...I. Introduction 2 II. Definition 3 A. Difference between translation and conversion 3 B. Role of FASB No. 52 4 1. Determine the 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)...
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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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...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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...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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...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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...Chapter 10 Translation of foreign Currency financial statements Chapter Outline I. In today's global economy, many companies have invested in operations in foreign countries. A. In preparing consolidated financial statements on a worldwide basis, the foreign currency accounts prepared by foreign operations must be restated into the parent company's reporting currency. B. There are two major issues related to the translation of foreign currency financial statements. 1. Which method should be used? 2. How should the resulting translation adjustment be reported on the consolidated financial statements? C. Translation methods differ on the basis of which accounts are translated at the current exchange rate and which are translated at a historical exchange rate. Translating accounts at the current exchange rate creates a translation adjustment. D. Historically, accountants have experimented with a number of different translation methods. The dominant methods currently in use are the temporal method and the current rate method. E. Translation adjustments can be either (1) reported as a gain or loss in income or (2) deferred in the stockholders' equity section of the balance sheet. II. The primary objective of the temporal method is to maintain the underlying valuation method used by the foreign entity to account for its assets and liabilities. A. Assets and liabilities carried at current or future value are translated at the current...
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...IAS) Observe the relevant items in the IS/CFS/BS and give your comments Observe the translations gains or losses if any The consolidated revenue for Infosys in FY 2010 is Rs. 22,742 cr with a Year on Year growth of 4.8%. As per IFRS, the annual revenues stood at US $1,313 million, with a Year on Year growth of 2.5%. Sensitivity of INR against USD For every 1% change in INR against USD, the operating margin was affected by 0.4%. Accounting Policy of Foreign Exchange Transactions – Infosys Some salient features of the accounting policies of foreign transactions at Infosys are as follows: * All currency translations are done into the relevant functional currency at the exchange rate which is in effect on the Balance Sheet date. * Any gains (losses) due to the currency translations are included in the Income Statement. * The non-monetary assets and non-monetary liabilities are reported at their fair value. They are translated at the exchange rate on the date when the fair value was determined. * All transactions are translated into the functional currency at the exchange rate on the date of the transaction * All profits (losses) that have resulted due to the foreign currency translation are included in the income statement. Functional Currency – Infosys The functional currency for: Indian Rupee Infosys Infosys BPO Respective Local Currencies Infosys Australia Infosys China Infosys Consulting Infosys Mexico Infosys Sweden Infosys...
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...Measuring/Managing Translation and Transaction Exposure Chapter 10 Lecture Notes Measuring Translation and Transaction Exposure PART I. ALTERNATIVE MEASURES OF FOREIGN EXCHANGE EXPOSURE: Accounting and Economic Risk I. ALTERNATIVE MEASURES A. TYPES 1. Accounting Exposure: arises when reporting and consolidating financial statements require conversion from subsidiary to parent currency. 2. Economic Exposure: arises because exchange rate changes alter the value of future revenues and costs. Accounting Exposure B. Accounting Exposure = Transaction risk + Translation risk [pic] ALTERNATIVE MEASURES OF FOREIGN EXCHANGE EXPOSURE C. Economic Exposure = Transaction Exposure +Operating Exposure Operating Exposure arises because exchange rate changes alter the value of future revenues and costs. PART II. ALTERNATIVE CURRENCY TRANSLATION METHODS (ACCY) I. FOUR METHODS OF TRANSLATION A. Current/Noncurrent Method 1. Current accounts use current exchange rate for conversion. 2. Income statement accounts use average exchange rate for the period. B. Monetary/Nonmonetary Method 1. Monetary accounts use current rate 2. Pertains to - Cash - Accounts receivable - Accounts payable - Long term debt 3. Nonmonetary accounts - Use historical rates - Pertains to: Inventory, Fixed assets, Long term investments 4. Income statement accounts - Use average...
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...Foreign currency exchange rates . 3/28/2014 Instructor name Student name Foreign currency exchange rates Introduction: Foreign currency exchange rates deals with the study of foreign exchange gains and losses facing companies when they are trading there subsidiaries outside their reporting entity jurisdiction. A reporting entity is an entity which is the principle co of different subsidiaries operating under their control. Subsidiaries are the companies reporting under a principle co whose accounts are consolidated at the end of the reporting entity period. Reporting entity period is the period where the reporting entity accounts are prepared and subsidiaries accounts are prepared according to their reporting period and at the end they are consolidated with the reporting entity accounts so that their accounts give a true and fair view. Now the point is that subsidiaries accounts may be prepared in a different jurisdiction where as the reporting entity accounts are prepared in their home jurisdiction. Subsidiaries must report their accounts in their own jurisdiction currency as well as in the reporting entity jurisdiction currency so that there is fair accounting and the accounts are prepared according to standards. Body: IAS 21 “The Effects of Changes in Foreign Exchange Rates” International accounting standard on foreign currency deals with the study of foreign exchange risks faced by a company. An entity must report their accounts in their home jurisdiction currency...
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...International Business & Economics Research Journal Volume 3, Number 3 Effects of Exchange Rates On International Transfer Pricing Decisions Canri Chan (E-mail: canri.chan@miis.edu), Monterey Institute of International Studies Steven P. Landry (E-mail: steve.landry@miis.edu), Monterey Institute of International Studies Terrance Jalbert (E-mail: jalbert@hawaii.edu), University of Hawaii at Hilo Abstract Events leading to the passing of the Sarbanes-Oxley Act have led to increased concern with and scrutiny of potential management manipulation of financial statements. From an agency theory perspective, managers have incentives to manipulate organizational methods and choices in order to produce financial statements that those managers believe will maximize their incentive compensation. Transfer pricing represents one possible choice that managers can manipulate. This paper investigates whether exchange rates affect transfer pricing particularly as it relates to maximizing overall corporate profitability. The effects of taxes and government regulations have been explored in considerable depth in the transfer pricing literature. However, while transfer prices should also be affected by exchange rates in predictable ways, this variable has received comparably little attention in the literature. Inclusion of exchange rates in an analysis of transfer pricing and corporate profitability presents an opportunity to add to the literature. We conducted an experiment to examine how...
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.................................................................................. 1 1.0 Sizable exposure to the foreign exchange risk .............................................................................. 1 2.0 Types of exposure ............................................................................................................................ 1 2.1 Capital Adequacy ........................................................................................................................ 2 2.2 Cash flow ...................................................................................................................................... 2 2.3 Fair value & income statement .................................................................................................. 3 2.4 Net investment in foreign operations ......................................................................................... 3 2.5 Translation exposure................................................................................................................... 3 Question 2 ............................................................................................................................................... 3 3.0 Policies of managing foreign currency exchange rate risk .......................................................... 3 3.1 Holding and issuing derivative financial instruments .............................................................. 4 3.1.1 Cash flow hedges ............
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...uses average rate in either method. 2. C In translating the financial statements of a foreign subsidiary into the parent’s reporting currency under the current rate method, the translation adjustment is a function of the foreign subsidiary’s net asset. 3. C Because functional currency is local currency, therefore, we should us current rate. And we will have to report translation adjustment in stockholders’ equity. Since the won has decreased in value, negative translation adjustment is resulted from the decreased rate. 4. C While the foreign subsidiary has more monetary assets than monetary liabilities, and the foreign currency depreciates in value, translation loss arises. 5. C Temporal method maintains in the translated financial statements, the underlying valuation methods used in the foreign currency financial statemetns. 6. B Since Functional currency is parent currency, we should use temporal method. The translation adjustment will reflect in net income. 7. C Local currency is the functional currency; hence, current rate method is used. Balance sheet will reflect the translation adjustment. 8. A) Functional currency is foreign currency in this case. Therefore, current rate method. In balance sheet, all items will be measured at current rate, hence, the total amount of the consolidated balance sheet is 670,000 B) While functional currency is parent currency, temporal method is used. AR...
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...Lost in Translation Ever been to a place where you don’t understand the language of the people around you? A place where you’re native language and their native language doesn’t meet. There are a lot of reasons why not knowing how to speak the language of the place you are staying can be exhausting. One of the reasons is for practicality. When you can’t speak the language, you’ll feel really useless because basically, you can’t communicate what you want. I experienced that firsthand while I was in Japan. I was in a shop in Japan and was looking through their items. I saw a coat and I really like it so I checked the price. It cost a lot but I think it was on sale, so I approach a saleslady. But apparently, the lady cannot speak English and I’m not that fluent in Japanese. So I ended up looking for my cousin just to ask him what the saleslady said. Did I mention my cousin was a 12 year-old? He grew up in Japan so he practically speaks the language half of his life. I often have a hard time speaking to him too. So, basically, language barrier can affect our lives in so many ways. Consequently, different language also means different currency. And because of globalization, the companies expand their business in different parts of the world. As a result, a company will have a subsidiary with a different functional currency. This subsidiary will have to be translated to the functional currency of its parent for the purpose of consolidation. The article discussed about the...
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...Transaction, Operating, & Accounting (Translation) Exposures Foreign Exchange Exposure – measures the potential for a firm’s profitability, net cash flow, and market value to alter because of a change in exchange rates. Q: What are the three main foreign exchange exposures? A: 1) Transaction Exposure 2) Operating Exposure 3) Accounting Exposure Transaction Exposure – measures changes in the value of outstanding financial obligations incurred prior to a change in exchange rates. Operating Exposure (Economic Exposure, Competitive Exposure, Strategic Exposure) – measures a change in the present value of a firm resulting from any change in future expected operating cash flows caused by unexpected changes in exchange rates. Accounting Exposure (Translation Exposure) – measures accounting-derived changes in owner’s equity as a result of translating foreign currency financial statements into a single reporting currency. Exhibit 8.1 [pic] Note: In the fourth quarter of 2001 Amazon.com reported a net income of $5 million, due in part to a one-time foreign currency gain of $16 million. Hedging – To take a position that will rise (or fall) in value to offset a change in value of an existing position. |Benefits of Hedging |Costs of Hedging | |Improved the planning capability of the firm. |Risk-averse strategy that benefits management...
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...EXPOSURE OF FOREIGN EXCHANGE RISK Foreign Exchange Exposure is the sensitivity of the real domestic currency value of assets, liabilities, or operating incomes to unanticipated changes in exchange rates EXPOSURE OF FOREIGN EXCHANGE RISK Foreign Exchange Risk is measured by the variance of the domestic - currency value of assets, liabilities, or operating income that is attributable to unanticipated changes in exchange rates EXPOSURE OF FOREIGN EXCHANGE RISK • Three important Facts: - Changes in the nominal exchange rate are not offset by corresponding changes in prices at home and abroad: there is real exchange rate risk - Neither the forward rate is successful in forecasting the exchange rate nor are other fundamental variables - Given the various market imperfections in the real world, hedging exchange rate risk can lead to an increase in the value of the firm EXPOSURE OF FOREIGN EXCHANGE RISK • Three types of Exposure: - Translation or Accounting Exposure - Transaction or Contractual Exposure - Operating or Economic Exposure EXPOSURE OF FOREIGN EXCHANGE RISK • Three types of Exposure: Exchange Rate Shock 1. Translation or Accounting Exposure ∆ in FE rate ∆ in Accounting statements 3. Operating Exposure ∆ in FE rate 2. Transaction Exposure ∆ in FE rate ∆ in outstanding obligations ∆ in future cash flows EXPOSURE OF FOREIGN EXCHANGE RISK • Translation or Accounting Exposure: Is the sensitivity of the...
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