Direct quotes
number of U.S dollars to purchase on foreign currency unit
indirect quotes
the number of foreign currency units that can be obtained with one U.S dollar
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
forward exchange contracts
provide companies with the ability to lock in a price today for purchase or selling currency at a specific future date
foreign currency options
provides the right but not the obligation to buy or sell foreign currency in the future, and therefore are more flexible than forward contracts
Export sale
a transaction exposure exists when the exporter allows the buyer to pay in a foreign currency and allows the buyer to pay sometime after the sale
import purchase
a transaction exposure exists when the importer is required to pay in foreign currency and allows the buyer to pay sometime after the sale has been made
Two-transaction treatment
- the initial transaction is recorded at the US dollar value at the spot exchange rate at the date of the transaction
- subsequent changes in the exchange rate until collection of the receivable are reflected through a restatement of the foreign currency account receivable with an offsetting foreign exchange gain or loss reported in income
foreign exchange risk
this is the risk that changes in the exchange rate over time will result in a foreign exchange loss
If the balance sheet date falls between the transaction date and payment date…
the foreign currency receivable/payable is revalued based on exchange rates at the balance sheet date
What value are derivatives carried at on the balance sheet?
fair value
How does the fair value of derivatives on the balance sheet change how they are classified?
derivatives are reported on the balance sheet as assets when they have a positive fair value and as liabilities when they have a negative fair value
What three conditions allow for hedge accounting?
- the derivative is used to hedge either a cash flow exposure or fair value exposure to foreign exchange risk
- the derivative is highly effective in offsetting changes in the cash flows or fair value related to the hedge item
- the derivative is properly documented as a hedge
Cash flow hedges
foreign currency dominated assets and liabilities, foreign currency firm commitments, and forecasted foreign currency transactions
fair value hedges
foreign currency dominated assets and liabilities, foreign currency firm commitments
For cash flow hedges of foreign currency denominated assets and liabilities, at each balance sheet date:
- The hedged asset or liability is adjusted to fair value based on changes in the spot exchange rate, and a foreign exchange gain or loss is recognized in net income.
- The derivative hedging instrument is adjusted to fair value (resulting in an asset or liability reported on the balance sheet), with the counterpart recognized as a change in Accumulated Other Comprehensive Income (AOCI).
- An amount equal to the foreign exchange gain or loss on the hedged asset or liability is then transferred from AOCI to net income; the net effect is to offset any gain or loss on the hedged asset or liability.
- An additional amount is removed from AOCI and recognized in net income to reflect (a) the current period’s amortization of the original discount or premium on the forward contract (if a forward contract is the hedging instrument) or (b) the change in the time value of the option (if an option is the hedging instrument).
Accounting for a hedge of a forecasted transaction differs from the accounting for a hedge of a foreign currency firm commitment in two ways
- Unlike the accounting for a firm commitment, there is no recognition of the forecasted transaction or gains and losses on the forecasted transaction.
- The hedging instrument (forward contract or option) is reported at fair value, but because there is no gain or loss on the forecasted transaction to offset against, changes in the fair value of the hedging instrument are not reported as gains and losses in net income. Instead they are reported in other comprehensive income. On the projected date of the forecasted transaction, the cumulative change in the fair value of the hedging instrument is transferred from other comprehensive income (balance sheet) to net income (income statement).
For fair value hedges of foreign currency denominated assets and liabilities, at each balance sheet date:
- The hedged asset or liability is adjusted to fair value based on changes in the spot exchange rate, and a foreign exchange gain or loss is recognized in net income.
- The derivative hedging instrument is adjusted to fair value (resulting in an asset or liability reported on the balance sheet), with the counterpart recognized as a gain or loss in net income.
Under fair value hedge accounting for hedges of foreign currency firm commitments:
- the gain or loss on the hedging instrument is recognized currently in net income, and
- the change in fair value of the firm commitment is also recognized currently in net income.
Which of the following does U.S GAAP not consider to be an objective of segment reporting?
it helps users make comparisons between a segment of one enterprise and a similar segment of another enterprise.
Which of the following operating segment disclosures is not required under current U.S accounting guidelines?
a. liabilities
b. interest expense
c. intersegment sales
d. unusual items
A
In determining whether a particular operating segment is of significant size to warrant disclosure, which of the following is true?
three tests are applied, and only one must be met
