Chapter 6 International Accounting

Front 1

Name and describe the "Exchange Rate Mechanisms"

Back 1

Independent float - currency value allowed to move freely with little government internvention
Pegged to another currency - currency value fixed in terms of a particular foreign currency and central bank intervenes to maintain the exchange rate
European Monetary system - twelve countries use a single currency, which floats against other currencies such as US dollar.

Front 2

Indirect & Direct Quotes

Back 2

Direct Quote - the exchange rate reflects the US dollar price for one unit of freign currency
Indirect Quote - the number of foreign currency units that can be purchased with one US dollar

Front 3

Spot rate & Forward rate
Premium & discount

Back 3

Spot rate - the price at which a foreign currency can be purchased or sold today
Forward rate - the price today at which foreign currency can be purchased or sold sometime in the future
Premium - when the forward rate is greater than teh spot rate for a particular day
Discount - when the forward rate is less than the spot rate for a particular day

Front 4

Accounting - sales transaction
One transaction perspective

Back 4

Treats sale and collection as one transaction which is complete when foreign currency is received. The sale is measured at converted amount. NOT allowed under IFRS or US GAAP.

Front 5

Accounting - sales transaction
Two transaction perspective

Back 5

Treats sales and collection as two transactions, respectively. Sale is based on current exchange rate. If the collection is different due to a change in exchange rate is is considered a foreign exchange gain or loss.

Front 6

For Exports and Imports, name the exposure type and gain or loss

Back 6

Export Sale = asset exposure
If foreign currency appreciates = gain
Import Purchase = liability exposure
If foreign currency appreciates = loss

Front 7

What is hedging?

Back 7

Protecting against losses from exchange rate fluctuations. Companies often use foreign currency forward contracts and foreign currency options.

Front 8

What are foreign currency forward contracts and foreign currency options?

Back 8

Used for hedging.
Foreign urrency forward contact - n agreement to buy or sell foreign currency at a future date
Foreign currency option - the right to buy or sell foreign currency for a period of time

Front 9

Describe Hedge Accounting and the 2 types of Hedges

Back 9

Hedge accounting - an offsetting gan or loss from the hedge is recognized in net income durig the same period as the gain or loss from the hedged item.
Cash flow Hedge - an accounting designation for hedges that offsetvariability in cash flows of hedged items.
Fair value hedge - offset the variability in fair value of hedged assets and liabilitied

Front 10

At each balance sheet date, what do you do for a cash flow hedge?

Back 10

1. Hedged asset/liab. is adj. to FV according to changes in spot rate adn a FEG or FEL is recognized in net income.
2. Derivative hedging instrument is adj. toFV, counterpart recognized as a change in accumulated other comprehensive income.
3.Amount = to FEG or FEL is transferred from AOCI to net income; to offset any gain or loss on the hedged asset or liab.
4. Add. amount is removed from AOCI and recognized in net income to reflect amortization of original discount or premium on forward contract

Front 11

Describe fair value hedge accounting

Back 11

1. Hedged asset or liab is adjusted to FV according to change in spot rate and a FEL or FEG is recognized in net income.
2. The derivative hedging instrucment is adj. to V with the counterpart recorgnized as gain or loss in net income.

Front 12

How do you account for Foreign currency borrowing?

Back 12

Record interest expense and accrued interest at year end and interest payments. The Note payable must be revalued at the end of the year and FEG or FEL reported in income.