Foreign Operations Flashcards
required exchange rate
usually current exchange rate
However, it is generally impractical to use exact exchange rates for the dates of numerous revenue, expense, gain, and loss transactions so it is acceptable to use an appropriate AVERAGE exchange rate to translate those elements.
translation
convert local currency to US dollars on fin stmt
result from converting financial statements from the functional currency into the reporting currency, are recognized in other comprehensive income (OCI)
remeasurement
functional currency is U.S. dollars
result from converting financial statements from the local currency into the functional currency, are recognized in INCOME
cash flow hedge
interest rate swap: would protect the company from changes in its future payments
Under IFRS, cash flow hedges
reported at fair value and gains or losses are recognized in other comprehensive income (OCI)
translation loss
exchange gain
The translation loss less the exchange gain is reported in other comprehensive income
functional currency
is the currency of the primary economic environment in which the entity does business,
may be its local currency, the U.S. dollar, or some other currency
presentation currency,
which may or may not be the functional currency, is the currency in which the financial statements are being presented.
gain/loss on cash flow hedge
not reported on income, 0
reported in OCI
if local currency is the functional currency
converting it to US dollars is called TRANSLATION
if the functional currency is the U.S. dollar
converting local currency to US dollars: then it’s called remeasurement
In order to account for a derivative, such as a futures contract, as a fair value hedge,
a company is required to document the relationship between the hedge and the hedged risk, indicate that the hedge is expected to be highly effective, and provide an explanation as to how effectiveness will be measured. The entity is not required to identify the portion of the hedge that is expected to be ineffective.
spot rate
usually used for receivable and payables
forward rate
forward rate is generally used for forward exchange or futures contracts