Slide CHAPTER 16 TRANSLATING FOREIGN CURRENCY TRANSACTIONS

Slide FOCUS OF CHAPTER 16 l Currency Exchange Rates l Causes of Exchange Rate Fluctuations l Translating Foreign Currency Transactions (importing and exporting) into U.S. Dollars

Slide Currency Exchange Rates: Terminology l Conversion: Actually going to the bank and physically exchanging currencies. for

Slide Currency Exchange Rates: Terminology l Translation: The process of applying an exchange rate to a foreign currency amount so that an amount can be expressed in dollars. 100,000 x $1.25 = $125,000

Slide Currency Exchange Rates: Terminology lExpressing Directly : 100,000 x $1.25 = $125,000 lExpressing Indirectly : 100,000 ÷.80 = $125,000

Slide Currency Exchange Rates: Terminology lIt is CUSTOM to always express certain currencies directly (British pound) : lIt is CUSTOM to always express certain currencies indirectly (Japanese yen) : 1 1$ = 110 = $1.60

Slide Currency Exchange Rates: Terminology l FOREIGN CURRENCY STRENGTHENS: n Direct exchange rate goes UP. After: 1 = $1.64 Before: 1 = $1.60 n Indirect exchange rate goes DOWN. Before: $1 =.625 After: $1 =.610

Slide Currency Exchange Rates: Terminology l Foreign currency strengthens : n It becomes more expensive to buy. s Imports cost more. s Exports cost foreign customers less. l Foreign currency weakens : n It becomes less expensive to buy. s Imports cost less. s Exports cost foreign customers more.

Slide Currency Exchange Rates: Why Do They Change? l Inflationary Factors: n Foreign inflation makes the DIRECT exchange rate decrease. n Domestic inflation makes the DIRECT exchange rate increase. l Noninflationary Factors: n Anything and everything else.

Slide The Foreign Exchange Market: The Biggest Market of All l An OTC market -- not an organized exchange such as the NYSE. l Open 24 hours a day. l $1.5 trillion per day. l The market-makers: Several hundred banks located throughout the world.

Slide Translating Importing & Exporting Transactions: Terminology l Denominated : The currency in which an FX transaction is to be settled. l Measured : The currency in which an FX transaction is recorded in the books and records. British pounds

Slide Translating Importing & Exporting Transactions: The Relevant Dates l Order (or Commitment) Date: The date the purchase or sales order is issued. l Transaction Date: The date that title passes and the parties record the sale and purchase. l Intervening F/R (or B/S) Date: Dates between the transaction date and the settlement date. l Settlement Date: The date that the debtor pays the creditor. bank wire transfer

Slide Translating Importing & Exporting Transactions: FX Gains & FX Losses l The One -Transaction View (non- GAAP) : n Treat as an adjustment to either: s Cost of item acquired. s Sales price of item sold. l The Two -Transaction View (GAAP) : n Recognize currently in earnings.

Slide Recognizing Currently FX Gains & FX Losses at Intervening F/R Dates l Does it matter if FX gains & losses at intervening balance sheet dates are unrealized?

Slide Recognizing Currently FX Gains & FX Losses At Intervening F/R Dates l NO! Because an economic gain or loss has occurred.

Slide Dear Ann: I Just Don’t Know! Dear Ann: My Intel stock has gone up in value $400,000. My accountant says the gain is unrealized. Should I feel good or not? Perplexed Peter Cruising in Tahiti Dear Peter: Feel good. If you have any doubts about feeling good, sell the stock and buy it back the same day. Then the gain will be realized --but you will still be “IN THE SAME BOAT.” Ann Anders

Slide Review Question #1 l On 11/9/04, Selco recorded a sale denominated in 100,000 euros. The customer paid on 1/5/05. Direct exchange rates were: 11/9/04--$.90; 12/31/04--$.95; and 1/5/05--$.92. What does Selco report in earnings in 2004? A. Sales of $90,000 and FX Gain of $5,000. B. Sales of $90,000 and FX Loss of $5,000. C. Sales of $90,000 and no FX gain or loss. D. Sales of $95,000 and no FX gain or loss. E. Sales of $85,000 and no FX gain or loss.

Slide Review Question #1 l On 11/9/04, Selco recorded a sale denominated in 100,000 euros. The customer paid on 1/5/05. Direct exchange rates were: 11/9/04--$.90; 12/31/04--$.95; and 1/5/05--$.92. What does Selco report in earnings in 2004? A. Sales of $90,000 and FX Gain of $5,000. B. Sales of $90,000 and FX Loss of $5,000. C. Sales of $90,000 and no FX gain or loss. D. Sales of $85,000 and no FX gain or loss. E. Sales of $95,000 and no FX gain or loss.

Slide Review Question #2 l On 12/28/04, Purco recorded an inventory purchase denominated in 100,000 euros. Purco paid the vendor on 1/12/05 Direct exchange rates were: 12/21/04--$1.10; 12/31/04--$1.11; and 1/12/05--$1.15. What does Purco report at 12/31/04? A. Inventory of $110,000 and FX Gain of $1,000. B. Inventory of $110,000 and FX Loss of $1,000. C. Inventory of $110,000 and no FX gain/loss. D. Inventory of $109,000 and no FX gain/loss. E. Inventory of $111,000 and no FX gain/loss.

Slide Review Question #2--With Answer l On 12/28/04, Purco recorded an inventory purchase denominated in 100,000 euros. Purco paid the vendor on 1/12/05 Direct exchange rates were: 12/21/04--$1.10; 12/31/04--$1.11; and 1/12/05--$1.15. What does Purco report at 12/31/04? A. Inventory of $110,000 and FX Gain of $1,000. B. Inventory of $110,000 and FX Loss of $1,000. C. Inventory of $110,000 and no FX gain/loss. D. Inventory of $109,000 and no FX gain/loss. E. Inventory of $111,000 and no FX gain/loss.

Slide End of Chapter 16 l Time to Clear Things Up-- Any Questions?