国际会计第六章 外币交易.ppt

1、CHAPTER 6 Foreign Currency Translation,张晓旭 张浩然 陈曦 侯方仪,Insert Title Text,6.1 REASONS FOR TRANSLATION (P127),The primary reasons: Companies with significant overseas operations prepare consolidated financial statements that give statement readers an aggregate view of the firms global operations.,Trans

2、lation,Click to edit title style,The additional reasons:,1.recording foreign currency transactions,2.measuring a firms exposure to the effects of currency gyrations,muincating with foreign audiences of interest,6.1 REASONS FOR TRANSLATION,Act of exchanging one type of money or security for another,I

3、t is simply a change in monetary expression.,Conversion,Translation,6.2 BANKGROUND AND TERMINOLOGY(P127-129),Click to edit title style,Foreign currency transactions,Spot transactions,Forward transaction,Swap transaction,6.2 BANKGROUND AND TERMINOLOGY(P127-129,the physical exchange of one currency fo

4、r another in which delivery rakes place immediately.,agreements to exchange a specified amount of one currency for another at a future date.,It involves the simultaneous spot purchase and forward sale, or spot sale and forward purchase, of a currency.,6.2 BANKGROUND AND TERMINOLOGY(P127-129,Spot tra

5、nsactions: the physical exchange of one currency for another in which delivery rakes place immediately.,Factors: 1.different inflation rates 2.differences in national interest rates 3.exceptions about the direction ot future rates,6.2 BANKGROUND AND TERMINOLOGY(P127-129,Suppose that the cash balance

6、 of a U.S. subsidiary located in Bombay, India, on January 31 is INR1,000,000. The direct exchange rate=0.02232 INR1,000,000 $0.02232= $22,320 The indirect exchange rate=1/0.02232=44.8 INR1,000,000 INR44.8= $22,320,Two methods: Direct quote: the exchange rate specifies the number of domestic currenc

7、y units needed to acquire a unit of foreign currency. Indirect quote: the exchange rate specifies the price of a unit of the domestic currency in terms of the foreign currency.,6.2 BANKGROUND AND TERMINOLOGY(P127-129,Forward transaction: agreements to exchange a specified amount of one currency for

8、another at a future date.,It expressed at either a discount or a premium from the spot rate, or as outright forward rates.,6.2 BANKGROUND AND TERMINOLOGY(P127-129,Illustration: If spot Swiss francs are offered at $0.8318, while the six-month forward franc is offered at $0.8462, six-month Swiss franc

9、s are selling at a premium of 3.4% in the U.S. forward premium(discount)=(forward rate spot rate)/spot rate 12/n ($0.8462-$0.8318)/$0.831812/6=3.4% Indirect quote: forward premium(discount)=(spot rate-forward rate)/forward rate 12/n,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P1

10、30-132),Historical rate: the exchange rate prevailing when a foreign currency asset was first acquire or a foreign currency liability first incurred. Use of historical rates do not give rise to translation gains or losses which are increases or decreases in the reporting currency equivalent of the f

11、oreign currency.,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P130-132),Current rate: the exchange rate prevailing as of financial statement date. Use of the current rate gives rise to translation gains and losses. Average rate: a simple or weighted average of either historical o

12、r current exchange rates.,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P130-132),Translation vs. Transaction gains and losses Translation gains and losses: result from a restatement process. Transactions gains and losses: result from the physical exchange of one currency for anot

13、her.,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P130-132),Gain or loss on a settled transaction: It arises whenever the exchange rate used to book the original transaction differs from the exchange rate used at settlement. Gains or losses on unsettled transaction: It arises whe

14、never consolidated financial statements are prepared before settlement and the current rate has changed since the transaction date.,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P130-132),Foreign Currency Transaction,Feature: Settlement is effected in a foreigh currency. Functiona

15、l currency: The primary currency in which it transacts business and generates and spends cash.,Functional Currency Criteria,Single-transaction Perspective,Exchange adjustments are treated as an adjustment to the original transaction accounts on the premise that a transaction and its settlement are o

16、ne single event.,Single-transaction Perspective,Exchange adjustments are treated as an adjustment to the original transaction accounts on the premise that a transaction and its settlement are a single event.,Two-transaction Perspective,Exchange adjustments are treated as an adjustment to the origina

17、l transaction accounts on the premise that a transaction and its settlement are seperate events. FAS NO.52 requires the two-trasanction method of accounting for foreign currency transactions Gains and losses on settled and unsettled transactions are included in the determination of income.,Two-trans

18、action Perspective,Foreign currency translation,A foreign currency asset or liability is said to be exposed to exchange rate risk if its parent currency equivalent changes owing to a change in the exchange rate used to translate that asset or liability. a.Single-rate Method b.Multiple-rate Method,Si

19、ngle-rate Method,All items are exposed to exchange rate risk,except contributed capital or common stock Advantages: 1.The consolidated statements preserve the original financial statement relationships. 2.It is simple to apply. Limitations: 1.It seldom accords with economics reality. 2.Translated as

20、set values make little sense unless local price-level adjustments are made first. 3.Translating all foreign currency balances by the current rate creates gains and losses every time exchange rates change.Many of them may never be fully realized.,Multiple-rate Method,a.Current-noncurrent Method b.Mon

21、etary-nonmonetary Method c.Temporal Method,Current-noncurrent Method,Balance Sheet: Current asssets and liabilities:current rates Noncurrent asssets and liabilities:historical rates Income Statement: Revenues and expenses (excluding depreciation and amortization) : average rates. Depreciation and am

22、ortization charges at historical rates in effect when related assets are acquired. Current items are exposed to exchange risk,which is not true.,Current-noncurrent Method,Limitations: 1.Using the year-end rate to translate current assets implies that all foreign currency,cash,receivables,and invento

23、ries are equally exposed to exchange risk. 2.Translation of long-term debt at the historical rate shifts the impact of fluctuating currencies to the year of settlement. 3.Current and noncurrent definitions are merely a classification scheme,not a conceptual justification,of which rates to use in tra

24、nslation.,Monetary-nonmonetary Method,Balance Sheet: Monetary asssets and liabilities:current rates Nonmonetary asssets and liabilities:historical rates Income Statement: Income statement items:similar as current-noncurrent method Advantages: Monetary items are exposed to exchange risk,which will re

25、flect their realizable or settlement values and changes in the domestic currency equivalent of long-term debt in the period in which the exchange rates change.,Monetary-nonmonetary Method,Limitations: 1.Translating all nonmonetary assets at historical rates,which is not reasonable for assets stated

26、at current market values. 2.Multiplying the current market value of an nonmonetary assets by a historical exchange rate yields an amount in the domestic currency that is neither the items current equivalent nor its historical cost. 3.Distorting profit margins by matching sales at current prices and

27、translation rates against cost of sales measured at historical costs and translation rates.,Temporal Method,The method does not change the attribute of an item being measured but the unit of measure. The distinction between temporal method and monetary-nonmonetary method is only if other asset-valua

28、tion bases are employed. Nonmonetary items translated at rates that preserve their original measurement bases. Foreign currency balances at historical cost are translated at historical rates. Foreign currency balances at current cost or market value are translated at the current rates.,Temporal Meth

29、od,Sharing most of the advantages and disadvantages of monetary and nonmonetary method. In deliberately ignoring local inflation,this method shares a limitation with the other translation method discussed. (Of course,historical cost accounting ignores inflation as well),Different Methods,Financial S

30、tatement Effects,Financial Statement Effects,Financial Statement Effects,The difference is large,given that all the results are based on the same facts.What is more,operations reporting,respectable profits before currency translation may well report losses or much lower earings after translation Sol

31、lution:such as hedging strategies, Which Is Best?,There is not a single translation method which is appropriate for all circumstances in which translations occur and for all purposes that translation serve. 1. The circumstances underlying foreign exchange translations differ widely. 2. Translations

32、are made for different purpose. What are acceptable foreign currency translation methods and under what conditions?, Translation Methods only their particular form of expression is changed. Translation at current rate does not change any of the initial relationships in the foreign currency statement

33、s, because all accounts balances are simply multiplied by a constant., Other conditions fit current-rate method, When the accounts of an independent company translated for the convenience of foreign stockholders or other external user groups When price-level-adjusted accounts are translated to anoth

34、er currency., Translation Methods other non-monetary items and capital accouts are translated at historical rate. Revenues and expenses are translated using average exchange rates for the period except those items realted to non-monetary items, which are translated using historical rate. Translation

35、 gains and losses are reflected in current income.,FEATURES OF FASB 52 AND ISA 21,Translation When Foreign Currency Is the Functional Currency A foreign entity may keep its records in one foreign currency when its functional currency is another foregn currency. In this situation, the financial state

36、ments are first remeasured from the local currency into the functional currency(temporal method) and then translated into U.S. dollars using the current-rate method.,FEATURES OF FASB 52 AND ISA 21,An exception to the current-rate method is required for subsidiaries located in places where the cumula

37、tive rate of inflation during the preceding three years exceeds 100 precent. In such hyperinflationary conditions, the dollar (the strong currency) is considered the functional currency, requiring use of the temporal translation method. Where an entity has more than one distinct and separable operat

38、ion. Each operation may be considered as a spearate entity with its own functional currency.,Once the functional currency for a foreign entity is determined, that currency designation must be used consistently unless changes in economic circumstances clearly indicate that the functional currency has

39、 changed. If a reporting enterprise can justify the change, analysts should note that the accounting change need not be accounted for retroactively.,MEASUREMENT ISSUES,Reporting Perspective In adopting the notion of functional currency, FAS No.52 and IAS 21 accommodate both local and parent company

40、reporting perspectives in the consolidated fianncial statements. Dong so would avoid of incorporating more than one perspective in the translated results What Happened to Historical Cost Translating a balance measured under historical cost at the current exchange rate produces an amount in U.S. doll

41、ars that is neither the items historical cost nor its current-value equivalent.,MEASUREMENT ISSUES,Concept of Income Under the currency translation pronouncements described above, adjusmens arising from the translation of foreign currency financial statements and certain trasactions are made directly to share holders equity, thus bypassing the income statement. Man