* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Foreign Currency Transactions
Survey
Document related concepts
Foreign direct investment in Iran wikipedia , lookup
International status and usage of the euro wikipedia , lookup
Bretton Woods system wikipedia , lookup
International monetary systems wikipedia , lookup
Purchasing power parity wikipedia , lookup
Currency War of 2009–11 wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Currency war wikipedia , lookup
Reserve currency wikipedia , lookup
Foreign exchange market wikipedia , lookup
Fixed exchange-rate system wikipedia , lookup
Transcript
11-1 Baker / Lembke / King Multinational Accounting: Foreign Currency Transactions and Financial Instruments McGraw-Hill/ Irwin 11 Electronic Presentation by Douglas Cloud Pepperdine University Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Factors Affecting Exchange Rates • Level of inflation • Balance of payments • Changes in interest rate and investment level • Stability and process of governance McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-2 European Monetary Union (EMU) • Germany • France • Italy • Spain • Portugal • Finland • Ireland • Belgium • Netherlands • Austria McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-3 11-4 Direct Exchange Rate U. S. Dollar Equivalent Value 1 Foreign Currency Unit McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-5 Direct Exchange Rate $1.20 1 Foreign Currency Unit = $1.20 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Indirect Exchange Rate 1 Foreign Currency Unit U. S. Dollar Equivalent Value 1 $1.20 = 0.8333 or 0.8333 = $1 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-6 Relationships Between Currencies and Rates January 1 Direct exchange rate: U.S. dollar relative to the European Euro $1.200 Indirect exchange rate: European Euro relative to the U.S. dollar 0.8333 Between January 1 and July 1: July 1 $1.100 December 31 $1.160 0.9090 0.8620 Direct rate decreases Dollar strengthens Euro weakens Indirect rate increases Foreign goods imported in the U.S. are less expensive U.S.-made exports from U.S. are more expensive McGraw-Hill/ Irwin 11-7 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Relationships Between Currencies and Rates January 1 Direct exchange rate: U.S. dollar relative to the European Euro $1.200 Indirect exchange rate: European Euro relative to the U.S. dollar 0.8333 Between July 1 and December 31 McGraw-Hill/ Irwin July 1 $1.100 11-8 December 31 $1.160 0.9290 0.8620 Direct rate increases Dollar weakens Euro strengthens Indirect rate decreases Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Foreign Currency Transactions Purchases or sales of goods or services (imports or exports), the prices of which are stated in a foreign currency. Loans payable or receivable in a foreign currency. The purchase or sale of forward exchange contracts in a foreign currency. Purchase or sale of foreign currency units. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-9 11-10 Foreign Currency Transactions A U.S. company acquires 5,000 from its bank on January 1, 20X1; for use in further purchases from German companies. January 1, 20X1 Foreign Currency Units ( ) Cash McGraw-Hill/ Irwin 6,000 6,000 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-11 Foreign Currency Transactions On July 1, 20X1, the exchange rate is $1.100 = 1. January 1,20X1 (Acquire euros) $1.200 McGraw-Hill/ Irwin July 1, 20X1 Direct exchange rate $1.100 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Foreign Currency Transaction Gain/Loss 11-12 On July 1, 20X1, the exchange rate is $1.100 = 1. Equivalent dollar value of January 1: 5,000 x $1.200 Equivalent dollar value of 5,000 on July 1: 5,000 x $1.100 Foreign currency transaction loss McGraw-Hill/ Irwin $6,000 5,500 $ 500 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Foreign Currency Transaction Loss 11-13 Foreign Currency Transaction Loss 500 Foreign Currency Units ( ) 500 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Foreign Currency Transactions 11-14 Required accounting for an import or export foreign currency transaction on credit for the following dates: Transaction date Balance sheet date Settlement date McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Foreign Currency Transactions 11-15 Required accounting for an import or export foreign currency transaction on credit is as follows: Transaction date Balance sheet date Settlement date McGraw-Hill/ Irwin Record the purchase or sale transaction at the U.S. dollar equivalent value using the spot rate of exchange on this date. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Foreign Currency Transactions 11-16 Required accounting for an import or export foreign currency transaction on credit is as follows: Transaction date Balance sheet date Settlement date McGraw-Hill/ Irwin Adjust the payable or receivable to its U.S. dollar equivalent , end-of-period value using the current exchange rate. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Foreign Currency Transactions 11-17 Required accounting for an import or export foreign currency transaction on credit is as follows: Transaction date Balance sheet date Settlement date McGraw-Hill/ Irwin First, adjust the foreign currency payable or receivable for any changes in the exchange rate from the balance sheet date to the settlement date. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Foreign Currency Transactions 11-18 Required accounting for an import or export foreign currency transaction on credit is as follows: Transaction date Balance sheet date Settlement date McGraw-Hill/ Irwin Then, record the settlement of the foreign currency payable or receivable. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-19 Illustration of Foreign Purchase Transaction On October 1, 20X1, Peerless Products, a U.S. company, acquired goods on account from Tokyo Industries, a Japanese company, for $14,000, or 2,000,000 yen. Settlement is made on April 1, 20X2, in the next fiscal period. October 1, 20X1 (Direct exchange rate = $.0070) Inventory Accounts Payable (¥) 14,000 14,000 ¥2,000,000 x $.0070 spot rate = $14,000 If Denominated in Japanese Yen McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-20 Illustration of Foreign Purchase Transaction An adjusting entry is needed on the balance sheet date to reflect the current exchange rate. The direct exchange rate on December 31, 20X1 is $.0080. December 31, 20X1 (Direct exchange rate = $.0080) Foreign Currency Transaction Loss Accounts Payable (¥) 2,000 2,000 ¥2,000,000 x $.0080 Dec. 31 spot rate = $16,000 ¥2,000,000 x $.0070 Oct. 1 spot rate = 14,000 $ 2,000 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-21 Illustration of Foreign Purchase Transaction Settlement of the payable was made on April 1, 20X2. April 1, 20X2 (Direct exchange rate = $.0076) Accounts Payable (¥) Foreign Currency Transaction Gain 800 800 ¥2,000,000 x $.0076 Apr. 1 spot rate = $15,200 ¥2,000,000 x $.0080 Dec. 31 spot rate = 16,000 $ 800 Step 1 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-22 Illustration of Foreign Purchase Transaction Settlement of the payable was made on April 1, 20X2. April 1, 20X2 (Direct exchange rate = $.0076) Foreign Currency Units (¥) Cash Accounts Payable (¥) Foreign Currency Units (¥) 15,200 15,200 15,200 15,200 Step 2 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-23 Illustration of Foreign Purchase Transaction Some accountants combine the revaluation and settlement entries into one entry. Foreign Currency Units (¥) Cash Accounts Payable (¥) Foreign Currency Transaction Gain Foreign Currency Units (¥) McGraw-Hill/ Irwin 15,200 15,200 16,000 800 15,200 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Foreign Currency Payable 11-24 Accounts Payable (¥) AJE: A/P (¥) Gain McGraw-Hill/ Irwin 10/1/X1 14,000 (¥2,000,000 x $.0070) AJE: Loss A/P (¥) 2,000 12/31/X1 16,000 (¥2,000,000 x $.0080) 800 4/1/X2 (¥2,000,000 x $.0076) 15,200 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-25 A Derivative Defined FASB 133 defines a derivative as a financial instrument or contract possessing all of the following characteristics: The financial instrument must contain one or more underlying, and one or more notional amounts. An underlying is anyA notional amount is the financial or physicalnumber of currency units, variable that has shares, bushels, pounds, or observable or objectively other units specified in the verifiable changes. financial instrument. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-26 A Derivative Defined FASB 133 defines a derivative as a financial instrument or contract possessing all of the following characteristics: The financial instrument must contain one or more underlying, and one or more notional amounts. The financial instrument or other contract requires no 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. The terms of the contract require or permit net settlement, or provide for the delivery of an asset that puts the recipient in an economic position not substantially different from net settlement. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-27 FASB 133 1. General rule of valuing at fair value. 2. Embedded derivatives--separate derivative from host contract. 3. Hedge a. Documentation to justify hedge at beginning of contract or hedge. b. Effectiveness to match changes in value of hedged item (reassess every three months). McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Three Types of Hedges in FASB 133 11-28 1. Fair-value hedge: a hedge of changes in the fair value of: (a) a recognized asset or liability, or (b) an unrecognized firm commitment - gain or losses on fair value hedges go to current earnings 2. Cash-flow hedge: a hedge of the exposure to variability in the projected cash flows of: (a) a recognized asset or liability, or (b) a forecasted transaction - gains and losses on the effective portion of the hedge go to OCI; other gains and losses go to current earnings Continued next slide McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Three Types of Hedges in FASB 133 11-29 3. Foreign currency hedge: a hedge of the foreign currency exposure of: (a) an unrecognized firm commitment, (b) an available-for-sale security. (c) a forecasted transaction, or (d) a net investment in a foreign operation McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Forward Exchange Contracts The FASB recognizes three major purposes of forward exchange contracts. McGraw-Hill/ Irwin 11-30 To hedge an exposed foreign currency net asset or liability position. To hedge an identifiable foreign currency commitment. To speculate in foreign currency markets. Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Hedging an Exposed Position: Time Line 10/1/X1 Transaction date 12/31/X1 Balance sheet date • Incur liability denominated in yen • Sign 180-day forward contract to receive yen McGraw-Hill/ Irwin 11-31 4/1/X2 Settlement date • Obtain yen by settling forward exchange contract • Pay yen to settle account payable Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-32 Hedging an Exposed Position: Main Points Account payable or receivable denominated in foreign currency valued at U.S. dollar equivalent value using the spot exchange rate. Foreign exchange contract foreign currency receivable or payable with exchange broker valued at fair value using the forward exchange rate. Exchange gain (losses) are recognized in current earnings in period of change in exchange rates. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-33 Example Exchange Rates Date Spot Rate October 1, 20X1 $.0070 December 31, 20X1 $.0080 April 1, 20X2 $.0076 Forward Rate $.0075 (180-day) $.0077 (90-day) ¥2,000,000 is the amount of both the accounts payable and the forward contract receivable McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Hedging Exposed Net Liability Position 11-34 Forward Contract Rec.(¥) Accounts Payable (¥) 10/1 FCRec(¥) 15,000 Inventory 14,000 Doll. Pay 15,000 A/P(¥) 14,000 FERate = $.0075 Spot rate = $.0070 12/31FCRec(¥) 400 FC Gain 400 FERate = $.0077 McGraw-Hill/ Irwin FC Loss 2,000 A/P(¥) 2,000 Spot rate = $.0080 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Hedging Exposed Net Liability Position 11-35 Forward Contract Rec.(¥) Accounts Payable (¥) 4/1 Doll. Pay 15,000 Cash 15,000 FERate = $.0075 FCU (¥) 15,200 A/P (¥) 15,200 FCRec(¥) 15,200 FCU (¥) 15,200 Spot rate = $.0076 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Hedging an Identifiable Foreign Currency Commitment: Major Points 11-36 11-34 On date of commitment (8/1/X1) FASB 133 specifies separation of forward exchange contracts into components: – Financial instrument component (obligation to pay yen) – Nonfinancial asset component (right to receive inventory) At point of receipt of inventory goods (10/1/X1): – Revalue forward contract to fair value, recognizing loss or gain – Record gain or loss on financial instrument component of commitment – Close Firm Commitment account to inventory McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Hedging Foreign Commitment 11-37 Forward Contract Rec.(¥) Firm Commitment 8/1 FCRec(¥) 14,600 Doll. Pay 14,600 FERate = $.0073 10/1 FCRec(¥) 400 FC Loss 400 FC Gain 400 Firm Comm. 400 FERate = $.0075 FERate = $.0075 Inventory 13,600 Firm Comm. 400 A/P(¥) 14,000 Spot rate = $.0070 McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Speculation with Forward Contracts: Time Line 10/1/X1 Enter 180-day speculative forward contract McGraw-Hill/ Irwin 12/31/X1 Balance sheet date 11-38 11-36 4/1/X2 Deliver Swiss francs and receive dollars to settle forward contract Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Speculation: Forward Exchange Contract 11-39 Value forward contract using forward exchange rate for remainder of term No separate accounting for premium or discount on forward contracts McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Speculation: Forward Exchange Contract 11-40 Foreign Currency Payable (SFr) 10/1/X1 2,960 (SFr4,000 x $.74 Forward rate) AJE: Loss FC Pay (SFr) 160 12/31/X1 3,120 (SFr4,000 x $.78 Forward rate) AJE: FCPay (SFr) Gain 40 4/1/X2 (SFR4,000 x $.77 Spot) McGraw-Hill/ Irwin 3,080 Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-41 Foreign Exchange Matrix Direct Exchange Rate Changes Transactions or Accounts Denominated in Foreign Currency Units Exchange Rate Increases Exchange Rate Decreases (dollar has weakened) (dollar has strengthened) Net monetary asset position, for example: (1) Foreign Currency Units (2) Accounts Receivable (3) Foreign Currency Receivable from Exchange Brokers McGraw-Hill/ Irwin EXCHANGE EXCHANGE GAIN LOSS Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-42 Foreign Exchange Matrix Direct Exchange Rate Changes Transactions or Accounts Denominated in Foreign Currency Units Exchange Rate Increases Exchange Rate Decreases (dollar has weakened) (dollar has strengthened) Net monetary liability position, for example: (1) Accounts Payable (2) Bonds Payable (3) Foreign Currency Payable to Exchange Brokers McGraw-Hill/ Irwin EXCHANGE EXCHANGE LOSS GAIN Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-43 Chapter Eleven The End McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.