Bài giảng môn Kế toán, kiểm toán - Chapter 7: Foreign currency transactions and hedging foreign exchange risk

Chapter 7:Foreign Currency Transactions and Hedging Foreign Exchange RiskLearning ObjectivesProvide an overview of the foreign exchange marketExplain how fluctuations in exchange rates give rise to foreign exchange riskDemonstrate the accounting for foreign currency transactionsDescribe how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange riskDescribe the concepts of cash flow hedges, fair value hedges, and hedge accounting7-2Learning ObjectivesDemonstrate the accounting for forward contracts and options used as cash flow hedges and fair value hedges to hedge foreign currency assets and liabilities, foreign currency firm commitments, and forecasted foreign currency transactions.7-3Foreign Exchange MarketsForeign exchange rate Purchase price of a foreign currency1945 –1973 Exchange rates fixed in U.S. dollarU.S. dollar was fixed in goldU.S. dollar was fixed to gold at $35 per ounce1960s Balance-of-payments deficits in the U.S.March 1973 most currencies float in value7-4Foreign Exchange MarketsExchange Rate MechanismsIndependent float Currency value allowed to move freelyLittle government interventionPegged to another currency Currency value fixed in terms of a foreign currency E.g. U.S. dollarCentral bank maintains the exchange rateEuropean Monetary System (Euro) Twelve countries use a single currency, Floats against other currencies E.g. U.S. dollar7-5Foreign Exchange MarketsForeign Exchange RatesInterbank ratesWholesale prices Banks charge one anotherExchange of currenciesPublished on the internet and in newspapersReflected Direct quotes (US $ equivalent) Indirect quotes (currency per US $)Direct quote reciprocal of indirect quoteIndirect quote reciprocal of direct quote 7-6Foreign Exchange MarketsSpot rates Today’s price for purchasing or selling a foreign currencyForward rate Today’s price for purchasing or selling a foreign currencyFor some future datePremium Forward rate is greater than the spot rateDiscount Forward rate is less than the spot rate7-7Foreign Exchange MarketsOption contracts Foreign currency option Gives right, no obligationTrade foreign currencyTrade in future Put optionOption to sell the foreign currencyCall optionOption to buy the foreign currencyStrike priceExchange rate at which currency will be exchanged when option is exercised7-8Foreign Exchange MarketsOption contractsOption premium Cost of purchasing the optionFunction of the option’s intrinsic value and time valueIntrinsic value Immediate exercise of the optionGain Time valueDerived value Currency value increase During the remainder of the option period7-9Foreign Currency TransactionsTransaction exposureExposure to foreign exchange riskExport saleSale to foreign customer Later payment In customer’s currencyImport purchasePurchases from foreign supplier Payment in the supplier’s currencyForeign exchange riskChange in the exchange rate results inExporter will receive less Importer will pay more than anticipated7-10Foreign Currency TransactionsExampleJoe Inc., a U.S. company, makes a sale and ships goods to Jose, SA, a Mexican customerSales price is $100,000 (U.S.) and Joe allows Jose to pay in pesos in 30 daysThe current exchange rate is $0.10 per 1 pesoJoe plans to receive 1,000,000 pesos ($100,000/$0.10)7-11Foreign Currency TransactionsJoe has foreign exchange risk exposure because he may receive less than $100,000.Suppose the peso decreases such that in 30 days the exchange rate is $0.09 per 1 peso.Joe will receive 1,000,000 pesos which will be worth $90,000 (1,000,000 x $0.09) and Joe receives $10,000 less due to exchange rate fluctuation.7-12Accounting for Foreign Currency TransactionsOne transaction perspective Treats sale and collection as one transactionTransaction complete when Foreign currency received and converted Sale is measured at converted amountNot allowed under IAS or U.S. GAAP7-13Accounting for Foreign Currency TransactionsTwo transaction perspective Two transactions SaleCollectionSale based on current exchange rateExchange rate changesCollection for different amountDifference considered Foreign exchange gain Foreign exchange lossConcepts are identical for purchase transaction(IAS) 21 and FASB ASC 830 require two-transaction perspective7-14Accounting for Foreign Currency TransactionsTransaction types, exposure type and gain or loss – export salesExport sale  asset exposure--if foreign currency appreciates  foreign exchange gainExport sale  asset exposure--if foreign currency depreciates  foreign exchange loss7-15Accounting for Foreign Currency TransactionsTransaction types, exposure type and gain or loss – import purchasesImport purchase  liability exposure -- if foreign currency appreciates  foreign exchange lossImport purchase  liability exposure -- if foreign currency depreciates  foreign exchange gain7-16Accounting for Foreign Currency TransactionsExport sale – example 1February 1, 2012, Joe Inc., a U.S. company, makes a sale and ships goods to Jose, SA, a Mexican customer.Sales price is $100,000 (U.S.).Jose agrees to pay in pesos on March 2, 2012.Assume spot rate as of February 1, 2011 is $0.10 per peso.7-17Accounting for Foreign Currency TransactionsExport sale – example 1Joe, Inc. records the sale (in U.S. $) on February 1, 2011 as follows:Accounts Receivable 100,000 Sales 100,000 7-18Accounting for Foreign Currency TransactionsExport sale – example 1On March 2, 2011, the spot rate is $0.09 per peso.Joe Inc. will receive 1,000,000 pesos, which are now worth $90,000. Joe makes the following journal entry:Cash 90,000Foreign Exchange Loss 10,000Accounts Receivable 100,0007-19Accounting for Foreign Currency TransactionsExport sale – example 2Assume the following facts are added or changed:Joe Inc., makes sale and ships goods on December 1, 2010 rather than February 1, 2011.Spot rate as of December 1, 2010 is $0.11 per peso.Spot rate as of December 31, 2010 is $0.105 per peso.Joe Inc. has a December 31 year end.7-20Accounting for Foreign Currency TransactionsExport sale – example 2Joe, Inc. records the sale (in U.S. $) on December 1, 2010 and the foreign exchange loss on December 31, 2010 as follows:Accounts Receivable 110,000Sales 110,000 Foreign Exchange Loss 5,000Accounts Receivable 5,0007-21Accounting for Foreign Currency TransactionsExport sale – example 2Joe, Inc. records the receivable collection and an additional foreign exchange loss on March 2, 2011:Cash 90,000Foreign Exchange Loss 15,000Accounts Receivable 105,0007-22Hedging Foreign Exchange RiskHedging Protects from exchange rate fluctuationsForeign currency forward contracts Foreign currency optionsForeign currency forward contractBuy or sell foreign currencyFuture dateForeign currency option Right to buy or sell foreign currency For a period of time7-23Hedging Foreign Exchange RiskDerivativeHedge accounting appropriate if derivativeUsed to hedge an exposureHighly effective In offsetting changes in Fair value Cash flows related to the hedged itemProperly documented as a hedge7-24Hedging Foreign Exchange RiskHedging risk on an export sale – example 1Previously, Joe Inc. lost $20,000 without hedging as the peso fell from $0.11 to $0.09.The loss was ($0.11 - $0.09) x 1,000,000 pesos.Joe could have purchased a foreign currency forward contract on December 1, 2010.7-25Hedging Foreign Exchange RiskHedging risk on an export sale – example 1Under the contract, Joe would have agreed to sell 1,000,000 pesos for $0.105 on March 2, 2011.In this case, Joe would have collected $105,000 rather than $90,000.Instead of a $20,000 foreign exchange loss, Joe would have paid a $5,000 premium on the forward contract.7-26Hedging Foreign Exchange RiskHedging risk on an export sale – example 2Previously, Joe Inc. lost $20,000 without hedging as the peso fell from $0.11 to $0.09.The loss was ($0.11 - $0.09) x 1,000,000 pesos.Joe could have purchased a foreign currency option on December 1, 2010.The option premium is $4,000.7-27Hedging Foreign Exchange RiskHedging risk on an export sale – example 2Joe would now have the option sell 1,000,000 pesos for $0.11 on March 2, 2011.In this case Joe would have collected $110,000 rather than $90,000.Instead of a $20,000 foreign exchange loss, Joe would have paid $4,000 for the option.7-28Cash Flow Hedges, Fair Value Hedges, and Hedge AccountingHedge accounting Offsetting gain or loss Recognized in net income In same period as The gain or loss from the hedged itemCash flow hedge An accounting designation for hedges Offset variability in cash flows Fair value hedge Accounting designation for hedges Offset variability in fair value of hedged assets and liabilities7-29Hedge AccountingHedge accounting examplesFC asset/forward contract/cash flow hedgeFC asset/forward contract/fair value hedgeFC asset/option/cash flow hedgeFC firm commitment/forward contract/fair value hedgeFC firm commitment/option/fair value hedgeForecasted FC transaction/option/cash flow hedge7-30Hedge AccountingAssumptions for examples 1 and 2December 1, 2010, Joe Inc., a U.S. company, makes a sale and ships goods to Jose, SA, a Mexican customer.Sales price is $110,000 (U.S.).Jose agrees to pay 1,000,000 pesos on March 2, 2011.Spot rates per peso are: December 1, 2010, $0.11, December 31, 2010, $0.10, and March 2, 2011, $0.095.The annual interest rate is 6% (0.5% per month).7-31Hedge AccountingJoe enters a foreign currency forward contract on December 1, 2010.The contract calls for Joe to sell 1,000,000 pesos at a forward rate of $0.105, on March 2, 2011.The forward rate on December 31, 2010 for March 2, 2011 delivery is $0.096.7-32Hedge AccountingExample 1, FC asset/forward/cash flow hedge12/01/10Accounts receivable 110,000 Sales 110,00012/31/10Foreign exchange loss 10,000 Accounts receivable 10,000Accumulated other comprehensive income 10,000 Gain on forward contract 10,00012/31/10Forward contract 8,911 Accumulated Other Comprehensive Income 8,9117-33Hedge AccountingExample 1, FC asset/forward/cash flow hedgeDiscount expense 1,667 Accumulated Other Comprehensive Income 1,667(discount expense is amortized using the straight-line method)7-34Hedge AccountingExample 1, FC asset/forward/cash flow hedge3/02/11Foreign exchange loss 5,000 Accounts receivable 5,000Accumulated Other Comprehensive Income 5,000 Gain on forward contract 5,000Forward contract 1,089 Accumulated Other Comprehensive Income 1,0897-35Hedge AccountingExample 1, FC asset/forward/cash flow hedge3/02/11Discount expense 3,333 Accumulated Other Comprehensive Income 3,333Foreign currency 95,000 Accounts receivable 95,000Cash 105,000 Foreign currency 95,000 Forward contract 10,0007-36Hedge AccountingExample 2, FC asset/forward/fair value hedge12/01/10Accounts receivable 110,000 Sales 110,00012/31/10Foreign exchange loss 10,000 Accounts receivable 10,000 Forward contract 8,911 Gain on forward contract 8,9117-37Hedge AccountingExample 2, FC asset/forward/fair value hedge3/02/11Foreign exchange loss 5,000 Accounts receivable 5,000Forward contract 1,089 Gain on forward contract 1,0897-38Hedge AccountingExample 2, FC asset/forward/fair value hedge3/02/11Foreign currency 95,000 Accounts receivable 95,000Cash 105,000 Foreign currency 95,000 Forward contract 10,0007-39End of Chapter 77-40