6 - Foreign Operations

Question 1

Transactional/Funtional/Reporting Currency

Answer 1

• Transactional - local, books and records
  
  • (remeasurement - IS)
• Functional - greatest impact
  
  • (Translation - BS comp. income)
• Reporting - $US, preparing financial statemtents

Question 2

Forward Exchange Contract (JEs)

Answer 2

DEF: forms of derivatives and all derivatives that are not hedges are required to be reported at fair values with gains or loses reported in profit or loss (IS)

when asset has not been sold yet but euro has gone up 2 cents:

buying party:

forward exchange contract (BS) 2000

gain on forward exchange contract (IS) 2000

selling party:

Loss on forward exchange contract (IS) 2000

Forward exchange contract (BS) 2000

when contract is settled and now the euro is worth 1.29, before it was worth 1.39 and before that 1.37

buying party:

Loss on forward exchange contract 10000

forward exchange contract 2000

cash 8000

sellers entry:

cash 8000

forward exchange contract 2000

gain on forward exchange contract 10000

Question 3

Fair Value Hedges (JEs)

Answer 3

DEF: protects a company against risks associated with changes in fair value of a reported asset or liability (hedging against a recognized asset or liability on the balance sheet or a firm purchase commitment). gain or loss on IS.

when euro goes from 1.30 t0 1.25

investing comp:

foward exchange contract (BS) 100000

Gain on forward exchange contract (IS) 100000

Loss due to decline in value (IS) 100000

investment in AFS securities (BS) 100000

Question 4

Cash Flow Hedge (JEs)

Answer 4

DEF: change in value reported in OCI BS

at end of period reporting and equipment has not been purchased yet. forward rate went from 1.30 to 1.35 at balance sheet date:

forward exchange contract 10000

unrealized gain due to increase in value (OCI BS) 10000

when company purchases equipment and rate stays at 1.35:

Equipment 260000

Unrealized gain due to increase

in value 10000

cash (received from counter party 10000

Forward exchange contract 10000

cash (paid to equipment vendor) 270000

Question 5

Measuring Translations and Remeasurements

Answer 5

• Translation:
  
  • assets + liab. - current rate
  • contributed capital - historical
  • Income statement items - weighted avg.
• remeasurement:
  
  • monetary assets/liab. - current rate
  • non monetary a/l - historical
  • income statement items - weighted avg.