Professional Documents
Culture Documents
Issues Arises when the value of the Canadian Dollar has changed relative to the value of the foreign
currency between:
Foreword Exchange contract: Agreement between bank and customer to exchange currencies on a
specified future date at a specific rate
Foreword Rate: Rate agreed to today for exchanging currency at a future date
Historical Rate: Rate on the date of the transaction
FTC Method
A) Foreign currency monetary items must be translated using the closing rate
B) Non-monetary items that are measured in terms of historical costs in a foreign currency must be
translated using the historical rate
C) Non-monetary items that are measured at FV in a foreign currency must be translated using the
spot exchange rate at the date FV was determined
Interest expense is translated at the average of the historical rates to produce a historical price
in Canadian dollars.
Exchange gains or losses occur on items translated at the closing rate
Forward exchange contracts: Two parties agree today to exchange currencies at a future date at
a specified exchange rate
When the forward rate changes, fair value of forward contract changes
Under net method, no journal entry needed when signed.
FV measured at reporting date
Gross Method: A/R from bank and payable to the bank are recorded separately at FV
Net Method: Receivable and payable are netted against each other and only net receivable is recorded.
Either method is acceptable for recording, however on statements only net amount is shown.
Hedges
Hedging: Offsetting risk exposure rising from foreign exchange (or interest rate or price)
fluctuations from those who wish to avoid it to those who are willing to assume it
Hedging instrument is the item used to offset risk to exposure
Hedge accounting is optional
FV Hedge can recognized asset, liabilities, unrecognized firm commitment or a highly probable
future transaction
Currency risk FV hedge or Cash flow hedge
Under hedge accounting, the exchange gains or losses on the hedging instrument will be
reported in income in the same period of the exchange gains or losses on the hedge item
Hedge with Bank (Payable is always the same, it’s the receivable that changes)