Syllabus_Ch 9_Accounting for International Business Transactions

Chapter 9: Accounting for International Business Transactions: 

9- 1 Chapter 9: Accounting for International Business Transactions EIB 505: Principles of Accounting

Chapter Objectives: 

9- 2 Chapter Objectives Explain the difference between receivable or payable measurement and denomination . Understand key concepts related to foreign currency exchange rates , such as indirect and direct quotes; floating, fixed, and multiple exchange rates; and spot, current, and historical exchange rates. Record foreign currency-denominated sales/receivables and purchases/payables at the initial transaction date, year-end, and the receivable or payable settlement date. Understand the International Accounting Standards Board accounting for foreign currency-denominated transactions.

1: Foreign Currencies: Measurement versus Denomination: 

9- 3 1: Foreign Currencies: Measurement versus Denomination Foreign Currency Transactions

Measurement and Denomination: 

9- 4 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

2: Foreign Currency Exchange Rates: 

9- 5 2: Foreign Currency Exchange Rates Foreign Currency Transactions

Quoting Exchange Rates: 

9- 6 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 $1 / £0.625 = $1.60

Rates: 

9- 7 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

3: Sales and Purchases Denominated in Foreign Currency: 

9- 8 3: Sales and Purchases Denominated in Foreign Currency Foreign Currency Transactions

Foreign Currency Purchases: 

9- 9 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

Foreign Currency Sales: 

9- 10 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.

Example: Sale on Account: 

9- 11 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 Spot rate Acct Rec Gain (Loss) 11/1 $1.55 $775 12/31 $1.56 $780 $5 1/30 $1.58 $790 $10

Sale on Account - Entries: 

9- 12 Sale on Account - Entries 11/1 Accounts receivable (euros) 775 Sales 775 12/31 Accounts receivable (euros) 5 Exchange gain 5 1/30 Cash (euros) 790 Accounts receivable 780 Exchange gain 10 1/30 Cash ($) 790 Cash (euros) 790 Adjust receivable to current rate. Collect from customer, recognizing additional gain Convert funds.

4: IASB Standards: 

9- 13 4: IASB Standards Foreign Currency Transactions

IASB Similar to US GAAP: 

9- 14 IASB Similar to US GAAP IAS 21 The Effects of Changes in Foreign Exchange Rates – foreign exchange rates foreign denominated monetary amounts adjusted to current rate at balance sheet date Translation of foreign currency statements

End of the Chapter: 

9- 15 End of the Chapter