会计学院 2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 CHAPTER 3 Accounting for Foreign Currency

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Objective  1. Provide an overview of foreign exchange markets and define related terminology.  2. Describe the different types of foreign exchange exposure and exchange difference.  3. Understand some of the more common foreign currency transactions.  4. Explain the use of forward contracts as a hedge of an unrecognized firm commitment.  5. Describe a derivative instrument and understand how it may be used as a hedge.  6. Describe foreign currency translation  7. Compare the different methods of accounting for foreign currency translation.

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Introduce  Evolution History of International Monetary System  the Mechanism of Exchange Rates and related terminology  Overview of Accounting For Exchange Rate Fluctuations

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Accounting for Foreign Currency Transactions  a transaction that requires payment or receipt (settlement) in a foreign currency is called a foreign currency transaction.  Exchange difference is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency at different exchange rates.

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六  Importing or Exporting of Goods or Services At the date the transaction is first recognized. At the date the transaction is first recognized. At each balance sheet date that occurs between the transaction date and the settlement date. At each balance sheet date that occurs between the transaction date and the settlement date. At the settlement date. At the settlement date. Accounting for Foreign Currency Transactions

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Accounting for Foreign Currency Transactions example: Assume that a U.S company sells mining equipment to a British company on June 1,20x9 with the corresponding receivable to be paid or settled on July 1, 20x9. The equipment has a selling price of US$306,000 and a cost of US$250,000. On June1, 20x9, the British pound is worth US$1.70, and on July 1,20x9, the pound is worth US$1.60. The payment is to be made in US dollars, and the British company bears the foreign currency risk.

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Accounting for Foreign Currency Transactions June 1,20x9 U.S Company British Company Dr. AR $306,000 Dr. Equ. ₤180,000 Cr. Sales $306,000 Cr. AP ₤180,000 Dr. COGS $250,000 Cr. Inventory $205,000

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Accounting for Foreign Currency Transactions July 1,20x9 U.S Company British Company Dr. Cash $306,000 Dr. AP ₤180,000 Cr. AR $306,000 Exchange loss ₤11,250 Cr. Cash ₤191,250

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Accounting for Foreign Currency Transactions Assume the same facts as in above example. but this time the payment is to be made in British pounds, and the U.S company bears the foreign currency risk.

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Accounting for Foreign Currency Transactions June 1 20x9 U.S Company British company Dr. AR $306,000 Dr. equip ₤180,000 Cr. Sales $306,000 Cr. AP ₤180,000 Dr. COGS $205,000 Cr. Inventory $205,000

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 July 1.20x9 U.S Company British company Dr. Cash $288,000 Dr. AP ₤180,000 Exchange loss $18,000 Cr. Cash ₤180,000 Cr. AR $306,000

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六  Recognition of Exchange Differences the single- transaction approach the single- transaction approach the two- transaction approach the two- transaction approach Accounting for Foreign Currency Transactions

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Hedging Foreign Exchange Rate Risk  A derivative instrument may be defined as a financial instrument that by its terms at inception or upon occurrence of a specified event, provides the holder (or writer) with the right (or obligation) to participate in some or all of the price changes of another underlying value of measure, but does not require the holder to own or deliver the underlying value of measure.

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Hedging Foreign Exchange Rate Risk  two broad categories two broad categories Forward-based derivatives, such as forwards, futures, and swaps, in which either party can potentially have a favorable or unfavorable outcome, but not both simultaneously (e.g., both will not simultaneously have favorable outcomes). Forward-based derivatives, such as forwards, futures, and swaps, in which either party can potentially have a favorable or unfavorable outcome, but not both simultaneously (e.g., both will not simultaneously have favorable outcomes). Option-based derivatives, such as interest rate caps, option contracts, and interest rate floors, in which only one party can potentially have a favorable outcome and it agrees to a premium at inception for this potentiality; the other party is paid the premium, and can potentially have only an unfavorable outcome. Option-based derivatives, such as interest rate caps, option contracts, and interest rate floors, in which only one party can potentially have a favorable outcome and it agrees to a premium at inception for this potentiality; the other party is paid the premium, and can potentially have only an unfavorable outcome.

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Hedging Foreign Exchange Rate Risk  Forward Exchange Contracts Forward Exchange Contracts  Options Options  Fair Value Hedge – Using a Forward Contract  Hedging an Identifiable Foreign Currency Commitment Using a Forward Contract (A Fair Value Hedge)  Hedging a Forecasted Transaction Using an Option (Cash Flow Hedge)

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Translation Of Foreign Financial Statements  Derivation of the Issue of Foreign Currency Translation Translation exposure, sometimes also called accounting exposure, refers to gains or losses caused by the translation of foreign currency assets and liabilities into the currency of the parent company for accounting purposes. Translation exposure, sometimes also called accounting exposure, refers to gains or losses caused by the translation of foreign currency assets and liabilities into the currency of the parent company for accounting purposes. The choice of any method for the translation of the financial statements of a foreign business operation involves two basic questions: The choice of any method for the translation of the financial statements of a foreign business operation involves two basic questions: (i) how shall foreign currency financial statements be translated——in particular what exchange rates are to be used for different assets/liabilities/equity accounts? (ii) how and when shall foreign exchange gains or losses be recognized?

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Translation Of Foreign Financial Statements  Translation Methods The current/non-current method The current/non-current method The monetary/non-monetary method The monetary/non-monetary method The temporal method The temporal method The current rate method The current rate method  Comparison of Four Translation Methods  Foreign currency translation methods ： development

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Translation Of Foreign Financial Statements  Issues Involving Foreign Currency Translation under SFAS No. 52 Background Background The Issue The Issue The Solution The Solution Foreign currency translation methods adopted by SFAS-52 Foreign currency translation methods adopted by SFAS-52

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Involving Foreign Currency Translation under SFAS No. 52  Functional Versus Reporting Currency Functional currency is defined as the currency of the primary economic environment which the affiliate operates and in which it generates cash flows. Generally, this is the local currency of the country in which the entity conducts most of its business. Under certain circumstances the functional currency may be the parent firm’s home country currency or some third country currency. Functional currency is defined as the currency of the primary economic environment which the affiliate operates and in which it generates cash flows. Generally, this is the local currency of the country in which the entity conducts most of its business. Under certain circumstances the functional currency may be the parent firm’s home country currency or some third country currency. The reporting currency is the currency in which the parent firm prepares its own financial statements. This currency is normally the home country currency, i.e., the currency of the country in which the parent is located and conducts, most of its business. The reporting currency is the currency in which the parent firm prepares its own financial statements. This currency is normally the home country currency, i.e., the currency of the country in which the parent is located and conducts, most of its business.

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六  Basic Translation Process The first thing that you have to do is to make sure that the financial statements of the foreign subsidiary reflect GAAP. The first thing that you have to do is to make sure that the financial statements of the foreign subsidiary reflect GAAP. Next, you have to identify the functional currency of the foreign subsidiar Next, you have to identify the functional currency of the foreign subsidiar Involving Foreign Currency Translation under SFAS No. 52

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六  Translation -- The Current Rate Method  Accounting for the Cumulative Translation Adjustment  Subsequent Recognition of the Translation Adjustment  Foreign Currency Transactions as Hedges of a Net Investment in a Foreign Entity Involving Foreign Currency Translation under SFAS No. 52

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六  Consolidating the Foreign Subsidiary  Unconsolidated Investments: Translation for the Cost of Equity Method  Remeasured Financial Statements: Foreign Currency to Functional Currency  Remeasurement When Functional Currency Is the Same as the Parent/Investor’s Currency  Remeasurement and Subsequent Translation When Functional Currency Is Not the Same as the Parent’s Currency  Consolidating the Foreign Subsidiary  Disclosure Requirements Involving Foreign Currency Translation under SFAS No. 52

2016年10月1日星期六 2016年10月1日星期六 2016年10月1日星期六 Translation Of Foreign Financial Statements  Foreign-currency Translation Methods Used in Other Major Developed Countries Japan Japan Germany Germany France France Canada Canada Italy Italy United Kingdom United Kingdom