F2: Foreign Currency Accounting

when was transaction settled or completed? IFRS

doesnt matter if purchase made in June. -if not delivered until november you will not use the June rate but use the november rate to compare to year end.

are translation adjustments included in determining net income for the period?

no, translation adjustments are not included in determining net income for the period but are disclosed and accumulated as a component of OCI in consolidated equity until sale or until liquidation of the investment takes place

Forward exchange rate

the rate existing now for exchanging two currencies at a specific future date -BET

a transaction denominated in a foreign currency is recorded at what rate? -

the spot rate on the date of the transaction

TRANSLATION METHOD AND STEPS - functional

(1) IS - weighted average (2) BS - year-end rate---C/S &APIC - historical---Roll forward RE (3) PLUG - AOCI REPORTED---PU**F**ER

individual foreign transactions

Introduction---foreign currency transaction gains and losses occur when a company buys from or sells to a foreign company with whom it has no ownership interest and agrees to pay or accept payment in a foreign currency. Transactions between subsidiary and parent of a permanent financing nature are not considered foreign currency transactions

Income statement - how to translate - translation / remeasurement

TRANSLATION (1) Income statement -all income statement items=Weighted average rate -Transfer net income to retained earnings ------------------------------------------------------------------------ REMEASUREMENT -weighted average -historical for BS related accounts

Direct Method

The direct method is the domestic price of one unit of another currency. For example, one euro costs $1.47.

Indirect Method

The indirect method is the foreign price of one unit of the domestic currency. For example, 0.68 euros buys $1.00.

Reporting Currency

The reporting currency is the currency of the entity ultimately reporting financial results of the foreign entity.

Weighted Average Rate

The weighted average rate is calculated to take into account the exchange rate in fluctuations for the exchange account for the actual exchange rate a effect for period It would be impractical to rate, when applied to numerous, transactions (e.g., sales). The average period, approximates transaction recurring evenly throughout the normally assumed to have occurred the effect of separate translations of each item. -used on income statement for translation -used on income statement for remeasurement

U.S. GAAP VS. IFRS

U.S. GAAP requires the use of the remeasurement method when a foreign subsidiary operates in a highly inflationary economy. Under IFRS, financial statements of a foreign subsidiary operating in a highly inflationary economy must first be restated for the effects of inflation and then must be converted from the foreign currency to the reporting currency using the current/year-end rate for all elements of both the balance sheet and income statement.

a transaction denominated in a foreign currency is recorded at what rate?

spot rate on the date of the transaction

Foreign Currency Transactions

Foreign currency transactions are transactions with a foreign entity (e.g., buying from and to denominated in (to be settled in) a foreign currency.

Remeasurement Method (temporal method)

-DYSFUNCTIONAL -If the financial statements of the foreign subsidiary are not in the subsidiary's functional currency, the financial statements are remeasured to the functional currency starting with the balance sheet. (1) Balance Sheet -Monetary items = Current/Year-end rate -Non-monetary items = Historical rate (2) Income Statement -Non-balance sheet related items = Weighted average rate -Balance sheet related items=Historical rate -Depreciation/PP&E -Cost of goods sold/inventory -Amortization/bonds and intangibles (3) Remeasurement Gain or Loss(income statement) Plug "Currency Gain/Loss" to get net income to the required amount needed to adjust retained earnings in order to make the balance sheet balance. -IDEA---I

Prepare in Accordance with GAAP/IFRS

Before performing a part of the translation process, it is necessary to ensure that the financial statements expressed in the foreign currency were prepared in accordance U.S. GAAP or IFRS, as appropriate. -If necessary, corrections must be made to comply with GAAP or IFRS

Current Exchange Rate

Current exchange rate is the exchange rate at the current date, or for immediate delivery of currency, often referred to as the spot rate -typically used with B/S accounts -year end/spot rate

Foreign Currency Remeasurement

Foreign currency remeasurement is the restatement of foreign financial state from the foreign currency to the entity s functional currency in the following situations: 1.The reporting currency is the functional currency 2. The financial statements must be restated in the entity's functional currency prior to translating the financial statements from the functional currency to the reporting currency

Foreign currency Translation

Foreign currency translation is the restatement of financial statements denominated in the functional currency to the reporting currency using appropriate rates of exchange

Foreign Currency Translation

Foreign currency translation the conversion of financial statements of a foreign entity into financial statements expressed in the domestic currency (the dollar)

Translation Method

Foreign currency=Functional currency (current rate method)***-will help you remember that assets and liabilities on the balance sheet are calculated using current/year-end rate (1) Income statement -all income statement items=Weighted average rate -Transfer net income to retained earnings (2) Balance Sheet -Assets=Current/year-end rate -Liabilities=current/year-end rate -Common stock/APIC=Historical rate -Retained earnings=Roll forward -Translated retained earnings is equal to the beginning translated retained earnings plus translated net income for the current period less translated dividends declared for the current period. (3) Translation Gain or Loss (other comprehensive income) -Plug "translation adjustment" to other comprehensive income. The translation adjustment is equal to the difference between the debits and credits in the translated trial balance. -PUFER---this is the F -Cumulative translation adjustment

U.S. GAAP VS Under IFRS

The following factors must be considered in determining a entity's functional currency. -The first three factors have priority over the other factors 1. The currency that influences sales prices for goods and service 2. The currency of the country whose competitive forces and regulations mainly determine the sales price of its goods and services 3. The currency that mainly influences labor, material, a other costs of providing goods and services 4. The currency in which funds from financing activities are generated 5. The currency in which receipts from operating activities are usually retained 6. Whether the activities of the foreign operation are an extension of the parent's activities or are carried out with a significant amount of autonomy. 7. Whether transactions with the parent are a large or small portion of the foreign entity's activities. 8. Whether cash flows generated by the foreign operation directly affect the cash flow of the parent and are available to be remitted to the parent. -Whether operating cash flows generated by the foreign operation are sufficient to service existing and normally expected debt or whether the foreign entity will need funds from the parent to service its debt

Functional currency

The functional currency is the currency of the primary economic environment in which the entity operates, usually the local currency or the reporting currency.

REMEASUREMENT METHOD AND STEPS - dysfunctional

(1) BS - monetary-year end rate - nonmonetary-historical (2) IS - weighted average---historical for BS related accounts (3) PLUG - G/L so I/S is at amount necessary for RE plug REPORTED---**I**dea

Translation Gain or Loss (other comprehensive income) - how to translate---what is the translation adjustment

-Plug "translation adjustment" to other comprehensive income. The translation adjustment is equal to the difference between the debits and credits in the translated trial balance. -PUFER---this is the F -Cumulative translation adjustment

what are specific BS related items that = historical rate (remeasurement method)

-depreciation/PPE -COGS/INV -amortization and intagibles -any nonmonetary item

individual foreign transactions - valuation of assets and liabilities

-historical rate -the assets or liabilities resulting from foreign currency transactions should be recorded in the U.S. company's books using the exchange rate in effect at the date of the transaction.

translation adjustments associated with remeasurement are displayed where? what about translation?

-remeasurement---income -translation---AOCI

transaction gains vs translation gains

-transaction gain---reported on the income statement -translation gain---reported in OCI and recognized as a separate component of stockholders equity

Historical Exchange Rate

-used for equity -the historical exchange rate is the rate in effect at the date of issuance of stock or acquisition of assets

temporal or remeasurement method used when....2 things

-when the subsidiary operates in a highly inflationary economy or -local currency of the subsidiary is not the functional currency

the foreign subsidiary's functional currency is the currency of the environment in which the subsidiary what?

1. the environment in which the sub *primarily generates and expends cash* 2. the currency in which the FS will be presented, which is the currency of the parent company 3. a foreign currency other than the one in which the foreign entity maintains its books

individual foreign transactions - transaction not settled at balance sheet date

A foreign exchange transaction gain or loss that is recognized in current net income must be computed at each balance sheet date on all recorded transactions denominated in foreign currencies that have not been settled. -The difference between the exchange rate used in recording the transaction in dollars and the exchange rate at the balance sheet date (current exchange rate) is an unrealized gain or loss on the foreign currency transaction

individual foreign transactions - changes in exchange rate

A foreign exchange transaction gain or loss will result if the exchange rates between the time a purchase or sale in foreign currency is contracted for and the time actual payment is made to market

BS - how to translate - translation / remeasurement

TRANSLATION -Assets=Current/year-end rate -Liabilities=current/year-end rate -Common stock/APIC=Historical rate -Retained earnings=Roll forward -Translated retained earnings is equal to the beginning translated retained earnings plus translated net income for the current period less translated dividends declared for the current period. ---------------------------------------------------------------------------- REMEASUREMENT -monetary=year-end rate -nonmonetary=historical rate

Determine the Functional currency - 3 things

The functional currency of a foreign entity determines the conversion methodology to use. The functional currency can be the entity's local currency, the currency of the reporting entity, or the currency of another country. Under U.S. GAAP, an entity's local currency qualifies as the functional currency if it is the currency of the primary economic environment in which the company operates, and all of the following conditions exist: A. The foreign operations are relatively self-contained and integrated within the country, B. The day-to-day operations do not depend on the parents or investors functional currency. C.The local economy of the foreign entity is NOT highly inflationary, which is defined as cumulative inflation of 100% *****over three years*****.