TRANSACTIONS IN FOREIGN CURRENCY
TRANSACTIONS IN FOREIGN CURRENCY
One of the major problems of accounting for international business is the operating in different currencies. In addition to eliminating or minimi; foreign-exchange risk, a firm must concern itself with the proper recorc and subsequent accounting of assets, liabilities, revenues, and expenses i are measured or denominated in a foreign currency. These transactions result from the purchase and sale of goods and services as well as the born ing and lending of foreign currency.
Recording of Transactions
Any time a U.S. importer is required to pay for equipment or merchandis a foreign currency, it must trade U.S. dollars for that currency to pay supplier. Assume that Sundance Ski Lodge buys skis from a French supp for FF 28,000 when the exchange rate is $0.1900/FF. Sundance would rec the following on its books:
As long as Sundance pays immediately, there is no problem. But what happens if the exporter extends 30 days' credit to Sundance? The original entry would be the same as above; during the next 30 days, anything could happen. If the rate changed to $0.1800/FF, Sundance would record a final settlement as follows:
The merchandise stays at the original value of $5320, but there is a difference between the dollar value of the account payable to the exporter ($5320) and the actual dollars that the importer must come up with in order to purchase the French francs to pay the exporter ($5040). The difference between the two accounts ($280) is the gain on foreign exchange and is recognized as income.
These gains and losses arising from foreign currency transactions must be recognized at the end of each accounting period, even if the payable (in the case of a purchase) or receivable (in the case of a sale) has not been settled. For most U.S. companies this adjustment is made every month. Using the example just given, assume that the end of the month has arrived and Sundance still has not paid the French exporter. The skis continue to be valued at $5320, but the payable has to be updated to the new exchange rate of $0.1800/FF. The journal entry to record that would be:
If the U.S. firm were an exporter and anticipated receiving foreign currency, the corresponding entries (using the same information) would be:
Correct Procedures for U.S. Firms
The procedures that U.S. firms must follow to account for foreign currency transactions are found in Financial Accounting Standards Board (FASB) Statement No. 52, "Foreign Currency Translation," which was adopted in December 1981. The FASB is the private-sector organization in the United States that establishes accounting standards. Statement 52 requires that firms record the initial transaction at the spot-exchange rate that is in effect on that date and record receivables and payables at subsequent balance-sheet dates at the spot-exchange rate on those dates. Any foreign exchange gains and losses that arise from carrying receivables or payables during a period when the exchange rate changes are taken directly to the income statement.3 In its 1988 Annual Report, for example, Ford Motor Company stated the following: "Exchange gains and losses from transactions in a currency other than the local currency of the entity involved . . . are included in income. Changes in foreign exchange rates reduced net income by $117 million (24 cents a share) in 1988. . . . These amounts included net transaction and translation gains before taxes of $734 million in 1988. . . ."4 Although some information was provided. Ford did not specifically state how much of the exchange gain was due to foreign currency transactions and how much was due to the translation of foreign currency financial statements.
One of the major problems of accounting for international business is the operating in different currencies. In addition to eliminating or minimi; foreign-exchange risk, a firm must concern itself with the proper recorc and subsequent accounting of assets, liabilities, revenues, and expenses i are measured or denominated in a foreign currency. These transactions result from the purchase and sale of goods and services as well as the born ing and lending of foreign currency.
Recording of Transactions
Any time a U.S. importer is required to pay for equipment or merchandis a foreign currency, it must trade U.S. dollars for that currency to pay supplier. Assume that Sundance Ski Lodge buys skis from a French supp for FF 28,000 when the exchange rate is $0.1900/FF. Sundance would rec the following on its books:
As long as Sundance pays immediately, there is no problem. But what happens if the exporter extends 30 days' credit to Sundance? The original entry would be the same as above; during the next 30 days, anything could happen. If the rate changed to $0.1800/FF, Sundance would record a final settlement as follows:
The merchandise stays at the original value of $5320, but there is a difference between the dollar value of the account payable to the exporter ($5320) and the actual dollars that the importer must come up with in order to purchase the French francs to pay the exporter ($5040). The difference between the two accounts ($280) is the gain on foreign exchange and is recognized as income.
These gains and losses arising from foreign currency transactions must be recognized at the end of each accounting period, even if the payable (in the case of a purchase) or receivable (in the case of a sale) has not been settled. For most U.S. companies this adjustment is made every month. Using the example just given, assume that the end of the month has arrived and Sundance still has not paid the French exporter. The skis continue to be valued at $5320, but the payable has to be updated to the new exchange rate of $0.1800/FF. The journal entry to record that would be:
If the U.S. firm were an exporter and anticipated receiving foreign currency, the corresponding entries (using the same information) would be:
Correct Procedures for U.S. Firms
The procedures that U.S. firms must follow to account for foreign currency transactions are found in Financial Accounting Standards Board (FASB) Statement No. 52, "Foreign Currency Translation," which was adopted in December 1981. The FASB is the private-sector organization in the United States that establishes accounting standards. Statement 52 requires that firms record the initial transaction at the spot-exchange rate that is in effect on that date and record receivables and payables at subsequent balance-sheet dates at the spot-exchange rate on those dates. Any foreign exchange gains and losses that arise from carrying receivables or payables during a period when the exchange rate changes are taken directly to the income statement.3 In its 1988 Annual Report, for example, Ford Motor Company stated the following: "Exchange gains and losses from transactions in a currency other than the local currency of the entity involved . . . are included in income. Changes in foreign exchange rates reduced net income by $117 million (24 cents a share) in 1988. . . . These amounts included net transaction and translation gains before taxes of $734 million in 1988. . . ."4 Although some information was provided. Ford did not specifically state how much of the exchange gain was due to foreign currency transactions and how much was due to the translation of foreign currency financial statements.
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