1、Chapter 3 Accounting for Foreign Currency Saturday,November 19,20221Learning Objectives Provide an overview of foreign exchange markets and define related terminology.Describe the different types of foreign exchange exposure and exchange difference.Understand foreign currency transaction.Describe fo
2、reign currency translation.Compare the different methods of accounting for foreign currency translation.Saturday,November 19,20222Course OutlineAccounting for Foreign Currency TransactionsHedging Foreign Exchange Rate RiskTranslation of Foreign Financial StatementsSaturday,November 19,20223Introduct
3、ionn Textbook P29-32Saturday,November 19,20224Accounting for Foreign Currency TransactionsSaturday,November 19,20225n A transaction that requires payment or receipt(settlement)in a foreign currency is called a foreign currency transaction.n Exchange difference is the difference resulting from report
4、ing the same number of units of a foreign currency in the reporting currency at different exchange rates.Accounting for Foreign Currency TransactionsSaturday,November 19,20226u Importing or Exporting of Goods or ServicesAt the date the transaction is first recognized.At each balance sheet date that
5、occurs between the transaction date and the settlement date.At the settlement date.Accounting for Foreign Currency TransactionsSaturday,November 19,20227u Recognition of Exchange Differencesthe single-transaction approach the two-transaction approachHedging Foreign Exchange Rate Risku A derivative i
6、nstrument 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 hold
7、er to own or deliver the underlying value of measure.Saturday,November 19,20228Hedging Foreign Exchange Rate Risku Two broad categoriesForward-based derivatives,such as forwards,futures,and swaps,in which either party can potentially have a favorable or unfavorable outcome,but not both simultaneousl
8、y(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
9、 paid the premium,and can potentially have only an unfavorable outcome.Saturday,November 19,20229Translation Of Foreign Financial Statementsu Derivation of the Issue of Foreign Currency TranslationTranslation exposure,sometimes also called accounting exposure,refers to gains or losses caused by the
10、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 questionsSaturday,November 19,202210Translation Of Foreig
11、n Financial Statementsu Derivation of the Issue of Foreign Currency Translation The choice of any method for the translation of the financial statements of a foreign business operation involves two basic questions:how shall foreign currency financial statements be translated in particular what excha
12、nge rates are to be used for different assets/liabilities/equity accounts?how and when shall foreign exchange gains or losses be recognized?Saturday,November 19,202211u Translation MethodsThe current/non-current methodThe monetary/non-monetary methodThe temporal methodThe current rate methoduComparison of Four Translation MethodsuForeign currency translation methods-developmentSaturday,November 19,202212Translation Of Foreign Financial StatementsSaturday,November 19,202213
