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1、CHAPTER 6 Foreign Currency Translation,张晓旭 张浩然 陈曦 侯方仪,Insert Title Text,6.1 REASONS FOR TRANSLATION (P127),The primary reasons: Companies with significant overseas operations prepare consolidated financial statements that give statement readers an aggregate view of the firms global operations.,Trans
2、lation,Click to edit title style,The additional reasons:,1.recording foreign currency transactions,2.measuring a firms exposure to the effects of currency gyrations,muincating with foreign audiences of interest,6.1 REASONS FOR TRANSLATION,Act of exchanging one type of money or security for another,I
3、t is simply a change in monetary expression.,Conversion,Translation,6.2 BANKGROUND AND TERMINOLOGY(P127-129),Click to edit title style,Foreign currency transactions,Spot transactions,Forward transaction,Swap transaction,6.2 BANKGROUND AND TERMINOLOGY(P127-129,the physical exchange of one currency fo
4、r another in which delivery rakes place immediately.,agreements to exchange a specified amount of one currency for another at a future date.,It involves the simultaneous spot purchase and forward sale, or spot sale and forward purchase, of a currency.,6.2 BANKGROUND AND TERMINOLOGY(P127-129,Spot tra
5、nsactions: the physical exchange of one currency for another in which delivery rakes place immediately.,Factors: 1.different inflation rates 2.differences in national interest rates 3.exceptions about the direction ot future rates,6.2 BANKGROUND AND TERMINOLOGY(P127-129,Suppose that the cash balance
6、 of a U.S. subsidiary located in Bombay, India, on January 31 is INR1,000,000. The direct exchange rate=0.02232 INR1,000,000 $0.02232= $22,320 The indirect exchange rate=1/0.02232=44.8 INR1,000,000 INR44.8= $22,320,Two methods: Direct quote: the exchange rate specifies the number of domestic currenc
7、y units needed to acquire a unit of foreign currency. Indirect quote: the exchange rate specifies the price of a unit of the domestic currency in terms of the foreign currency.,6.2 BANKGROUND AND TERMINOLOGY(P127-129,Forward transaction: agreements to exchange a specified amount of one currency for
8、another at a future date.,It expressed at either a discount or a premium from the spot rate, or as outright forward rates.,6.2 BANKGROUND AND TERMINOLOGY(P127-129,Illustration: If spot Swiss francs are offered at $0.8318, while the six-month forward franc is offered at $0.8462, six-month Swiss franc
9、s are selling at a premium of 3.4% in the U.S. forward premium(discount)=(forward rate spot rate)/spot rate 12/n ($0.8462-$0.8318)/$0.831812/6=3.4% Indirect quote: forward premium(discount)=(spot rate-forward rate)/forward rate 12/n,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P1
10、30-132),Historical rate: the exchange rate prevailing when a foreign currency asset was first acquire or a foreign currency liability first incurred. Use of historical rates do not give rise to translation gains or losses which are increases or decreases in the reporting currency equivalent of the f
11、oreign currency.,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P130-132),Current rate: the exchange rate prevailing as of financial statement date. Use of the current rate gives rise to translation gains and losses. Average rate: a simple or weighted average of either historical o
12、r current exchange rates.,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P130-132),Translation vs. Transaction gains and losses Translation gains and losses: result from a restatement process. Transactions gains and losses: result from the physical exchange of one currency for anot
13、her.,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P130-132),Gain or loss on a settled transaction: It arises whenever the exchange rate used to book the original transaction differs from the exchange rate used at settlement. Gains or losses on unsettled transaction: It arises whe
14、never consolidated financial statements are prepared before settlement and the current rate has changed since the transaction date.,6.4 FINANCIAL STATEMENT EFFECTS OF ALTERNATIVE TRANSLATION RATES(P130-132),Foreign Currency Transaction,Feature: Settlement is effected in a foreigh currency. Functiona
15、l currency: The primary currency in which it transacts business and generates and spends cash.,Functional Currency Criteria,Single-transaction Perspective,Exchange adjustments are treated as an adjustment to the original transaction accounts on the premise that a transaction and its settlement are o
16、ne single event.,Single-transaction Perspective,Exchange adjustments are treated as an adjustment to the original transaction accounts on the premise that a transaction and its settlement are a single event.,Two-transaction Perspective,Exchange adjustments are treated as an adjustment to the original transaction accounts on the premise that a transaction and its settlement are seperate events. FAS NO.52 requires the two-trasanction method of accounting
