Foreign Currency Transaction & Translation Flashcards by Gabe Celeste

II. The functional currency could be the recording currency of the foreign entity. When used for speculative purposes, a forward contract is not entered into to offset, or hedge, an existing risk. Rather, the purpose of entering into a speculative forward contract is Foreign Currency Transaction & Translation Flashcards By Gabe Celeste to make a profit. Statement II is not correct. Changes in the value of a forward contract used for speculative purposes, measured using the forward rate, are recognized in the period in which the forward rate changes and are not deferred until the contract matures.

• If the functional currency is the same as the presentation currency, gains or losses are reported in profit and loss for the period.
• Since the contract holder has the option of whether or not to exercise the contract option to exchange currencies, it is not likely that the option would be exercised if it would result in a loss.
• The translation loss is reported separately in other comprehensive income, and the exchange gain is reported in the income statement.
• A forward contract used to hedge a foreign currency firm commitment can be either a cash flow hedge (as permitted by the FASB’s Derivatives Implementation Group) or a fair value hedge (as permitted by FASB #133).

The hedge of a firm commitment is a fair value hedge, with changes in the fair value of the forward contract reported as an increase or decrease to the forward contract and a gain or loss recognized in current income. The change in the forward contract reported as a translation adjustment offsets the change in the value of the translated financial statements of the foreign operation, which also are reported as a translation adjustment. The hedge of a forecasted transaction to be denominated in a foreign currency is a cash flow hedge. The risk being hedged is the variability in expected cash flows on the planned transaction that would result from changes in the exchange rate.

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Nonmonetary items measured at historical cost are translated at the historical exchange rate. Weighted-average exchange rate for the current year. Weighted-average exchange rate over the economic life of each plant asset. Bart had a $20,000 loss resulting from the translation of the accounts https://quick-bookkeeping.net/ of its wholly owned foreign subsidiary for the year ended December 31, year 1. Orr had an account payable to an unrelated foreign supplier payable in the supplier’s local currency. The U.S. Dollar equivalent of the payable was $60,000 on October 31, 2008 and $64,000 on December 31, 2008.

Invest in the equity securities of another foreign entity with the same foreign currency as the operation being hedged. A forward contract used to hedge a foreign currency firm commitment can be either a cash flow hedge (as permitted by the FASB’s Derivatives Implementation Group) or a fair value hedge (as permitted by FASB #133). The purchase of goods by a U.S. entity would most likely reflect an import transaction and, since it is to be settled in a foreign currency, would be a foreign currency import transaction.

CPA – FAR > Foreign Currency Transaction & Translation > Flashcards

(The recovery in the next period would be treated as a gain in that period.) The loss is $1,500 [($.55 – $.70)10,000], making this response correct. Component of income from continuing operations. Gains and losses are deferred until transactions are settled. For determining a functional currency, a highly inflationary economy is one that has experienced a cumulative inflation of 100% or more over the past 3 years.

However, the statement also says that weighted-average rates can be used for items occurring numerous times during the accounting period. Such weighted-average rates may also be used for accounting allocations such as depreciation. Borrowing from another foreign entity with the same foreign currency as the operation being hedged would hedge the investment in the foreign operation.

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Caused a foreign currency translation gain to be reported as a separate component of stockholders’ equity. Gains and losses result from changes in currency exchange rates. Under IFRS reporting, if the functional currency is not the same as the presentation currency, gains or losses are charged to other comprehensive income, not deferred to future periods. Because El Rio’s operations are a direct extension of Eagle, the peso is not El Rio’s functional currency; Eagle’s currency, the U.S. dollar, is El Rio’s functional currency. Therefore, El Rio’s financial statements will be converted to U.S. dollars using remeasurement. This response is correct because a balance arising from remeasurement is reported in the income statement whenever the U.S. dollar is the functional currency .

• The purchase of goods by a U.S. entity would most likely reflect an import transaction and, since it is to be settled in a foreign currency, would be a foreign currency import transaction.
• Normally, that is the currency of the environment in which the entity primarily generates and expends cash.
• I. The item being hedged is denominated in a foreign currency.

Inflation of 35% per year over the past three years is a cumulative 105% and constitutes a highly inflationary economy. Invest in the debt securities of the same foreign operation. I. The investment security must not be traded in the investor’s functional currency.

If the functional currency is the same as the presentation currency, any translation gain or loss is reported in current earnings on the income statement. However, there are several exceptions to this rule. Currency gains or losses on nonmonetary items for which gains and losses are recorded in other comprehensive income should also be reported in other comprehensive income. A gain or loss on a foreign currency import transaction can be recognized if the transaction is initiated in one fiscal period and settled in either the same fiscal period or a later fiscal period. The effect of exchange rate changes on accounts denominated in a foreign currency should be recognized in the period in which the exchange rate changes.