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Lecture 11

ACCT3321 Lecture Notes - Lecture 11: Cash Flow Hedge, Credit Risk, Book Value


Department
Accounting
Course Code
ACCT3321
Professor
Lyndie Bayne
Lecture
11

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CHAPTER 23
Foreign currency transactions and forward exchange contracts
-Functional currency
oIs the currency of the primary economic environment in which the company
operates [the one in which the company primarily generates and expends
cash
-Types of foreign currency transactions
oA transaction that is denominated or requires settlement in a foreign
currency
oAny currency other than the company’s functional currency
EXCHANGE RATES
- The ratio of exchange for two currencies
-Spot exchange rate  the exchange rate for immediate delivery at a particular point
in time whereas the closing rate is the spot exchange rate at the end of the reporting
period
INITIAL MEASUREMENT AT THE TRANSACTION DATE
- Which exchange rates should be used to translate the foreign currency balances?
- The financial statement item that arise from a foreign currency transaction should be
measured on initial recognition using the historical exchange rate at the date of
transaction
- The acquisition or disposal of an asset – the date of the transaction depends on
when control of the future economic benefits embodied in the asset are obtained
from or transferred to another entity
- DR Purchase thing CR payable to foreign supplier (initial recognition)
MONETARY AND NON-MONETARY ITEMS
- Monetary – units of currency held and assets and liabilities to be received or paid in
a fixed or determinable amount of currency
oRefers to cash or another item that constitutes a claim to cash or an
obligation to pay cash
oShares held in ASX = financial asset but the shares do not constitute a
monetary item
- Non-monetary item – an asset or liability that is not a monetary item – inventory and
PPE
FOREIGN EXCHANGE DIFFERENCES FOR MONETARY ITEMS
- The difference resulting from translating a given number of units of one currency
into another currency at difference exchange rates
-Realised and unrealised gains or losses from exchange differences
oWhen there are differences in the exchange rate and you win out
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oWhen it occurs in more than one period – should the unrealised exchange
gain or losses be recognised?
oThere is a requirement that exchange gains and losses be immediately
recognised in the P&L as they arise
-The relationship between exchange rates and exchange differences
oExample p 10 – 11
oIf the change in exchange rate shows that the foreign currency increases in
value relative to the functional currency:
A monetary asset denominated in foreign currency will increase when
translated into the less valuable functional currency  giving rise to a
gain as the company is effectively entitles to receive more units of
functional currency
A monetary liability denominated in foreign currency will increase
when translated into the less valuable functional currency  giving rise
to a foreign exchange loss as the company is effectively asked to pay
more units of functional currency
oIf the change in the exchange rate shows that the foreign currency decreases
in value relative to the functional currency
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find more resources at oneclass.com
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