Foreign Currency Transactions

Chapter 2:
Foreign
Currency
Transactions
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
 Provide an overview of the foreign exchange market
 Explain how fluctuations in exchange rates give rise to
foreign exchange risk
 Demonstrate the accounting for foreign currency
transactions
 Describe how foreign currency forward contracts and
foreign currency options can be used to hedge
foreign exchange risk
 Describe the concepts of cash flow hedges, fair value
hedges, and hedge accounting
7-2
Learning Objectives
 Demonstrate the accounting for forward contracts and
options used as cash flow hedges and fair value
hedges to hedge foreign currency assets and
liabilities, foreign currency firm commitments, and
forecasted foreign currency transactions.
7-3
Foreign Exchange Markets
 Foreign exchange rate
 Purchase price of a foreign currency
 1945 –1973
 Exchange rates fixed in U.S. dollar
 U.S. dollar was fixed in gold
 U.S. dollar was fixed to gold at $35 per ounce
 1960s Balance-of-payments deficits in the U.S.
 March 1973 most currencies float in value
7-4
 Exchange Rate Mechanisms
 Independent float
 Currency value allowed to move freely
 Little government intervention
 Pegged to another currency
 Currency value fixed in terms of a foreign currency
 E.g. U.S. dollar
 Central bank maintains the exchange rate
 European Monetary System (Euro)
 Twelve countries use a single currency,
 Floats against other currencies
 E.g. U.S. dollar
7-5
 Foreign Exchange Rates
 Interbank rates
 Wholesale prices
 Banks charge one another
 Exchange of currencies
 Published on the internet and in newspapers
 Reflected
 Direct quotes (US $ equivalent)
 Indirect quotes (currency per US $)
 Direct quote reciprocal of indirect quote
 Indirect quote reciprocal of direct quote
7-6
 Spot rates
 Today’s price for purchasing or selling a foreign
currency
 Forward rate
 Today’s price for purchasing or selling a foreign
currency
 For some future date
 Premium
 Forward rate is greater than the spot rate
 Discount
 Forward rate is less than the spot rate
7-7
 Option contracts
 Foreign currency option
 Gives right, no obligation
 Trade foreign currency
 Trade in future
 Put option
 Option to sell the foreign currency
 Call option
 Option to buy the foreign currency
 Strike price
 Exchange rate at which currency will be exchanged when
option is exercised
7-8
 Option contracts
 Option premium
 Cost of purchasing the option
 Function of the option’s intrinsic value and time value
 Intrinsic value
 Immediate exercise of the option
 Gain
 Time value
 Derived value
 Currency value increase
 During the remainder of the option period
7-9
Foreign Currency Transactions
 Transaction exposure
 Exposure to foreign exchange risk
 Export sale
 Sale to foreign customer
 Later payment
 In customer’s currency
 Import purchase
 Purchases from foreign supplier
 Payment in the supplier’s currency
 Foreign exchange risk
 Change in the exchange rate results in
 Exporter will receive less
 Importer will pay more than anticipated
7-10
 Example
 Joe Inc., a U.S. company, makes a sale and ships goods
to Jose, SA, a Mexican customer
 Sales price is $100,000 (U.S.) and Joe allows Jose to
pay in pesos in 30 days
 The current exchange rate is $0.10 per 1 peso
 Joe plans to receive 1,000,000 pesos
($100,000/$0.10)
7-11
 Joe has foreign exchange risk exposure because he
may receive less than $100,000.
 Suppose the peso decreases such that in 30 days the
exchange rate is $0.09 per 1 peso.
 Joe will receive 1,000,000 pesos which will be worth
$90,000 (1,000,000 x $0.09) and Joe receives
$10,000 less due to exchange rate fluctuation.
7-12
Accounting for Foreign Currency Transactions
 One transaction perspective

 Treats sale and collection as one transaction
 Transaction complete when
 Foreign currency received and converted
 Sale is measured at converted amount
 Not allowed under IAS or U.S. GAAP
7-13
 Two transaction perspective

 Two transactions
 Sale
 Collection
 Sale based on current exchange rate
 Exchange rate changes
 Collection for different amount
 Difference considered
 Foreign exchange gain
 Foreign exchange loss
 Concepts are identical for purchase transaction
 (IAS) 21 and FASB ASC 830 require two-transaction
perspective
7-14
 Transaction types, exposure type and gain or loss –

export sales
 Export sale  asset exposure--if foreign currency
appreciates  foreign exchange gain
 Export sale  asset exposure--if foreign currency
depreciates  foreign exchange loss
7-15
 Transaction types, exposure type and gain or loss –

import purchases
 Import purchase  liability exposure -- if foreign
currency appreciates  foreign exchange loss
 Import purchase  liability exposure -- if foreign
currency depreciates  foreign exchange gain
7-16
 Export sale – example 1

 February 1, 2012, Joe Inc., a U.S. company, makes a
sale and ships goods to Jose, SA, a Mexican
customer.
 Sales price is $100,000 (U.S.).
 Jose agrees to pay in pesos on March 2, 2012.
 Assume spot rate as of February 1, 2011 is $0.10
per peso.
7-17

 Joe, Inc. records the sale (in U.S. $) on February 1,
2011 as follows:
Accounts Receivable 100,000
Sales 100,000
7-18

 On March 2, 2011, the spot rate is $0.09 per peso.
 Joe Inc. will receive 1,000,000 pesos, which are now
worth $90,000. Joe makes the following journal
entry:
 Cash 90,000
 Foreign Exchange Loss 10,000
 Accounts Receivable 100,000
7-19
 Assume the following facts are added or changed:
 Joe Inc., makes sale and ships goods on December 1,
2010 rather than February 1, 2011.
 Spot rate as of December 1, 2010 is $0.11 per peso.
 Spot rate as of December 31, 2010 is $0.105 per
peso.
 Joe Inc. has a December 31 year end.
7-20

 Joe, Inc. records the sale (in U.S. $) on December 1,
2010 and the foreign exchange loss on December
31, 2010 as follows:
 Sales 110,000
7-21

 Joe, Inc. records the receivable collection and an
additional foreign exchange loss on March 2, 2011:
 Cash 90,000
7-22
Hedging Foreign Exchange Risk
 Hedging
 Protects from exchange rate fluctuations
 Foreign currency forward contracts
 Foreign currency options
 Foreign currency forward contract
 Buy or sell foreign currency
 Future date
 Foreign currency option
 Right to buy or sell foreign currency
 For a period of time
7-23
 Derivative
 Hedge accounting appropriate if derivative
 Used to hedge an exposure
 Highly effective In offsetting changes in
 Fair value
 Cash flows related to the hedged item
 Properly documented as a hedge
7-24
 Hedging risk on an export sale – example 1
 Previously, Joe Inc. lost $20,000 without hedging as
the peso fell from $0.11 to $0.09.
 The loss was ($0.11 - $0.09) x 1,000,000 pesos.
 Joe could have purchased a foreign currency forward
contract on December 1, 2010.
7-25
 Under the contract, Joe would have agreed to sell
1,000,000 pesos for $0.105 on March 2, 2011.
 In this case, Joe would have collected $105,000
rather than $90,000.
 Instead of a $20,000 foreign exchange loss, Joe
would have paid a $5,000 premium on the forward
contract.
7-26
 Previously, Joe Inc. lost $20,000 without hedging as
the peso fell from $0.11 to $0.09.
 The loss was ($0.11 - $0.09) x 1,000,000 pesos.
 Joe could have purchased a foreign currency option
on December 1, 2010.
 The option premium is $4,000.
7-27
 Joe would now have the option sell 1,000,000 pesos
for $0.11 on March 2, 2011.
 In this case Joe would have collected $110,000
rather than $90,000.
 Instead of a $20,000 foreign exchange loss, Joe
would have paid $4,000 for the option.
7-28
Cash Flow Hedges, Fair Value Hedges, and
Hedge Accounting
 Hedge accounting
 Offsetting gain or loss
 Recognized in net income
 In same period as
 The gain or loss from the hedged item
 Cash flow hedge
 An accounting designation for hedges
 Offset variability in cash flows
 Fair value hedge

 Accounting designation for hedges
 Offset variability in fair value of hedged assets and
liabilities
7-29
Hedge Accounting
 Hedge accounting examples
 FC asset/forward contract/cash flow hedge
 FC asset/forward contract/fair value hedge
 FC asset/option/cash flow hedge
 FC firm commitment/forward contract/fair value hedge
 FC firm commitment/option/fair value hedge
 Forecasted FC transaction/option/cash flow hedge
7-30
Hedge Accounting
 Assumptions for examples 1 and 2
 December 1, 2010, Joe Inc., a U.S. company, makes
a sale and ships goods to Jose, SA, a Mexican
customer.
 Sales price is $110,000 (U.S.).
 Jose agrees to pay 1,000,000 pesos on March 2,
2011.
 Spot rates per peso are: December 1, 2010, $0.11,
December 31, 2010, $0.10, and March 2, 2011,
$0.095.
 The annual interest rate is 6% (0.5% per month).
7-31
Hedge Accounting
 Joe enters a foreign currency forward contract on
December 1, 2010.
 The contract calls for Joe to sell 1,000,000 pesos at a

forward rate of $0.105, on March 2, 2011.
 The forward rate on December 31, 2010 for March

2, 2011 delivery is $0.096.
7-32
Hedge Accounting
 Example 1, FC asset/forward/cash flow hedge
 12/01/10
Accounts receivable 110,000
Sales 110,000
 12/31/10
Foreign exchange loss 10,000
Accumulated other comprehensive income 10,000
Gain on forward contract 10,000
 12/31/10
Forward contract 8,911
Accumulated Other Comprehensive Income 8,911
7-33
Hedge Accounting
Discount expense 1,667

(discount expense is amortized using the straight-line

method)
7-34
Hedge Accounting
3/02/11


7-35
Hedge Accounting
3/02/11
Discount expense 3,333
Foreign currency 95,000

Cash 105,000
7-36
Hedge Accounting
 Example 2, FC asset/forward/fair value hedge
12/01/10
Sales 110,000
12/31/10

7-37
Hedge Accounting
3/02/11

7-38
Hedge Accounting
3/02/11
Cash 105,000
7-39
End of Chapter 7
7-40

Foreign Currency Transactions

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Foreign Currency Transactions

Enviado por

Direitos autorais:

Formatos disponíveis

Chapter 2:

 One transaction perspective

 Two transaction perspective

 Transaction types, exposure type and gain or loss –

 Transaction types, exposure type and gain or loss –

 Export sale – example 1

 Export sale – example 1

 Export sale – example 1

 Export sale – example 2

 Export sale – example 2

 Fair value hedge

 The contract calls for Joe to sell 1,000,000 pesos at a

 The forward rate on December 31, 2010 for March

Discount expense 1,667

(discount expense is amortized using the straight-line

Accumulated Other Comprehensive Income 5,000

Forward contract 1,089

Foreign currency 95,000

Forward contract 8,911

Forward contract 1,089

Você também pode gostar