Used for MBA professional accounting class room presentation and it includes FASB rules and forex currency dealings details for purchase and sale of goods and services with foreign party.

1. Accounting for Forex Transactions Foreign Currency Transactions

6. Foreign Exchange Rates As the relative strength of a country’s economy changes . . . . . . the exchange rate of the local currency relative to other currencies also fluctuates. ?¥ = $?

8. Foreign Exchange Forward Contracts This forward contract allows us to purchase 1,000,000 ¥ at a price of $.0080 US in 30 days. But if the spot rate is $.0069 US in 30 days, we still have to pay $.0080 US and we lose $1,100 !! A forward contract requires the purchase (or sale) of currency units at a future date at the contracted exchange rate.

9. Foreign Exchange Options Contracts An alternative is an option contract to purchase 1,000,000 ¥ at $.0080 US in 30 days. But it costs $.00002 per ¥. That way, if the spot rate is $.0069 in 30 days, we only lose the $20 cost of the option contract! An options contract gives the holder the option of buying (or selling) the currency units at a future date at the contracted “ strike ” price.

13. Foreign Currency Transactions ? . . . but the cash flow is at a later date . . . . . . fluctuating exchange rates can result in exchange rate gains or losses. When a transaction occurs on one date (for example a credit sale) . . .

14. Foreign Currency Transactions ? When the rate is expressed as the US $ equivalent of 1 unit of foreign currency, the rate is called a “ DIRECT QUOTE”

15. Foreign Currency Transactions When the rate is expressed as the US $ equivalent of 1 unit of foreign currency, the rate is called a “ DIRECT QUOTE” When the rate is expressed as the number of foreign currency units that $1 will buy, the rate is called an “ INDIRECT QUOTE”

21. Hedging Foreign Exchange Risk To control for the risk of exchange rate fluctuation, a forward contract for currency can be purchased. Hedging effectively reduces the uncertainty associated with fluctuating exchange rates.

23. Accounting for Derivatives SFAS 133 provides guidance for hedges of four types of foreign exchange risk. Recognized foreign currency denominated assets & liabilities. Forecasted foreign currency denominated transactions. Unrecognized foreign currency firm commitments. Net investments in foreign operations

26. Translation of Financial Statements If we control our subsidiaries, why don’t they all use the U.S. $ as their currency? Our subsidiaries in other countries are required by local regulations to use the local currency where they are located. Their statements must be translated to US $.

27. Translation of Financial Statements In addition, many countries have different accounting rules that we must consider before translating the sub’s financial statements.

32. Balance Sheet Exposure Balance sheet items translated at current exchange rates change in $ value from one balance sheet to the next and are exposed to translation adjustments. Balance sheet items translated at historical exchange rates do not change in $ value from one balance sheet to the next and are NOT subject to balance sheet exposure.

33. Balance Sheet Exposure Net Asset Balance Sheet Exposure When assets translated at current rates > liabilities translated at current rates. Net Liability Balance Sheet Exposure When liabilities translated at current rates > assets translated at current rates.

39. Functional Currency To determine whether a subsidiary is integrated with the parent or operates independently, SFAS 52 introduced the concept of functional currency . A company’s functional currency is the primary currency of the foreign entity’s operating environment.