AKUNTANSI KEUANGAN
LANJUTAN I
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12
Accounting for Foreign Currency
Transactions and Hedging
Foreign Exchange Risk
Advanced Accounting, Fifth Edition
Foreign Currency Transactions
Recording and reporting problems with foreign currency
transactions:
Transactions in a foreign currency must be translated
(expressed in dollars) before they can be aggregated
with domestic transactions.
Receivables or payables denominated in foreign
currencies are subject to gains and losses.
Companies use hedging strategies with derivatives
to minimize the impact of exchange rate changes.
Exchange Rates—Means of Translation
Translation - process of expressing amounts stated
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.
Exchange Rates—Means of Translation
Direct Exchange Rate
Units of domestic currency that can be converted into
one unit of foreign currency.
Direct rate = 1.517 ($1.517 U.S. for 1 British pound)
Indirect Exchange Rate
Units of foreign currency that can be converted into
one unit of domestic currency.
Indirect rate = 1.00/1.517 = .6592
($1 U.S. for .6592 British pound)
Exchange Rates—Means of Translation
Spot Rate
Rate at which currencies can be exchanged today.
Forward or Future Rate
Rate at which currencies can be exchanged at
some future date.
Forward Exchange Contract
Contract to exchange currencies of different countries
on a stipulated future date, at a specified rate (the
forward rate).
Exchange Rates—Means of Translation
Floating Rates
Relationship between major currencies is determined by
supply and demand factors.
Increase risk to companies doing business with a
foreign company.
Example – Payable to be settled in 100,000 yen
Transaction Change Settlement
Date in Rate Date
Yen 100,000 100,000
Direct rate $ 0.00434 $ 0.00625
Payable $ 434.00 $ 625.00
Foreign Currency Transactions
Foreign Currency Transaction - requires payment or receipt
(settlement) in a foreign currency.
U.S. firm exposed to risk of unfavorable changes in the
exchange rate.
Direct exchange rate More dollars needed to
increasing, or foreign = acquire the foreign
currency unit strengthening. currency units.
Direct exchange rate Fewer dollars needed to
decreasing, or foreign = acquire the foreign
currency unit weakening. currency units.
LO 2 Foreign Currency Transactions.
Foreign Currency Transactions
Importing or Exporting of Goods or Services
Translating Accounts Denominated in Foreign Currency
Transaction Balance Settlement
date sheet date date
Units of foreign currency x Current direct exchange rate
Increase or decrease is generally reported as a foreign currency
transaction gain or loss, sometimes referred to as an exchange gain
or loss, in determining net income for the current period.
LO 3 Common transactions.
LO 4 Three stages of concern.
Importing and Exporting Transactions
Exercise 12-2: During December of the current year,
Teletex Systems, Inc., a company based in Seattle,
Washington, entered into the following transactions:
Dec. 10 Sold seven office computers to a company located in
Colombia for 8,541,000 pesos. On this date, the spot rate
was 365 pesos per U.S. dollar.
Inventory delivered
12/10/Year 1
U.S. firm
Columbia firm
(Teletex)
8,541,000 pesos
received on 1/10/Year 2
LO 3 Common transactions.
LO 4 Three stages of concern.
Importing and Exporting Transactions
Exercise 12-2: Dec. 10, Sold seven office computers to a
company located in Colombia for 8,541,000 pesos. On this
date, the spot rate was 365 pesos per U.S. dollar. Prepare the
journal entry on the books of Teletex Systems, Inc. (periodic
method)
Accounts receivable 23,400
Sales 23,400
Sales price in pesos 8,541,000
Pesos per U.S. dollar / 365
Sales price in U.S. dollars $ 23,400
LO 3 Common transactions.
LO 4 Three stages of concern.
Importing and Exporting Transactions
Exercise 12-2: Prepare journal entry necessary to adjust
the accounts as of December 31. Assume that on December
31 the direct exchange rates was Colombia peso $.00268.
Transaction loss 510
Accounts receivable 510
Receivable in pesos 8,541,000
Direct exchange rate to U.S. dollar $ .00268
Receivable in U.S. dollars $ 22,890
Balance in receivable 23,400
Transaction loss $ 510
LO 3 Common transactions. LO 4 Three stages of concern.
Importing and Exporting Transactions
Exercise 12-2: Prepare journal entry to record settlement of
the account on January 10. Assume that the direct exchange
rate on the settlement date was Colombia peso $.00320.
Cash (8,541,000 x $.00320) 27,331
Accounts receivable ($23,400 - $510) 22,890
Transaction gain 4,441
LO 3 Common transactions. LO 4 Three stages of concern.
Importing and Exporting Transactions
Exercise 12-2: During December of the current year,
Teletex Systems, Inc., a company based in Seattle,
Washington, entered into the following transactions:
Dec. 12 Purchased computer chips from a Taiwan company.
Contract was denominated in 500,000 Taiwan dollars.
Direct exchange rate on this date was $.0391.
Inventory received
12/12/Year 1
U.S. firm
Taiwan firm
(Teletex)
500,000 Taiwan dollars
paid on 1/10/Year 2
LO 3 Common transactions.
LO 4 Three stages of concern.
Importing and Exporting Transactions
Exercise 12-2: Dec. 12, Purchased computer chips from a
company domiciled in Taiwan. The contract was denominated
in 500,000 Taiwan dollars. The direct exchange spot rate on
this date was $.0391. Prepare the journal entry on the books
of Teletex Systems, Inc.
Purchases 19,550
Accounts payable 19,550
Purchase price in Taiwan dollars 500,000
Direct exchange rate to U.S. dollar x $.0391
Purchase price in U.S. dollars $ 19,550
LO 3 Common transactions.
LO 4 Three stages of concern.
Importing and Exporting Transactions
Exercise 12-2: Prepare journal entry necessary to adjust
the account as of December 31. Assume that on December 31
the direct exchange rates was Taiwan dollar $.0351.
Accounts payable 2,000
Transaction gain 2,000
Payable in pesos 500,000
Direct exchange rate to U.S. dollar $ .0351
Payable in U.S. dollars $ 17,550
Balance in payable 19,550
Transaction gain $ 2,000
LO 3 Common transactions. LO 4 Three stages of concern.
Importing and Exporting Transactions
Exercise 12-2: Prepare journal entry to record settlement
of account on January 10. Assume that the direct exchange
rate on the settlement date was Taiwan dollar $.0398.
Transaction loss 2,350
Accounts payable ($19,550 - $2,000) 17,550
Cash (500,000 x $.0398) 19,900
LO 3 Common transactions. LO 4 Three stages of concern.
Importing and Exporting Transactions
Importing or Exporting of Goods or Services
Foreign currency transaction gains and losses are
included in net income.
Two-transaction approach:
The sale or purchase is viewed as a transaction separate
from the financing arrangement.
The dollar amount recorded (in Sales or in Purchases) is
determined by the exchange rate on the transaction date.
Adjustments to the foreign-currency-denominated
receivable or payable are recorded directly to the
transaction gain or loss and included in net income.
LO 3 Common transactions. LO 4 Three stages of concern.
Importing and Exporting Transactions
Hedging Foreign Exchange Rate Risk
Derivative Instrument - a financial instrument that
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.
Two broad categories: Derivatives are recognized in the
Forward-based balance sheet at their fair value,
Option-based resulting in a payable position for
one party and a receivable
position for the other.
LO 8 Derivatives as a hedge.
Importing and Exporting Transactions
Forward Exchange Contracts
A forward exchange contract (forward contract) is an
agreement to exchange currencies of two different countries
at a specified rate (the forward rate) on a stipulated
future date.
LO 5 Forward exchange contracts.
Importing and Exporting Transactions
Which Kind of Forward Contract to Choose?
1. Forward Contract used as a Hedge of a(n):
a. Foreign currency transaction.
b. Unrecognized firm commitment (a fair value hedge).
c. Foreign-currency-denominated “forecasted”
transaction (a cash flow hedge).
d. Net investment in foreign operations.
2. Speculation
Forward contracts used to speculate changes in foreign
currency.
LO 5 Forward exchange contracts.
Using Forward Contracts as a Hedge
Hedge of a Foreign Currency Exposed Liability
Problem 12-2: Christel Exporting Co. is a U.S. wholesaler
engaged in foreign trade. The following transaction is
representative of its business dealings. The company uses a
periodic inventory system and is on a calendar-year basis. All
exchange rates are direct quotations.
Dec. 1 Christel Exporting purchased merchandise from
Chang’s Ltd., a Hong Kong manufacturer. The invoice was for
210,000 Hong Kong dollars, payable on April 1. On this same
date, Christel Exporting acquired a forward contract to buy
210,000 Hong Kong dollars on April 1 for $.1314.
LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Problem 12-2: (additional facts)
April 1 Christel Exporting submitted full payment of
210,000 Hong Kong dollars to Chang’s, Ltd., after obtaining
the 210,000 Hong Kong dollars on its forward contract.
Spot rates and the forward rates for the Hong Kong dollar
were as follows:
Forward Rate for
Spot Rate ($) April 1 Delivery ($)
Dec. 1 .1265 .1314
Dec. 29 .1240 .1305
Dec. 31 .1259 .1308
April 1 .1430
LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Problem 12-2: Prepare journal entries for the transactions
including the necessary adjustments on December 31.
Dec 1 Purchases 26,565
Accounts Payable 26,565
Hong Kong dollars 210,000
Dec. 1 Direct Spot Rate $ .1265
Payable in U.S. dollars $ 26,565
LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Problem 12-2: Prepare journal entries for the transactions
including the necessary adjustments on December 31.
Dec 1 FC Receivable from Exch. Dealer 27,594
Dollars Payable to Exch. Dealer 27,594
Hong Kong dollars 210,000
Dec. 1 Forward Rate $ .1314
Payable in U.S. dollars $ 27,594
LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Problem 12-2: Prepare journal entries for the transactions
including the necessary adjustments on December 31.
Dec 31 Accounts Payable 126
Transaction Gain 126
Hong Kong dollars 210,000
Dec. 31 Spot Rate $ .1259
Payable in U.S. dollars $ 26,439
Payable recorded on Dec. 1 26,565
Transaction gain $ 126
LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Problem 12-2: Prepare journal entries for the transactions
including the necessary adjustments on December 31.
Dec 31 Transaction Loss 126
FC Receivable from Exchange Dealer 126
Hong Kong dollars 210,000
Dec. 31 Forward Rate $ .1308
Payable in U.S. dollars $ 27,468
Payable recorded on Dec. 1 27,594
Transaction loss $ (126)
LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Problem 12-2: Prepare journal entries for the transactions
including the necessary adjustments on December 31.
Dec 31 Transaction Loss 3,591
Accounts payable 3,591
Hong Kong dollars 210,000
Apr. 1 Spot Rate $ .1430
Payable in U.S. dollars $ 30,030
Payable established on Dec. 31 26,439
Transaction loss $ (3,591)
LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Problem 12-2: Prepare journal entries for the transactions
including the necessary adjustments on December 31.
Dec 31 FC Receivable from Exch. Dealer 2,562
Transaction Gain 2,562
Hong Kong dollars 210,000
Apr. 1 Spot Rate $ .1430
Payable in U.S. dollars $ 30,030
Payable established on Dec. 31 27,468
Transaction loss $ 2,562
LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Problem 12-2: Prepare journal entries for the transactions
including the necessary adjustments on December 31.
Apr 1 Investment in Foreign Currency 30,030
Dollars Payable to Exch. Dealer 27,594
Cash 27,594
FC Receivable from Exch. Dealer 30,030
(payment to dealer and receipt of 210,000 Hong Kong dollars)
Accounts Payable 30,030
Investment in Foreign Currency 30,030
(payment of liability upon transfer of 210,000 Hong Kong dollars)
LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Problem 12-2: Transaction Summary
Transaction Transaction
Hedged Item Balance Gain/(Loss) Hedge Balance Gain/(Loss)
Accounts Payable FC Receivable
Dec. 1 $ 26,565 Dec. 1 $ 27,594
Dec. 31 26,439 $ 126 Dec. 31 27,468 $ (126)
Apr. 1 30,030 (3,591) Apr. 1 30,030 2,562
Total gain/(loss) $ (3,465) $ 2,436
Thus the net effect is a $1,029 loss when the
forward contract is used.
LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Hedge of a Foreign Currency Exposed Asset
Accounting for a forward contract entered into as a hedge of
an exposed receivable position is similar to an exposed
liability position.
Because the U.S. firm will be receiving foreign currency in
settlement of the exposed receivable balance, it will enter
into a forward contract to sell foreign currency for U.S.
dollars.
LO 7 Forward contracts as a hedge.
Using Forward Contracts as a Hedge
Cash Flow Hedge-A Forecasted Transaction
Cash Flow Hedge - hedging cash flows for future
transactions that have not yet occurred or for which
there are no firm commitments.
Cash flow hedges may defer the Income statement
recognition of gains and losses on forecasted transactions
if certain criteria are met.
Amounts in accumulated other comprehensive income are
reclassified into earnings in the same period which the
hedged forecasted transaction affects earnings.
LO 7 Fair value hedge vs. cash flow hedge.
