Foreign Exchange Markets
This is the price at which foreign currency can be acquired.
Foreign exchange rate
(pg.340)
This perspective is required by the IAS and FASB for accounting for changes in the value of a foreign currency transaction.
The two-transaction perspective
(pg.346)
In accounting for derivative financial instruments, the fundamental requirement is that all derivatives must be carried on the balance sheet at their _______________.
Fair Value
(pg.351)
Companies enter into this to minimize the adverse effect that changes in exchange rates have on cash flows and net income.
Hedging relationships
(pg.352)
Under fair hedge accounting, the original forward contract is not amortized systematically over the life of the contract, but is instead treated like this.
It is recognized in income as the difference between the Foreign Exchange Gain (Loss) on the account receivable and the Gain (Loss) on the Forward Contract.
(pg.362)
This is the price at which foreign currency can be purchased or sold today.
Spot rate
(pg.343)
This is the approach required by the IAS and FASB for accounting for unrealized foreign exchange gains and losses.
Accrual approach
(pg.347)
Hedge accounting is acceptable for those derivatives used for hedging purposes provided the hedging relationship is.....
Hint: there are 3 requirements
Clearly defined, measurable, and actually effective
(pg.351)
These 3 conditions must be satisfied so that hedge accounting for foreign currency derivatives may be used.
1. The derivative is used to hedge either a fair value exposure or cash flow exposure to foreign exchange risk
2. The derivative is highly effective in offsetting changes in the fair value or cash flows related to the hedged item
3. The derivative is properly documented as a hedge
(pg.352)
Derivatives for which companies wish to use hedge accounting must be designated as either of these types of hedges.
Hint: There are 2 types
1. Fair value hedge
2. Cash flow hedge
(pg.353)
A ______________ is for the purchase of foreign currency by the holder of an option.
Call option
(pg.344)
The general consensus worldwide is that a foreign currency receivable or foreign currency payable should be revalued at the _______________ to account for the change in exchange rates.
Balance sheet date
(pg.347)
These 3 pieces of information are needed to determine the fair value of a forward contract at any time.
1. The forward rate when the forward contract was entered into
2. The current forward rate for a contract that matures on the same date as the forward contract entered into
3. A discount rate-typically, the company's incremental borrowing rate
(pg.351)
These 3 items are considered types of items that can be hedged.
1. Foreign-currency-denominated asset/liability
2. Foreign currency firm commitment
3. Forecasted foreign currency transaction
(pg.353)
Cash flow hedge accounting is used for foreign currency derivatives that hedge the cash flow risk associated with this.
A forecasted foreign currency transaction
(pg.373)
When the forward rate is less then the spot rate, the foreign currency is said to be selling at __________.
A discount
(pg.343)
A large reason the one-transaction perspective is not acceptable under IFRS or U.S. GAAP is because any losses caused by a depreciation in a foreign currency are....
Buried under sales
(pg.346)
The manner in which the fair value of a foreign currency option is determined depends on this.
Whether the option is traded on an exchange or has been acquired in the over-the-counter market
(pg.351)
At inception, a foreign currency derivative can be considered an effective hedge if the ________ of the hedging instrument match those of the hedged item.
Critical Terms
(pg.353)
As an alternative to a forward contract, a company could hedge its exposure to foreign exchange risk by purchasing this.
A foreign currency put option
(pg. 363)
This foreign currency arrangement allows the value of the currency to fluctuate freely according to market forces with little or no intervention from a central bank.
Hint: Used by the United States
Independent float
(pg.341)
What journal entry would be made to adjust the U.S. dollar value of a €1,000,000 euro receivable due to a change in spot rate of $1.50 at the date of sale to a spot rate of $1.48 at the date of payment.
Hint: The same numbers are used in your textbook, look at the journal entries that are displayed.
Foreign Exchange Loss 20,000
Accounts Receivable 20,000
(pg.346)
Gains and losses arising from changes in fair value of derivatives are recognized initially......
Hint: there are 2 ways they can be recognized
Either:
1. On the income statement as a part of net income
or
2. On the balance sheet as a component of other comprehensive income
(pg.352)
To qualify as this type of hedge, the hedging instrument must completely offset the variability in the cash flows associated with the foreign currency receivable or payable.
Cash flow hedge
(pg.354)
Accounting for a foreign currency borrowing is complicated because of this.
The fact that both the principal and interest are denominated in foreign currency and both create an exposure to foreign exchange risk.
(pg.377)