14accountingforforeigncurrencytransactions-Wiley.docVIP

13 ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS AND HEDGING FOREIGN EXCHANGE RISK Learning Objectives Distinguish between the terms “measured” and “denominated.” Describe a foreign currency transaction. Understand some of the more common foreign currency transactions. Identify three stages of concern to accountants for foreign currency transactions and explain the steps used to translate foreign currency transactions for each stage. Describe a forward exchange contract. Explain the use of forward contracts as a hedge of an unrecognized firm commitment. Identify some of the common situations in which a forward exchange contract can be used as a hedge. Describe a derivative instrument and understand how it may be used as a hedge. Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. In the News: Lands’ End reported holding net outstanding foreign currency forward contracts totaling $77 million and options totaling $16 million. In addition, based on anticipated cash flows and outflows over the next 12 months, if the US currency strengthens 10% relative to all other currencies, Lands’ End’s fiscal 2002 cash flows could be adversely affected by $0.7 million. Many companies in the United States engage in international activities such as exporting or importing goods, establishing a foreign branch, or holding an equity investment in a foreign company. Recording and reporting problems are encountered when transactions with a foreign company or the financial statements of a foreign branch or investee are measured in a currency other than U.S. currency. Transactions to be settled in a foreign currency must be translated - that is, expressed in dollars - before they can be aggregated with the domestic transactions of the U.S. firm. When a foreign branch or investee maintains its accounts and prepares its financial statements in terms of the currency of the country in which it is domiciled, the accounts must be translated from the fo