Lecture 6: Foreign Operations

Question 1

An entity can be involved in foreign operations by:

ASC 830

Answer 1

1. Foreign Currency Transactions: receipt or payment in foreign currency
2. Receivables or Payables that is Denominated in a foreign currency: will be settled by the receipt or payment of some amount of foreign currency (Converted to USD for inclusion on reporting FS)
3. Foreign Currency Exchange Transactions: Forward Exchange Contracts, results in the net amount being paid or received to settle the contract, representing a L or A
4. Foreign Division or Subsidiary: may maintain its books and records in foreign currency but will be included in the reporting entity’s consolidated FS. the FS must be converted into USD.

Question 2

Under Foreign Currency Transactions, it will be settled through the payment or receipt of foreign currency, it is initially recognized in the _______ of the entity using the exchange rate in effect on the date of the transaction.

Answer 2

Functional Currency

Question 3

spot rate

Answer 3

the exchange rate under a foreign currency transaction on the date of the transaction.

Question 4

Functional Currency

Answer 4

the currency that has the greatest economic impact on the entities financial performance. If a company reports its FS in USD but buys and sells its goods in Canadian Dollars, the functional currency is CA
-Factors: CF, Sales Prices, Demand for company’s G/S, Expenses, financing, intra-entity arrangements

Question 5

Remeasurement

Answer 5

When a transaction occurs in some currency other than the functional currency, it is REMEASURES as if the transaction had originally occurred in the functional currency. Any G/L go to IS as a foreign currency exchange G/L

Question 6

Translation

Answer 6

When the functional currency is not the same as the currency used for reporting, amounts are TRANSLATED from the functional currency into the reporting currency. Any G/L goes to OCI on the BS (DENT)

Question 7

Reporting Currency

Answer 7

Currency in which the enterprise prepares its financials

Question 8

If transactional currency and functional currency are the same….

Answer 8

You must translate it to the reporting currency

Question 9

If Reporting and Functional currency are the same….

Answer 9

you must remeasure it to the transactional currency.

Question 10

Transactional Currency

Answer 10

Local “recording currency”, the currency of a particular country. Usually the Books and Records are kept.

Question 11

Financial Instruments Denominated in Foreign Currency means:

Answer 11

when an AR/AP, NR/NP, etc are received or paid in foreign currency and adjusted for changes in the exchange rates as of the BS date.

Question 12

When Financial Instruments are denominated in Foreign Currency, the changes in exchange rates on the BS date will be measured:

Answer 12

• The CV of the financial instrument will be remeasured based on the spot rate on the BS date
• Any increase or decrease is generally recognized in INcome or loss as as foreign currency transaction G/L

Question 13

Foreign Currency Exchange Transactions are often referred to as______

Answer 13

Forward Exchange Contracts, they have a settlement date

Question 14

Companies will enter into Foreign Currency Exchange Contracts as______,_____, and to ______.

Answer 14

Hedges, Speculation, and to protect the reported value of an investment.

Question 15

Speculation

Answer 15

unless an entity qualifies for and chooses to account for its foreign exchange contracts as hedges, they will be accounted for as if entered into for speculative purposes. Using a spot rate of todays date and forward rates to predict changes in rates.

Question 16

Forward Rate

Answer 16

what the exchange rate is expected to be at some point in the future, 30, 60, 90 day forward rates
*Any G/L are reported in income.

Question 17

if a FV hedge has an investment in AFS securities, the unrealized g/l are reported as….
and examples of JE for this transaction

Answer 17

income because the FV Hedge takes precedent over the AFS.
On date of investment: 100K Shares of Euro stock at E20 with spot rate of 1.3%
Dr. Investment in AFS Security 2.6 million
Cr. Cash 2.6 million
The spot rate dropped from 1.3 to 1.25
Dr. Forward Exchange Contract 100K
Cr. Gain on Forward Exchange Contract 100K (IS)
Dr. Loss from decline in value of Spot Rate 100K (IS)
Cr. Investment in AFS Security 100K

Question 18

Example of Entries for a CF hedge

Answer 18

Company gets into an agreement to buy equipment 6 months from now from Europe. The cost is E200K and the 6 month forward exchange rate is 1.3 so budget, 260K USD.
No Entry
Then after 2 months the 4 month forward rate is 1.35.
Dr. Forward Exchange Contract 10K (.05 *200K)
Cr. Unrealized Gain due to increase in FEC (OCI) 10K
Then whent hey purchase equipment after 6 months the rate is still 1.35:
Dr. Equipment 260k (Original Price)
Dr. Unrealized Gain due to Increase in value FEC 10K
Dr. Cash received from Counterparty
Cr. Forward Exchange Contract 10K
Cr. Cash paid to equipment vendor 270K

Question 19

Translation

Answer 19

The process by which the entity will convert the financial statements from the local currency into US dollars depending upon the functional currency.

• If the Functional Currency is the local currency, the process is referred to as translation. G/L go to OCI on BS
• Always what the FS have to be in

Question 20

Remeasurement

Answer 20

if the functional currency is US dollar, the process is referred to as remeasurement. G/L go to IS.

Question 21

When the local currency is the functional currency, the consolidated financials require all items expressed in USD and will______________ the FS of the subsidiary into USD.

Answer 21

TRANSLATE moving from IS to BS, G/L reported on BS under OCI

Question 22

Translation Adjustment

Answer 22

the amount required to balance the entry occurs because the items that are being translated are at different rates and results will most likely not balance. This is recognized in OCI on the BS, the “T” in DENT

Question 23

The Normal Process for performing Translation involves:

Answer 23

1. Translate all IS items using weighted average
2. Translate all BS items:
   - Assets and Liabilities: Rates on the BS date
   - Contributed Capital (CS, APIC) historical rates
   - RE: rolled forward
3. The difference will be the translation adjustment recognized in OCI

Question 24

When the functional currency is the reporting currency, but the transactional currency is different, the transactions are ________ in order to present financial information as if all transactions had originally been recorded in the functional currency.

Answer 24

REMEASURED, moving from BS items to IS items, G/L reported on IS

Question 25

BS non-monetary items value is _______ and are remeasured at __________.

Answer 25

value is not fixed in terms of dollars/ Historical Rates.

Examples: Marketable Securities, Prepaid expenses, PPE and Accum Dep, Intangibles, Deferred Charges, Preferred Stock, Rev and Exp that are nonmonetary like COGS, Dep, ammortization

Question 26

BS Monetary items are valued _______and are remeasured at_________________.

Answer 26

at fixed in terms of dollars/ exchange rate on the BS date.

Question 27

Remeasurement Adjustment:

Answer 27

The amount required to balance the entry, this occurs because items are being remeasured at different rates and the result is not likely to balance. This adjustment is recognized in Income.

Question 28

The Normal Process for Remeasurement is:

Answer 28

1. Remeasure all BS items:
   1a. Monetary Assets and Liabilities are remeasured using the rates at the BS dates
   1b. Non Monetary A and L and Contributed Capital are remeasured using historical rates based on when acquired, incurred, or contributed.
   1c. The difference is ending RE, the beginning balance will be rolled forward from the previous period and dividends will be remeasured using the rate on the div date. The difference between that amount and the ending balance is the current period’s Net Income or Net Loss.
2. Remeasure all IS items
3. the difference between NI or Loss and the result of remeasuring all IS items will be the remeasurement adjustment recognized in Income.

Question 29

Under IFRS, when dealing with foreign operations the currency is:

Answer 29

Foreign Currency: GAAP Transactional
Functional Currency: Same as GAAP
Presentation Currency: GAAP Reporting

• ALL remeasurement and translations are same as GAAP.

Question 30

Under IFRS, non monetary items are reported at______ and _______whereas under GAAP they are only reported at_____.

Answer 30

Historical Cost and FV, Historical Cost.

Question 31

Transaction G/L result from a change in the ______ between the _____ currency and the _____currency.

Answer 31

exchange rate, functional, transactional.
*Holders of the Receivables achieve a gain from an increase in the rate but debtors will see a loss because they will owe more money. When the exchange rate decreases, debtors will see a gain and creditors (Receivables) will see a loss.

Question 32

A Company is required to use the ______exchange rate for BS accounts when translating the BS accounts from a subsidiary.

Answer 32

Current

Question 33

For a Company to Translate the Income of a subsidiary to the parent a company will generally use an _______exchange rate.

Answer 33

average.

Question 34

BS items are generally translated using the ____rate at the BS date, whereas IS items are generally translated using the ______rate because these transactions occur uniformly throughout the year.

Answer 34

spot, weighted average rate.