Foreign Currency Transactions

By: Ryan Huelsmann

Options for foreign currency transactions occurring•Importing/exporting•Loans payable and receivable to a foreign

currency•Contract that forward the purchase or

sale of foreign currency•Purchase and sale of foreign currency

directly

FASB Statement 52Foreign Currency Translation

•December 1981 and replaces FASB 8•Adjustments that do not affect cash flows

excluded▫Translation adjustments

•Adjustments that affect cash flow are included in net income▫Extension of parent’s operations ▫Gains and losses are included

FASB Statement 52 continued

•Translation adjustments ▫Although not included in net income,

must be reported in the consolidated equity section

•Transaction Gains and Losses▫Example: U.S may borrow Mexican

pesos or have receivable to Germany in Euros

▫Included unless it is a hedge▫Intercompany investments do not give

rise to gains and losses

FASB Statement 133Accounting for Derivative Instruments and Hedging Activities

•June 1998 & works in conjunction with FASB 52▫“contracts, transactions, or balances

that are, in fact, effective hedges of foreign exchange risk will be accounted for as hedges without regard to their form”

•3 forms of hedges are listed but we will only focus on the third hedge for that one focuses on foreign currency

FASB Statement133 Continued •Further subdivided

▫Hedging foreign currency exposure for net investment

▫Hedging foreign currency exposure of unrecognized firm’s commitment

▫Hedging foreign currency exposure of an available-for-sale security

▫Hedging foreign currency exposure of foreign-currency-denominated forecasted transaction

Functional Currency

•Functional Currency is the primary currency where most of the economic activities.▫U.S. dollar for U.S. Co. operating in

U.S.▫This is also the reporting currency on

financial statements•If self contained and integrated,

functional currency is the currency of that country

•If dependent on parent and affect cash flows, then parent’s currency is functional currency

Spot Rate, Current Rate, and Valueing

•Spot rate is the rate at which transactions occurred

•Current Rate is the one found on balance sheet

•Direct Exchange Rate▫DER=(U.S. dollar-equivalent value)/ 1

FCU•Indirect Exchange Rate

▫IER=1 FCU/ (U.S. dollar-equivalent value)

Tables & Computing Gains and Loss

•http://www.exchange-rates.org/

•Functional= foreign currency units * DER▫At time of transaction▫Then do it again when you prepare

financial reports▫If there is a difference record the gain

or loss

Jerry Brown’s Crusade

•Don’t make this mistake •California Attorney General Jerry Brown

is suing the State Street Bank & Trust for overcharging the state’s two biggest pension funds

•Highest rate of the day instead of the rate the transactions took place.

•Believed to been done for 8 years with $56 million in overcharges

•Suit asks for three times as much

Transactions for Receivables and Payables•The two transaction approach

▫1. The Transaction date- record the purchase or sale at functional currency

▫2. The Balance Sheet date-adjust the payable of receivable to Balance Sheet date and record any gains or losses

▫3. Settlement Date-First adjust the currency payable or receivable for any change in ER. Record gain or loss acquired and record the settlement

Works cited • Baker, Richard E., Valdean C. Lembke, Thomas E. King, and Cynthia G.

Jeffrey. Advanced Financial Accounting. 8th ed. New York: McGraw-Hill/Irwin, 2009. Print.

• FASB: Financial Accounting Standards Board. Web. 31 Mar. 2010. <http://www.fasb.org/home>.

• Maurer, Harry, and Cristina Linblaid, eds. "Jerry Brown's Crusade." BusinessWeek 2 Nov. 2009: 10. LexisNexis. Web. 20 Feb. 2010.

• Opdyke, Jeff D. "Weekend Investor--- The New Basics---Running with Scissors: The Carry Trade Can be Unforgiving." The Wall Street Journal [New York] 20 Feb. 2010: 9. ProQuest. Web. 20 Feb. 2010.