CO. GEN'L JOURNAL Date Dec Description 1 A/R (€) (rounded) Sales McGraw-Hill/Irwin Page Debit 18 Credit 19,400 19,400 © The McGraw-Hill Companies, Inc., 2004 Slide 9-40 Fair Value Hedge - Date of Transaction Example Balloon Co buys a 90-day forward contract to pay 20,000 €. Balloon contracts for the 90-day forward rate on 12/1/04 of $.9500 = 1 €. BALLOON CO. GEN'L JOURNAL Date Description Page Debit 18 Credit This is an executory contract, so no entry is made on the contract date. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-41 Fair Value Hedge - Interim Reporting Date Example On 12/31/04, the value of the foreign currency receivable must be adjusted based on the 12/31/04 spot rate of $.9650 = 1 €. Adjust the original receivable: BALLOON CO. GEN'L JOURNAL Date Description Dec. 31 Foreign Exchange Loss Accounts Receivable (€) 20,000 x .9650 = $19,300 $19,400 - $19,300 = 100 McGraw-Hill/Irwin Page Debit 25 Credit 100.00 100.00 © The McGraw-Hill Companies, Inc., 2004 Slide 9-42 Fair Value Hedge - Interim Reporting Date Example Also, on 12/31/04, the forward contract must be recorded. The available forward rate to March 1, 2005 is $.9520 = 1 €. Balloon uses a 6% discount rate. Record the forward contract: BALLOON CO. GEN'L JOURNAL Date Description Dec. 31 Loss on Forward Contract Forward Contract at the 60-Day Rate = $19,040 at the Contract Rate = $19,000 PV factor = .9901 McGraw-Hill/Irwin Page Debit 25 Credit 39.60 39.60 © The McGraw-Hill Companies, Inc., 2004 Slide 9-43 Fair Value Hedge - Date of Collection Example On 3/1/05, both the original receivable and the forward contract come due. The 3/1/05 exchange rate is $.9540 = 1 €. 1. Adjust the Accounts Receivable: BALLOON CO. GEN'L JOURNAL Date Mar Description 1 Foreign Exchange Loss Accounts Receivable 20,000 x .9540 = $19,080 $19,300 - $19,080 = $220 McGraw-Hill/Irwin Page Debit 40 Credit 220 220 © The McGraw-Hill Companies, Inc., 2004 Slide 9-44 Fair Value Hedge - Date of Collection Example On 3/1/05, both the original receivable and the forward contract come due. The 3/1/05 exchange rate is $.9540 = 1 €. Adjust the Forward Contract Payable: BALLOON CO. GEN'L JOURNAL Date Mar Description 1 Loss on Forward Contract Forward Contract at the Spot Rate = $19,080 at the Contract Rate = $19,000 Forward Contract on 12/31 = 39.60 McGraw-Hill/Irwin Page Debit 40 Credit 40.40 40.40 © The McGraw-Hill Companies, Inc., 2004 Slide 9-45 Fair Value Hedge - Date of Collection Example On 3/1/05, both the original receivable and the forward contract come due. The 3/1/05 exchange rate is $.9540 = 1 €. 3. Collect the 20,000 € in settlement of the Account Receivable: BALLOON CO. GEN'L JOURNAL Date Mar Description 1 Foreign Currency (€) Accounts Receivable (€) McGraw-Hill/Irwin Page Debit 40 Credit 19,080 19,080 © The McGraw-Hill Companies, Inc., 2004 Slide 9-46 Fair Value Hedge - Date of Collection Example On 3/1/05, both the original receivable and the forward contract come due. The 3/1/05 exchange rate is $.9540 = 1 €. 4. Complete the Forward Contract: BALLOON CO. GEN'L JOURNAL Date Mar Description 1 Cash ($) Forward Contract Foreign Currency (€) McGraw-Hill/Irwin Page Debit 40 Credit 19,000 80 19,080 © The McGraw-Hill Companies, Inc., 2004 Slide 9-47 Using a Foreign Currency Option as a Hedge An option is a contract that allows you to exercise a predetermined exchange rate if it is to your advantage. Options carry a cost. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-48 Using a Foreign Currency Option as a Hedge As with forward contracts, options can be designed as cash flow hedges or fair value hedges. Option prices are determined using the Black-Scholes Option Pricing Model covered in most finance texts. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-49 Using a Foreign Currency Option as a Hedge SFAS 133 requires that the option be carried at fair value on the balance sheet. Option fair values are determined by examining the current quotes for similar options and breaking the fair value into two components: Intrinsic Value & Time Value McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-50 Hedge of a Foreign Currency Firm Commitment Occurs when a company hedges a transaction that has yet to take place. Example Ruff Wood orders 1,000,000 board feet of lumber from Brazil. Ruff Wood enters the hedge contract on the same day as the order is placed. McGraw-Hill/Irwin Under fair value hedge accounting: (1) The gain/loss on the hedge is recognized currently in net income. (2) The gain/loss on the firm commitment attributable to the hedged risk is also recognized currently in net income. © The McGraw-Hill Companies, Inc., 2004 Slide 9-51 Foreign Currency Firm Commitment - Example On December 1, 2004, Amerco receives an order from a German customer. The delivery date is March 1, 2005, when Amerco will receive immediate payment. The sale is three months away, Amerco has a firm commitment to make the sale and receive payment of 1,000,000 €. Amerco decides to hedge this commitment. Amerco General Journal Date Description Page Debit 18 Credit These are executory contracts, so no entries are made on this date. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004 Slide 9-52 Foreign Currency Firm Commitment - Example Amerco will receive 1,000,000 € on March 1, 2005. A forward contract was entered into to sell the euros at a price of $.905 = 1 €. Amerco’s discount rate is 12%. On 12/31/04, the currently available forward rate is $.916 = 1 €. 1. Record the forward contract. Amerco General Journal Date McGraw-Hill/Irwin Description Page Debit 18 Credit © The McGraw-Hill Companies, Inc., 2004 Slide 9-53 Foreign Currency Firm Commitment - Example 1,000,000 € @ the contract rate of $.905 $ 905,000 1,000,000 € @ the currently available forward rate of $.916 $ 916,000 Difference attributed to loss on forward contract $ (11,000) Time value factor at the discount rate of 12% 12/31/04 fair value of the forward contract. Amerco General Journal Date Description Dec 31 Loss on Forward Contract Forward Contract McGraw-Hill/Irwin 0.9803 $ (10,783) Page 18 Debit Credit 10,783 10,783 © The McGraw-Hill Companies, Inc., 2004 Slide 9-54 Foreign Currency Firm Commitment - Example Amerco will receive 1,000,000 € on March 1, 2005. A forward contract was entered into to sell the euros at a price of $.905 = 1 €. Amerco’s discount rate is 12%. On 12/31/04, the currently available forward rate is $.916 = 1 €. 2. Record the firm commitment. Amerco General Journal Date Dec Description 31 Firm Commitment Gain on Firm Commitment Note that this entry effectively offsets the loss on the forward contract. McGraw-Hill/Irwin Page Debit 18 Credit 10,783 10,783 © The McGraw-Hill Companies, Inc., 2004 Slide 9-55 Foreign Currency Firm Commitment - Example On March 1, 2005, Amerco receives 1,000,000 € from the German customer upon deliver of the order. On 3/1/05, the spot rate is $.900 = 1 €. 1. Adjust the forward contract to its current value of $5,000. Amerco General Journal Date Mar Description 1 Forward Contract Gain on Forward Contract McGraw-Hill/Irwin Page Debit 18 Credit 15,783 15,783 © The McGraw-Hill Companies, Inc., 2004 Slide 9-56 Foreign Currency Firm Commitment - Example On March 1, 2005, Amerco receives 1,000,000 € from the German customer upon deliver of the order. On 3/1/05, the spot rate is $.900 = 1 €. 2. Record an offsetting loss associated with the Firm Commitment. Amerco General Journal Date Mar Description 1 Loss on Firm Commitment Firm Commitment Note that the balance in the Firm Commitment is now $5,000 CR. McGraw-Hill/Irwin Page Debit 18 Credit 15,783 15,783 © The McGraw-Hill Companies, Inc., 2004 Slide 9-57 Foreign Currency Firm Commitment - Example On March 1, 2005, Amerco receives 1,000,000 € from the German customer upon deliver of the order. On 3/1/05, the spot rate is $.900 = 1 €. 3. Record the receipt of the foreign currency. Amerco General Journal Date Mar Description 1 Foreign Currency (€) Sales McGraw-Hill/Irwin Page Debit 18 Credit 900,000 900,000 © The McGraw-Hill Companies, Inc., 2004 Slide 9-58 Foreign Currency Firm Commitment - Example On March 1, 2005, Amerco receives 1,000,000 € from the German customer upon deliver of the order. On 3/1/05, the spot rate is $.900 = 1 €. 4. Record the fulfilling of the forward contract. Amerco General Journal Date Mar Description 1 Cash Forward Contract Foreign Currency McGraw-Hill/Irwin Page Debit 18 Credit 905,000 5,000 900,000 © The McGraw-Hill Companies, Inc., 2004 Slide 9-59 Foreign Currency Firm Commitment - Example On March 1, 2005, Amerco receives 1,000,000 € from the German customer upon deliver of the order. On 3/1/05, the spot rate is $.900 = 1 €. 5. Close the Firm Commitment to Net Income. Amerco General Journal Date Mar Description 1 Firm Commitment Adjustment to Net Income McGraw-Hill/Irwin Page Debit 18 Credit 5,000 5,000 © The McGraw-Hill Companies, Inc., 2004 Slide 9-60 The End . . . . . . sort of McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2004