Chapter 12 - Accounting for foreign currency transactions and hedging foreign exchange risk. In this chapter we’ll look at the actual accounting transactions we record if we do business with companies from other countries. We have to deal with the currency of our foreign customer or supplier, and how that affects our record keeping. We will also learn about hedging our activity in foreign currency transactions. There are many new terms in this chapter that you will need to learn. | Accounting for Foreign Currency Transactions and Hedging Foreign Exchange Risk 1 Learning Objectives Distinguish between the terms “measured” and “denominated.” Describe what is meant by a foreign currency transaction. Understand some of the more common foreign currency transactions. Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage. Describe a forward exchange contract. 2 Learning Objectives Explain the use of forward contracts as a hedge of an unrecognized firm commitment. Identify some of the common situations in which a forward exchange contract can be used as a hedge. Describe a derivative instrument and understand how it may be used as a hedge. Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. 3 Foreign Currency Transactions Many . companies engage in international activities such as: Exporting or importing goods, Establishing a foreign branch, or Holding an equity investment in a foreign company. 4 Foreign Currency Transactions Recording and reporting problems with foreign currency transactions: Transactions to be settled in a foreign currency must be translated (expressed in dollars) before they can be aggregated with domestic transactions of the . firm. Receivables or payables denominated in foreign currencies are subject to gains and losses. Due to the changes in exchange rates. Companies use hedging strategies with derivatives to minimize the impact of exchange rate changes on their financial statements. 5 Exchange Rates—Means of Translation Translation - process of expressing amounts stated in terms in a foreign currency in the currency of the reporting entity by using an appropriate exchange rate. Exchange rate - ratio between a unit of one currency and another currency for which that unit can be exchanged at a particular time. 6 Exchange Rates—Means of Translation Direct Exchange . | Accounting for Foreign Currency Transactions and Hedging Foreign Exchange Risk 1 Learning Objectives Distinguish between the terms “measured” and “denominated.” Describe what is meant by a foreign currency transaction. Understand some of the more common foreign currency transactions. Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage. Describe a forward exchange contract. 2 Learning Objectives Explain the use of forward contracts as a hedge of an unrecognized firm commitment. Identify some of the common situations in which a forward exchange contract can be used as a hedge. Describe a derivative instrument and understand how it may be used as a hedge. Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. 3 Foreign Currency Transactions Many . companies engage in international activities such as: Exporting or importing goods, .
