Matakuliah
Tahun
: Akuntansi Keuangan Lanjutan I
: 2010
Foreign Currency Concepts & Transactions
Pertemuan 21-22
Measurement and Denomination
• Measured in a currency
– Recorded in the financial records in that currency
• Denominated in a currency
– Requires settlement (payment or receipt) in that currency
• For US firms
– US dollar is the measurement currency
– Payables and receivables may be denominated in US dollars
or other currencies
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Foreign Currency Exchange Rates
Quoting Exchange Rates
• Direct quotation (US dollars per one foreign currency
unit)
– $1.60 (US dollars) for £1 (British pound)
• Indirect quotation (foreign currency units per one US
dollar)
– £0.625 (British pounds) for $1 (US dollar)
• Direct and indirect quotes are reciprocals
£1 / $1.60 = £0.625
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$1 / £0.625 = $1.60
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Rates
• Spot rate
– Exchange rate for immediate delivery
• Current rate
– Exchange rate at balance sheet date, or
– Exchange rate at the income statement transaction date
• Historical rate
– Exchange rate existed when a specific transaction or event
occurred
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Foreign Currency Purchases
• Purchases on account
– Denominated in a foreign currency
– Subject to foreign exchange risk
• Changes in the foreign exchange rate
– Rate increases result in exchange losses
• Increases to payables 
– Rate decreases result in exchange gains
• Foreign currency accounts payable is adjusted to fair
value each period until paid
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Foreign Currency Sales
• Sales on account
– Denominated in a foreign currency
– Subject to foreign exchange risk
• Changes in the foreign exchange rate
– Rate increases result in exchange gains
• Increases to receivables 
– Rate decreases result in exchange losses
• Foreign currency accounts receivable is adjusted to
fair value each period until collected.
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Example: Sale on Account
• On 11/1 Sam sells goods for 500 euros on account.
The customer pays on 1/30 and cash is converted on
that date. Pertinent rates:
Date
11/1
12/31
1/30
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Spot rate
$1.55
$1.56
$1.58
Acct Rec
$775
$780
$790
Gain (Loss)
$5
$10
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Sale on Account - Entries
11/1 Accounts receivable (euros)
Adjust
receivable
to current
rate.
Collect
from
customer,
recognizing
additional
gain
775
775
Sales
12/31 Accounts receivable (euros)
5
5
Exchange gain
1/30 Cash (euros)
790
780
10
Accounts receivable
Exchange gain
1/30 Cash ($)
Cash (euros)
790
790
Convert funds.
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Fair Value Hedge: Liability
• Cary purchases equipment costing 200,000 yen on
12/2/09 with payment due on 1/30/10.
• On 12/2/09 Cary enters a forward contract to
purchase 200,000 yen on 1/30/10 at the forward
contract rate of $0.0095.
Date
12/2
12/31
1/30
Spot rate
$0.0094
$0.0092
$0.0098
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Acct Pay
$1,880
$1,840
$1,960
Forward rate
$0.0095
$0.0093
$0.0098
Cont Rec
$1,900
$1,860
$1,960
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Hedge: Liability – Effect (cont.)
• Accounts payable:
Gain of $40 for December
Loss of $120 for January
• Contract receivable:
Loss of $40 for December
Gain of $100 for January
• The net gain/loss for December = $0.
• The net loss for January = ($20)
• Total exchange loss on the transaction = ($20)
• Spread between the spot and forward rate on 12/2
determines the total loss, e.g., cost of hedging.
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Hedge: Liability - Entries
12/2: Buy
equipment
and sign
forward
contract.
12/2 Equipment
1,880
1,880
Accounts payable (¥)
12/2 Contract receivable (¥)
1,900
1,900
Contract payable ($)
12/31 Accounts payable (¥)
12/31:
Adjust
Exchange gain
foreign
12/31 Exchange loss
monetary
accounts
Contract receivable (¥)
to current
(year-end)
rate.
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40
40
40
40
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Hedge: Liability – Entries (cont.)
1/30: Pay
promised
$1,900 on
forward
contract
and
receive
yen in
exchange
1/30 Contract payable ($)
1,900
1,900
Cash ($)
1/30 Cash (¥)
1,960
1,860
100
Contract receivable (¥)
Exchange gain
1/30 Accounts payable (¥)
Exchange loss
Cash (¥)
1,840
120
1,960
Use the yen to pay the supplier
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Cash Flow Hedge: Anticipated Cash Outflow
• On 12/2/08, Winkler anticipates purchasing equipment on 3/1/09
with payment on that date of £500,000.
• On 12/2/08, Winkler signs a 90-day forward contract to buy
£500,000 for $1.68 (the spot rate is $1.70)
• The contract discount is (1.70-1.68)x500,000=10,000
– Amortized to exchange gain over life of contract
– Use effective interest method
– Implied interest is:
•
•
•
•
PV = 1.70(500,000) = 850,000
FV = 1.68(500,000) = 840,000
Period = 3 months
Monthly rate using Excel =rate(nper,pmt,pv,fv)
=rate(3,0,850000,-840000)
Result: 0.003937
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Hedge: Anticipated Outflow
• Forward rates and fair value of contract:
Date Forward rate
12/2
$1.68
12/31
$1.69
3/1
$1.72
Notional
£500,000
840,000
845,000
860,000
Contract
Fair
Discounte
Fair value
5,000
20,000
4,901
15,099
• The contract will be adjusted to its discounted fair value. Use the
incremental borrowing rate (12%, or 1% monthly), discounting for
the remaining contract life.
12/31: 5,000 / (1.01)2
3/1 (end of contract): 15,000
Note: 1/31 would be equal to fair value / (1.01)1
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Hedge: Anticipated Outflow Entries
12/2 no entry for forward contract - no cash exchanged
12/31 Forward contract
4,901
4,901
OCI
Bring forward contract to discounted fair value.
12/31 OCI
3,346
3,346
Exchange gain
Effective interest method amortization of the 10,000
The change in value for the
forward contract is an
unrealized gain put into
OCI.
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The discount on the
contract is amortized
over the 3 months of
the contract.
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Hedge: Entries (cont.)
3/1 Forward contract
15,099
OCI
15,099
Bring forward contract to fair value, $20,000
3/1 Cash
20,000
The final
balance in
OCI is
$10,000 CR.
This will
reduce the
equipment's
depreciation
over its life.
Bina Nusantara University
Forward contract
20,000
for net settlement of contract: 860,000 current 3/1 Equipment
860,000
860,000
Cash
Purchase equipment from supplier
3/1 OCI
6,654
6,654
Exchange gain
remaining amortization: 10,000 - 3,346
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IASB Standards (Bandingkan dg PSAK !)
• IAS 21 – foreign exchange rates
– foreign denominated monetary amounts adjusted to current
rate at balance sheet date
– Translation of foreign currency statements
• IAS 32 – financial instruments
– Debt and equity instruments
• IAS 39 – derivatives and hedges
– Cash flow and fair value hedges
– Difference: hedges of firm commitments can be either cash
flow or fair value hedge
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Footnote Disclosures
• Focus on risk management objectives and strategies
• Fair value hedges
– Net gain or loss in earnings, placement on statements,
effectiveness and ineffectiveness
• Cash flow hedges
– Hedge ineffectiveness gain or loss, placement on statements,
types of situations hedged, expected length of time, effect of
discontinuance of hedge
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