...to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency. [IAS 21.1] The principal issues are which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements. [IAS 21.2] (IASPlus, Deloitte) Key definitions [IAS 21.8] -Functional currency: the currency of the primary economic environment in which the entity operates. (The term 'functional currency' was used in the 2003 revision of IAS 21 in place of 'measurement currency' but with essentially the same meaning.) -Presentation currency: the currency in which financial statements are presented. Exchange difference: the difference resulting from translating a given number of units of one currency into another currency at different exchange rates. -Foreign operation: a subsidiary, associate, joint venture, or branch whose activities are based in a country or currency other than that of the reporting entity. (IASPlus, Deloitte) An entity considers the following factors in determining its functional currency: (a) The currency: (i) that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and (ii) of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services. (b) the currency that mainly...
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...MG 760: INTERNATIONAL FINANCE FINAL EXAM HOW THE TRANSACTION (SUPPLY AND DEMAND) OF CURRENCY TAKES PLACE IN THE FOREIGN EXCHANGE MARKET By ABIOLA BAKARE MONROE COLLEGE MBA FINANCE Foreign exchange markets facilitate the trade of one foreign currency for another. Most exchanges are made in bank deposits and involve U.S. dollars. Over a trillion dollars in foreign exchange trades take place every day; foreign exchange dealers handle most transactions. Businesses, financial institutions, governments, investors, and individuals use the foreign exchange markets to adjust their currency holdings. The foreign exchange market (forex, FX, or currency market) is a global decentralized market for the trading of currencies. In terms of volume of trading, it is by far the largest market in the world. The main participants in this market are the larger international banks. Financial centers around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. The foreign exchange market works through financial institutions, and it operates on several levels. Behind the scenes banks turn to a smaller number of financial firms known as “dealers,” who are actively involved in large quantities of foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the-scenes market is sometimes...
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...from climate change to crossborder health risks to natural-resource scarcities. Many of these so-called global commons problems carry grave risks to economic growth in the developing world and to the livelihoods and welfare of their people. Climate change is the classic example. Despite the risks involved, donor governments have funded programs addressing global challenges such as climate change at far lower levels than traditional programs of country-based development assistance. The prospects for dealing with such global challenges will depend at least in part on new collective financing mechanisms. In this paper, we examine four categories of existing resource-mobilization options, including (1) transportation levies; (2) currency and financial transaction taxes; (3) capitalization of IMF Special Drawing Rights (SDRs); and (4) the sale, mobilization, or capitalization of IMF gold. In the end, we recommend that willing governments utilize a modest portion of their existing SDR allocations to capitalize a third-party financing entity. This entity would offer bonds on international capital markets backed by its SDR reserves. The proceeds would back private investment in climate-mitigation projects in developing countries that might otherwise lack adequate financing. This approach could mobilize up to $75 billion at little or no budgetary cost for contributing governments. Any limited budgetary costs could be offset by using excess proceeds from recent IMF gold sales. In our view...
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...recognized that very jurisdiction has a right to determinate whether to impose direct taxes and, if so, to determinate the appropriate tax rate b) Bank and commercial secrecy. Tax havens generally allow secrecy or confidentiality to operations in or through them. Many jurisdictions offer protection to banking affairs and other financial transactions from divulgence to foreign tax authorities, and some of them have also enacted secrecy or confidentiality provisions. Generally, classical tax havens do not require the production of companies’ annual accounts. Transparency ensures that there is an open and consistent application of tax laws among similarly situated taxpayers and that information needed by tax authorities to determine taxpayer’s correct tax liability is available. c) Lack of exchange controls. Many tax havens developed a dual currency control system, under which residents are subjected to both local and foreign currency controls and non-residents, only to the local currency controls. Companies set up in a tax haven are treated as non-residents for exchange control purposes and their operations conducted outside the tax haven, in foreign currency, are not subjected to exchange controls. These rules are purposely designed to facilitate the use of tax havens. d) Relative importance of banking. In...
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...A Case Study: How CIGNA Streamlined its Foreign Currency Payments Global Finance CIGNA, an international employee benefits provider, makes cross-border payments by wire, check and ACH to more than 225,000 beneficiaries in over 70 countries. The company wished to simplify and automate its foreign currency payments. Key objectives were to accelerate payment processing time, trim cost and to ensure a superior service to their clients. The Problem: Payment Timing is Critical to Service Quality Typically, producing checks and Explanation of Benefits (EOB) statements (i.e., remittance advices), adds a week or more to processing time in addition to the time for crossborder delivery. But payment timing is of the essence. The payment process must be as effective as if the beneficiary were using a local insurance provider while also reflecting the superior service that CIGNA provides. The Solution: Simple and Seamless Citigroup provided CIGNA with a single solution for all of its cross-border payments. CIGNA uses a direct file-delivery connection to send one payments file to Citigroup covering all of its foreign currency payments. WorldLink® Payment Services handles the rest. Printing and distributing checks with EOB details at Citigroup's regional centers accelerates check payment. Citigroup debits CIGNA's U.S. bank account for an aggregated amount covering the total dollar equivalent of all foreign currency payments. Following payment execution, the bank sends CIGNA one file...
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...multinational accounting: foreign currency transactions and financial instruments L.O.11-1: Understand how to make calculations using foreign currency exchange rates The accounting issues * Foreign currency transactions of a U.S. company include sales, purchases, and other transactions giving rise to a transfer of foreign currency or the recording of receivables or payables that are denominated in a foreign currency. * Translation is the process of restating foreign currency transactions to their U.S. dollar equivalent values. * Many U.S. corporations have multinational operations. * The foreign subsidiaries prepare their financial statements in their home currencies * The foreign currency amounts in these financial statements have to be translated into their U.S. dollar equivalents before they can be consolidated with the U.S. parent’s financial statements that uses U.S. dollar as its reporting currency unit Foreign currency exchange rates * Foreign currency exchange rates between currencies are established daily by foreign exchange brokers who serve as agents for individuals or countries wishing to deal in foreign currencies * Some countries maintain an official fixed rate of currency exchange and have established fixed exchange rates for dividends remitted outside the country. * The determination of exchange rates * Exchange rates change because of a number of economic factors affecting the supply of and demand for a nation’s currency. * Factors...
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...Changes in Foreign Exchange Rates By: Benjamin T. Givens INTRODUCTION Over the past few decades, different generally accepted accounting principles (GAAP) have been developed in various countries. These differences have arisen in response to the unique legal, regulatory, litigious, social, economic, religious, and cultural environments of the countries they were created in (Wiecek and Young, 1-2). The increase in globalization coupled with related regulations has given rise to the need for a common set of global accounting standards – International Financial Reporting Standards (IFRS). Leading the charge, the International Accounting Standards Board (IASB), formerly known as the International Accounting Standards Committee, has begun a movement toward harmonization and convergence of GAAP. More than 100 countries currently use IFRS, so if your business goals include global expansion, it is critical to educate yourself about the impact of IFRS on your financial reporting processes and business now (U.S. GAAP vs. IFRS). This paper will focus specifically on the differences and similarities between IFRS and U.S. GAAP with respect to accounting for the effects of changes in foreign exchange rates. The guidance related to accounting for foreign currencies in U.S. GAAP is included in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 830, Foreign Currency Matters. In IFRS, the guidance related to accounting for foreign currency issues is...
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...International Accounting, 7/e Frederick D.S. Choi Gary K. Meek Chapter 6: Foreign Currency Ch 6 F i C Translation 1 Learning Objectives Why do firms translate from one currency to another? What is the difference between a spot forward and swap spot, forward, transaction? What exchange rates are used in the currency translation process and what are their financial statement effects? How does a translation gain or loss differ from a transactions gain or loss? Is there more than one way of translating financial statements from one currency to another? If so, what are they? y , y How does the temporal method of currency translation differ from the current rate method? What is the relationship between currency translation and inflation? 2 1 01/09/2013 Why do Firms Translate? Facilitates the preparation of consolidated financial statements that allow readers to see the performance of a multinational company s total operations both domestic and company’s foreign. Facilitates the measurement of a firm’s exposure to foreign exchange risk. Facilitates the recording of foreign currency transactions; i.e., f foreign currency sales, purchases, borrowing or lending in the consolidated entity’s reporting currency. Facilitates reporting domestic accounts to foreign audiences-of-interest. 3 Types of Transaction Rates Spot transactions: the physical exchange of one currency for another in which delivery takes place immediately. Direct...
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...functional currency: 4 2. Determine whether the functional currency of the subsidiary is also its home currency. 4 a) If the functional currency is the home currency, 4 b) If the functional currency of the subsidiary is not its home currency, 5 III. Reasons for Translation 5 A. Recording direct business transactions 5 B. Reporting operations conducted through a foreign enterprise 6 C. Measuring the enterprise exposure to the effects of currency fluctuation 7 D. Communicating with foreign audiences-of-interest 7 IV. Financial statement effects of alternative translation rates 7 A. Exchange rates used in translation 7 1. Current rate: 7 2. Historical rate: 7 3. Average rate: 8 B. Risks associated with fluctuations of exchange rates 8 1. Currency transaction risk 9 2. Currency translation risk 9 V. Foreign Currency Translation Methods 9 A. Single rate method 10 1. Current rate method 10 B. Multiple rate method 11 1. Current/noncurrent method 11 2. Monetary/nonmonetary method 11 3. Temporal method 12 VI. Foreign Currency Transactions 13 A. Exchange rate mechanisms 13 1. Independent float: 13 2. Pegged to another currency: 13 3. European monetary system: 13 B. Foreign currency markets 13 1. Exchange Rate 13 2. Types of Exchange rates 14 a) Spot rate: 14 b) Forward rate: 15 c) Swap transaction: 15 C. Hedging foreign exchange risk 16 1. Definition 16 2. Techniques for hedging foreign exchange...
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...Abstract If there was only one currency in the world, there would not have been any need for foreign exchange market, foreign exchange rates or foreign exchange. But in a world of many national currencies, the foreign exchange market plays the crucial role of providing the requisite machinery for making payments across borders, transferring funds and purchasing power from one currency to another, and determining the exchange rate. The fundamental changes in foreign exchange, or FX, market began to take form in 1970′s along with the increasing internationalization of financial transactions and the change of many economies into floating exchange rate system from fixed rate system. Over years, these changes have transformed the foreign exchange market into the world’s biggest and most dynamic market today. The daily turnover of global FX market currently amounts to many trillions of dollars. The objective behind this entire project is to get the basic understanding about an Indian foreign exchange market, Forex Instruments available in India, its functioning, Forexregulators& players. Project has emphasis more on numerical data gathered through different reliable sources to comparing and analysis the performance so far by Indian foreign market with other countries and their currencies which holds a dominant position in the global foreign exchange market. As in the rest of the world, in India too, foreign exchange market is the largest financial market in existence. The...
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...When we buy foreign goods or invest in another country we have to obtain some of that country’s currency to make the transaction. When foreigners buy US produced goods or invest in the United States they have to obtain required US dollars. We get foreign currency and foreigner get US dollars in the foreign exchange market. The foreign exchange market is the market in which the currency of one country is exchanged for the currency of another. The market is made up of thousands of people mainly importers and exporters, banks and specialists in the buying and selling of foreign exchange brokers. The price of one currency in terms of another is called the exchange rate. Exchange rates are almost identical no matter where ever in the world the transaction is taking place. Foreign exchange conversion has daily rate on the basis of internationally acceptable hard currency like US dollar, British Pound Sterling, Euro etc. Foreign Exchange Regimes Foreign exchange rates are of critical importance for millions of people. For its importance governments pay a great deal of attention to what is happening in foreign exchange markets and more than that, take actions designed to achieve what they regard as desirable movements in exchange rates. There are three ways in which the government can operate the foreign exchange market. They are. * Fixed exchange rate. * Flexible exchange rate. * Managed exchange rate. A fixed exchange rate is an exchange rate the value of which...
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...an OANDA currency simulation game to enhance my knowledge on international currencies through currency trading. As an individual I started out with $100,000 US dollars, and I traded over $75,000 with more than five different foreign currencies. Also, during the simulation I made over 12 round-way transactions. This report is going to explain the currency concepts I learned over this simulation, my major transactions during the game, and information on the international financial market through this time period. Currency Concepts Before the currency trading began Professor Tang taught about the foreign exchange market. I learned how foreign exchange is an exchange of one currency to another currency, and we need foreign exchange for five major reasons. The five reasons consist of international traveling, international business, international investment and speculation, international financing, and cross-border activities. The foreign exchange market, like I participated in, is usually undertaken in over-the-counter markets, and is the largest financial market in the world with over $3.98 trillion USD turnover a day. This game taught me about why/how individuals participate in currency trading. In order to exchange the different currencies, I had to learn the quotations for them. A foreign exchange quotation is a statement of willingness to buy/sell at an announced rate. There is either a direct or indirect quotation. A direct quote is a home currency price of...
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...Accounting Standard 21 The Effects of Changes in Foreign Exchange Rates HKAS 21 COPYRIGHT © Copyright 2014 Hong Kong Institute of Certified Public Accountants This Hong Kong Financial Reporting Standard contains IFRS Foundation copyright material. Reproduction within Hong Kong in unaltered form (retaining this notice) is permitted for personal and non-commercial use subject to the inclusion of an acknowledgment of the source. Requests and inquiries concerning reproduction and rights for commercial purposes within Hong Kong should be addressed to the Director, Finance and Operation, Hong Kong Institute of Certified Public Accountants, 37/F., Wu Chung House, 213 Queen's Road East, Wanchai, Hong Kong. All rights in this material outside of Hong Kong are reserved by IFRS Foundation. Reproduction of Hong Kong Financial Reporting Standards outside of Hong Kong in unaltered form (retaining this notice) is permitted for personal and non-commercial use only. Further information and requests for authorisation to reproduce for commercial purposes outside Hong Kong should be addressed to the IFRS Foundation at www.ifrs.org. Further details of the copyright notice form IFRS Foundation is available at http://app1.hkicpa.org.hk/ebook/copyright-notice.pdf © Copyright 2 HKAS 21 (July 2012May 2014) CONTENTS from paragraph INTRODUCTION IN1 HONG KONG ACCOUNTING STANDARD 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES OBJECTIVE 1 SCOPE 3 ...
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...Foreign Exchange Market Demond McKeever National University In view of the fact that the international business environment is not set up with a worldwide medium for exchange, the foreign exchange market is a necessity for international trade. The major functions of the foreign exchange market are to transfer purchasing power, allocate open trade for international markets, monitor exchange rates from fluctuating to rigorously, and to aid in the import and export of goods between countries by providing credit for financing international trade (Suranovic, 2005) The foreign exchange market or forex market as it is often called is the market in which currencies are traded. Currency Trading is the world’s largest market consisting of almost trillion in daily volume and as investors learn more and become more interested, the market continues to rapidly grow. Not only is the forex market the largest market in the world, but it is also the most liquid, differentiating it from the other markets. In addition, there is no central marketplace for the exchange of currency, but instead the trading is conducted over-the-counter. Unlike the stock market, this decentralization of the market allows traders to choose from a number of different dealers to make trades with and allows for comparison of prices. Typically, the larger a dealer is the better access they have to pricing at the largest banks in the world, and are able to...
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...Introduction to Foreign Exchange: Foreign Exchange means Foreign Currency. If we consider Foreign Exchange as a subject then it means all kinds of transactions related to foreign Currency, as well as currency instruments such as draft, MT, TT, TC, and Payment Order & Foreign Trade. In other words Foreign Exchange deals with Foreign Financial Transactions. Foreign Exchange refers to the process or mechanism by which the currency of one country is converted into the currency of another currency and, thereby, involves the international transfer of money. It is the means of method by which rights to wealth in a country’s currency are converted into rights to wealth in another currency. In banks where we talk Foreign Exchange, we refer to the general mechanism by which a bank converts currency of one country into that of another’s. Dr. Paul Einzig defines Foreign Exchange as the system or process of converting one national currency into another and of transferring the ownership of money from one country to another. In terms of Foreign Exchange Regulations Act, 1947 as adapted in Bangladesh, Foreign Exchange means Foreign Currency and include all deposits credits and balances payable in Foreign currency as well as all Foreign currency instruments, such as, Drafts, Travelers Cheques, Bill of Exchange, Hundi, and Promissory Notes payable in any foreign country. Evaluation of Foreign Exchange Rate System in Bangladesh: With the demise of the foreign currency exchange rates during...
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