Topic 6 - Advanced Accounting

The fair value of a foreign currency option is the sum of its intrinsic value and its

time value

Formal documentation of a hedging relationship must explain how the hedging instrument's effectiveness will be measured.

True

True or false: Unlike U.S. GAAP, IFRS allows certain nonderivative financial instruments to be designated as hedging instruments.

True

True or false: Almost all companies establish hedges for all of their foreign currency transactions.

False

Forward points excluded in assessing the effectiveness of a forward contract to hedge the foreign exchange risk associated with a foreign currency account receivable must be recognized in the

Foreign exchange gain or loss line item in net income

Excluding the forward points on a forward contract from the hedging instrument is similar to treating the forward contract as an ___________ contract

Insurance

When an option is used to hedge a forecasted foreign currency denominated transaction, the change in fair value of the option from its date of acquisition to the balance sheet date is

Reported as a change in other comprehensive income

The change in fair value of a derivative used for _________ purposes must always be recognized in net income

Speculative

Hedge documentation required for hedge accounting must include information about

The type of exposure (cash flow or fair value) being hedged

The fair value of a foreign currency option is equal to the sum of its intrinsic value and its _________ value.

Time

The depreciation of a foreign currency will result in an exporter recognizing a foreign exchange ________ when it makes a foreign currency sale to a foreign customer and receives payment after the date of sale.

Loss

In assessing the effectiveness of a forward contract as a hedge, forward points

May be excluded

In assessing the effectiveness of an option as a foreign currency hedge, the option's time value

May be excluded

Amortization of a forward contract _____ over the life of the forward contract results in an increase in net income

Premium

When a forward contract is used to hedge a foreign currency firm commitment, the fair value of the firm commitment is

Equal to the fair value of the forward contract

The procedures required by IFRS and U.S. GAAP to account for foreign currency transactions are

Essentially the same

U.S. GAAP requires hedges to be recognized as fair value hedges or cash flow hedges. IFRS requires hedges to be recognized as

Fair value hedges or cash flow hedges

The current spot rate to purchase a foreign currency is $1.00. The intrinsic value of an option to purchase that foreign currency at a strike price of $0.90 is

$0.10 per foreign currency unit

The current spot rate to sell a foreign currency is $1.00. The intrinsic value of an option to sell that foreign currency at a strike price of $0.90 is

$0.10 per foreign currency unit

An increase in the fair value of a foreign currency forward contract used to hedge a fair value exposure of a foreign currency denominated asset or liability is reported as

- An asset on the balance sheet - A foreign exchange gain in net income

When a forward contract is used to hedge a foreign currency firm commitment, hedge accounting requires the forward contract and the firm commitment to

Be recognized on the balance sheet at their fair values

Similar to a foreign currency firm commitment, a forecasted foreign currency denominated transaction is recognized as an asset or liability on the balance sheet.

False

A transaction exposure to foreign exchange risk exists when an exporter

allows a foreign customer to pay in a foreign currency and allows the customer time to pay for its purchases

The Canadian subsidiary of a U.S.-based company has an account receivable in British pounds. To report this account receivable in the U.S.-parent's consolidated balance sheet, the Multiple select question. the Canadian dollar translated amount for the British pound receivable should be translated into U.S. dollars using the current exchange rate. British pound receivable should translated into Canadian dollars using the current exchange rate. British pound receivable should translated into U.S. dollars using the historical exchange rate.

British pound receivable should be translated into Canadian dollars using the current exchange rate the Canadian dollar translated amount for the British pound receivable should be translated in to U.S. dollars using the current exchange rate

Forward points excluded in assessing the effectiveness of a forward contract to hedge the foreign exchange risk associated with a forecasted export sale must be recognized in the

Sales revenue line item in net income

The premium paid to acquire a foreign currency option is

equal to the sum of the option's intrinsic value only

The appreciation of a foreign currency will result in an exporter recognizing a foreign exchange _____ when it makes a foreign currency sale to a foreign customer and receives payment after the date of sale.

gain

The functional currency of a foreign entity is the U.S. dollar. The gain on forward contract designated as a hedge of the net investment in this foreign entity should be reported

in accumulated other comprehensive income on the consolidated balance sheet

Current U.S. GAAP recognizes that Multiple select question. some foreign entities are relatively self-contained and are integrated with the local economy. all foreign entities are relatively self-contained and are integrated with the local economy. all foreign entities are closely integrated with their parent company. some foreign entities are closely integrated with their parent company.

some foreign entities are relatively self-contained and are integrated with the local economy some foreign entities are closely integrated with their parent company