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29 Cards in this Set

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Foreign Currency Transactions & Translations
-Foreign currency transactions are transactions with a foreign entity denominated in a foreign currency.
-Foreign currency translation is the conversion of F/S's of a foreign entity into F/S's expressed in the domestic currency (the dollar).
Impact of the Cash Flows
The standards for foreign currency accounting are designed to:
1. Provide information regarding the effects of exchange rate changes on an enterprise's cash flow and entity.
2. Recognize in income from continuing operations the effects (gain/loss) of adjustments for currency exchange rate changes that impact CF's and exclude from net income those adjustments that do not impact CF's.
Purpose of the Standards
-Reflect in consolidated F/S's the financial results and relationships of the affiliated entities as measured in the currency of the primary economic environment in which each entity operates (called the "Functional Currency").
Exchange Rate
-The price of one unit of a currency expressed in units of another currency; the rate at which two currencies will be exchanged at equal value. May be expressed in two ways*
*1. Direct Method: the domestic price of one unit of another currency (Ex: one euro costs $1.47)
2. Indirect Method: the foreign price of one unit of the domestic currency (Ex: .68 euros buys $1.00)
Current Exchange Rate
-The exchange rate at the current date, or for immediate delivery currency, often referred to as the spot rate.*
*The year end/spot rate is typically used for all of the B/S accounts.
Forward Exchange Rate
-The exchange rate existing now for exchanging two currencies at a specific future date.*
*The bet
Historical Exchange Rate
-The rate in effect at the date of issuance of stock or acquisition of assets.*
*Used for equity
Weighted Average Rate
-Calculated to take into account the exchange rate fluctuations for the period. The average rate, when applied to a transaction normally assumed to have occurred evenly throughout the period, approximates the effect of separate translations of each item.*
*Used for the I/S

-Used b/c it would be impractical to account for the actual exchange rate in effect for numerous, recurring transactions (ex: sales).
Forward Exchange Contract
-An agreement to exchange at a future specified date and rate a fixed amount of currencies of different countries.
Denominated or Fixed in a Currency
-A transaction is denominated or fixed in the currency used to negotiate and settle the transaction, either in U.S. dollars or a foreign currency.
Reporting Currency
-The currency of the entity ultimately reporting financial results of the foreign entity.*
*=USA $
Functional Currency
-Currency of the primary economic environment in which the entity operates, usually the local currency or the reporting currency.
Foreign Currency Translation
-The restatement of F/S's denominated in the functional currency to the reporting currency using appropriate rates of exchange.*
*Functional
Foreign Currency Remeasurement
-The restatement of foreign F/S's from the foreign currency to the entity's functional currency in the following situations-
1. The reporting currency is the functional currency
2. The F/S's must be restated in the entity's functional currency prior to translating the F/S's from the functional currency to the reporting currency.
*Dysfunctional
Foreign Financial Statement Translation
-Before a parent company can consolidate the F/S's of a foreign subsidiary, the subsidiary's foreign currency F/S's must be restated in the parent's reporting currency.*
*This method used to restate the foreign subsidiary's F/S's is determined by the functional currency of the foreign subsidiary.
Step 1: Prepare in Accordance with GAAP/IFRS
-Before performing any part of the translation process, it is necessary to ensure that the F/S's expressed in the foreign currency were prepared in accordance with U.S. GAAp or IFRS, as appropriate.
-If necessary, corrections must be made to comply with GAAP or IFRS.
Step 2: Determine the Functional Currency
-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 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 the following conditions exist:
1. The foreign operations are relatively self-contained and integrated within the country.
2. The day-to-day operations do not depend on the parent's or investor's functional currency.
3. The local economy of the foreign entity is NOT highly inflationary, which is defined as cumulative inflation of 100% over three years.
Step 3: Determine Appropriate Exchange Rates
-The functional currency of the foreign entity determines the exchange rates to be used in converting account balances and the treatment of the gains or losses associated with the translation process.
IFRS vs. U.S. GAAP
Under IFRS, the following factors must be considered in determining an entity's functional currency. The first 3 factors have priority over the others:
1. The currency that influences sales prices for goods and services.
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, and 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 CF's generated by the foreign operation directly affect the CF of the parent and are available to be remitted to the parent.
9. Whether operating CF's 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.
Step 4: Remeasurement and/or Translate the Financial Statements- Remeasurement Method
= Dysfunctional
-If the F/S's of the foreign subsidiary are not in the subsidiary's functional currency, the F/S's are remeasured to the functional currency starting with the B/S.
1. Balance Sheet: (1) Monetary Items = Current/Year-end rate (Fixed), (2) Non-Monetary Items = Historical rate (Fluctuate)
2. Income Statement: (1) Non-B/S related items = Weighted Average rate, (2) B/S related items = Historical Rate (Depreciation/PP&E, COGS/inventory, Amortization/bonds and intangibles)
3. Remeasurement Gain or Loss (I/S): Plug "Currency Gain/Loss" to get net income to the required amount needed to adjust retained earnings in order to make the B/S balance.
IFRS vs. U.S. GAAP
-U.S. GAAP requires the use of the remeasurement method when a foreign subsidiary operates in a highly inflationary economy.
-Under IFRS, the F/S's of a foreign subsidiary 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 B/S and I/S.
Step 4: Remeasurement and/or Translate the Financial Statements- Translation Method
="Functional"/normal
-(Current Rate Method) If the F/S's of the foreign subsidiary are in the subsidiary's functional currency, the F/S's are translated to the reporting currency starting with the I/S.
-Foreign currency = Functional currency
1. I/S: (1) All I/S items = Weighted average rate, (2) Transfer net income to retained earnings.
2. B/S: (1) Assets = Current/Year-end rate, (2) Liabilities = Current/Year-end rate, (3) Common Stock/APIC = Historical rate, (4) Retained Earnings = Roll forward.
(5) Translated retained earnings to the beginning translated retained earnings plus transferred net income for the current period less translated dividends declared for the current period.
3. Translation Gain or Loss (OCI): plug "translation adjustment" to OCI. The translation adjustment is equal to the difference between the debits and credits in the translated trial balance (cumulative translation adjustment).
*the F in PUFER
Parent Company: Reporting Currency = Functional Currency
-The reporting currency is the functional currency and the remeasurement method must be used when:
1. The foreign subsidiary is highly integrated with the parent and serves primarily as a sales outlet for the parent. Day-to-day operations of the subsidiary depend on the reporting currency.
2. The foreign subsidiary operates in a highly inflationary economy.
Foreign Subsidiary: Foreign Currency = Functional Currency
-The foreign currency is the functional currency and the translation method must be used when:
1. The foreign subsidiary is relatively self-contained and independent and operates primarily in local markets. Day-to-day operations of the subsidiary do not depend on the reporting currency.*
*When the functional currency of the subsidiary differs from both the subsidiary's local currency and the reporting currency, the subsidiary's F/S's must be remeasured from the local currency to the functional currency, and then must be translated from the functional currency to the reporting currency.
Individual Foreign Transactions (Single)
-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 a subsidiary and parent of a permanent financing nature are not considered foreign currency transactions.
Types of Foreign Currency Transactions
1. Operating Transactions: import, export, borrowing, lending, and investing transactions.
1. Forward Exchange Contracts: agreements to exchange two different currencies at a specific future date and at a specific rate.
Changes in Exchange Rate
-A foreign exchange rate gain or loss will result if the exchange rate changes between the time a purchase or sale in foreign currency is contracted for and the time actual payment is made.
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 B/S 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 B/S date (current exchange rate) is an unrealized gain or loss on the foreign currency transaction.
*Use Spot Rate, goes to income from continuing operations, I in IDEA
Valuation of Assets and Liabilities
-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.*
*The Historical Rate