Spot transaction: occurs when an enterprise purchases or sells goods for which payment is made in a foreign currency, or when it borrows or lends foreign currency.
Direct quote: the exchange rate specifies the number of domestic currency units needed to acquire a unit of foreign currency.
Indirect quote: the exchange rate specifies
At the transaction date, each asset, liability, revenue, and expense denominated in a foreign currency is measured and recorded in the functional currency of the reporting entity at the spot exchange rate in effect on that date.
Facilitates the measurement of a firm’s exposure to foreign exchange risk.
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Facilitates the recording of foreign currency transactions; i.e., foreign currency sales, purchases, borrowing or lending in the consolidated entity’s reportingifference between a spot, forward, and swap transaction?
What exchange rates are used in the currency translation process and what are their financial statement effects?
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Functional currency is the primary currency in which the reporting entity transacts business and generates and spends cash; e.g., dollars in the case of a U.S. reporting entity.
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How does a translation gain or loss differ from a transactions gain or loss?
Is there more than one way of translating financial statements from one currency to another? If so, what are they?
International Accounting, 6/e Frederick D.S. Choi Gary K. Meek
Chapter 6:
Foreign Currency Translation
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Learning Objectives
Why do firms translate from one currency to another?
Facilitates reporting domestic accounts to foreign audiences-of-interest.
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Types of Transaction Rates
Spot transactions: the physical exchange of one currency for another in which delivery takes place immediately.
Swap transaction: involves the simultaneous spot purchase and forward sale, or spot sale and forward purchase of a currency.
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Accounting for Spot Transactions
the price of a unit of the domestic currency in
terms of the foreign currency.
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Forward transaction: agreements to exchange a specified amount of one currency for another at a future date.
How does the temporal method of currency translation differ from the current rate method?
What is the relationship between currency translation and inflation?
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Why do Firms Translate?
Facilitates the preparation of consolidated financial statements that allow readers to see the performance of a multinational company’s total operations both domestic and foreign.