Akuntansi Keuangan Lanjutan 2: Program Studi Akuntansi Fakultas Ilmu Sosial Dan Humaniora Universitas Bunda Mulia

AKUNTANSI KEUANGAN LANJUTAN 2
Program Studi Akuntansi

Fakultas Ilmu Sosial dan Humaniora
Universitas Bunda Mulia
Accounting for Foreign Currency
Transactions and Hedging Foreign
Exchange Risk
Session 1, 2, 3, 4
Reference
Jeter, Debra C And Paul K. Chaney. 2016. Advance Accounting 6E.

United States : John Wiley & Sons, Inc.
CPMK
• Mahasiswa mampu menyusun laporan keuangan Non Pemerintah
Non Bisnis (NPNB) berdasarkan SAK dan SAK ETAP yang berlaku di
Indonesia (C3, A3)
• Mahasiswa mampu menyusun dan menganalisis Laporan Keuangan
perusahaan yang berafiliasi dengan perusahaan asing (C4, A3)
• Mahasiswa mampu menyusun laporan keuangan persekutuan yang
berkaitan dengan pendirian, operasional, dan perubahan
kepemilikan (C3, A3)
• Mahasiswa mampu menyusun laporan keuangan bagi perusahaan
yang sedang mengalami kesulitan keuangan (C3, A3)
Preliminary
• Lecturer Introduction
• Procedure for Lectures
• Lecture Event Unit
• Component of Assessment
• Classroom Rules
Sub-CPMK
• Mahasiswa mampu mencatat dan melaporkan

transaksi yang terkait mata uang asing, kontrak
valuta berjangka, instrumen derivatif, serta
menjelaskan keuntungan dan kerugian atas
transaksi mata uang asing (C3, A3)
• Mahasiswa mampu menganalisis manfaat dari

lindung nilai atas transaksi dengan mata uang asing
(C4, A3)
1. Distinguish between the terms ‘measured” and
“denominated”.
Measured Versus Denominated
• Transactions are normally measured and recorded in
terms of the currency in which the reporting entity
prepares its financial statements.
– Reporting Currency - usually the currency where the
company is located.
• Transaction between a U.S. firm and a foreign
company:
– Companies negotiate whether settlement is to be made in
dollars or in the foreign currency.
– If settled by foreign currency, U.S. firm measures the
receivable or payable in dollars, but the transaction is
denominated in the foreign currency.
2. Describe what is meant by a foreign currency
transaction.
Foreign Currency Transactions
• Many U.S. companies 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 with foreign
currency transactions:
– Transactions to be settled in a foreign currency must be
translated (expressed in dollars) before they can be
aggregated with domestic transactions of the U.S. firm.
– Receivables or payables denominated in foreign currencies
are subject to gains and losses.
• Due to the changes in exchange rates.
– Companies use hedging strategies with derivatives to
minimize the impact of exchange rate changes on their
financial statements.
Exchange Rates—Means of Translation
• Translation - process of expressing amounts stated in terms in
a foreign currency in the currency of the reporting entity by
using an appropriate exchange rate.
• Exchange rate - ratio between a unit of one currency and
another currency for which that unit can be exchanged at a
particular time.
Two Exchange quotations:
• Direct Exchange Quotation
– Units of domestic currency that can be converted into one unit of
foreign currency.
– Direct rate = 1.517 ($1.517 U.S. for 1 British pound)
• Indirect Exchange Quotation

– Units of foreign currency that can be converted into one unit of
domestic currency.
– Indirect rate = 1.00/1.517 = .6592 ($1 U.S. for .6592 British pound)
Some terms related exchange rate:
1. Spot Rate
– Rate at which currencies can be exchanged today.
2. Forward or Future Rate
– Rate at which currencies can be exchanged at some
future date.
3. Forward Exchange Contract
– Contract to exchange currencies of different countries on
a stipulated future date, at a specified rate (the forward
rate).
4. Floating Rates
– Relationship between major currencies is
determined by supply and demand factors.
– Increase risk to companies doing business with a
foreign company.
Example – Payable to be settled in 100,000 yen
Transaction Change Settlement
Date in Rate Date
Yen 100,000 100,000
Direct rate $ 0.00434 $ 0.00625
Payable $ 434.00 $ 625.00
An increase in in the value of the yen to $.00625 would result in an increase in the payable to $625.
• Foreign Currency Transaction – A transaction that requires
payment or receipt (settlement) in a foreign currency.
– U.S. firm exposed to risk of unfavorable changes in the
exchange rate.
Direct exchange rate increasing, More dollars needed to
or foreign currency unit = acquire the foreign currency
strengthening. units.
Direct exchange rate Fewer dollars needed to

decreasing, or foreign currency = acquire the foreign currency
unit weakening. units.
3. Identify three stages of concern to accountants for
foreign currency transactions.
Importing or Exporting of Goods or Services
Translating Accounts Denominated in Foreign Currency
Transaction Balance sheet Settlement

date date date
Units of foreign currency x Current direct exchange rate (spot rate)
Increase or decrease is generally reported as a foreign currency transaction

gain or loss, sometimes referred to as an exchange gain or loss, in determining
net income for the current period.
Exercise 12-2: During December of the current year, Teletex Systems,
Inc., a company based in Seattle, Washington, entered into the
following transactions:
Dec. 10 Sold seven office computers to a company located in

Colombia for 8,541,000 peso. On this date, the spot rate was 365 peso
per U.S. dollar.
Inventory delivered
12/10/Year 1
U.S. firm
Columbia firm
(Teletex)
8,541,000 peso
received on 1/10/Year 2
Exercise 12-2: Dec. 10, Sold seven office computers to a company
located in Colombia for 8,541,000 peso. On this date, the spot rate was
365 peso per U.S. dollar. Prepare the journal entry on the books of
Teletex Systems, Inc. (periodic method)
Accounts Receivable 23,400
Sales 23,400
Sales price in peso 8,541,000

peso per U.S. dollar / 365
Sales price in U.S. dollars $ 23,400
Exercise 12-2: Prepare journal entry necessary to adjust the accounts
as of December 31. Assume that on December 31 the direct exchange
rates was Colombia peso $.00268.
Transaction Loss 510
Accounts Receivable 510
Receivable in peso 8,541,000

Direct exchange rate to U.S. dollar $ .00268
Receivable in U.S. dollars $ 22,890
Balance in receivable 23,400
Transaction loss $ 510
Exercise 12-2: Prepare journal entry to record settlement of the account
on January 10. Assume that the direct exchange rate on the settlement
date was Colombia peso $.00320.
Cash (8,541,000 x $.00320) 27,331

Accounts Receivable ($23,400 - $510) 22,890
Transaction Gain 4,441
Exercise 12-2: During December of the current year, Teletex Systems,
Inc., a company based in Seattle, Washington, entered into the following
transactions:
Dec. 12 Purchased computer chips from a Taiwan company. Contract
was denominated in 500,000 Taiwan dollars.
Direct exchange spot rate on this date was $.0391.
Inventory received
12/12/Year 1
U.S. firm
Taiwan firm
(Teletex)
500,000 Taiwan dollars
paid on 1/10/Year 2
Exercise 12-2: Dec. 12, Purchased computer chips from a company
domiciled in Taiwan. The contract was denominated in 500,000 Taiwan
dollars. The direct exchange spot rate on this date was $.0391. Prepare
the journal entry on the books of Teletex Systems, Inc.
Purchases 19,550
Accounts Payable 19,550
Purchase price in Taiwan dollars 500,000

Direct exchange rate to U.S. dollar x $.0391
Purchase price in U.S. dollars $ 19,550
Exercise 12-2: Prepare journal entry necessary to adjust the account as
of December 31. Assume that on December 31 the direct exchange
rates was Taiwan dollar $.0351.
Payable in Taiwan dollars 500,000

Direct exchange rate to U.S. dollar $ .0351
Payable in U.S. dollars $ 17,550
Balance in payable 19,550
Transaction gain $ 2,000
Exercise 12-2: Prepare journal entry to record settlement of account
on January 10. Assume that the direct exchange rate on the settlement
date was Taiwan dollar $.0398.
Transaction Loss 2,350
Accounts Payable ($19,550 - $2,000) 17,550
Cash (500,000 x $.0398) 19,900
Importing or Exporting of Goods or Services: Two-transaction
approach:
– Sale or purchase is viewed as a transaction separate and distinct
from the financing arrangement.
– Dollar amount recorded (in Sales or in Purchases) is determined
by the exchange rate on the transaction date.
– Adjustments to the foreign-currency-denominated receivable or
payable are recorded directly to the transaction gain or loss and
included in net income.
• Transaction gain or loss
» Does not result from an operating decision to buy or sell goods or services in a
foreign market.
» But from a decision to delay the payment or receipt of foreign currency and
not to hedge the exposed receivable or payable.
4. Describe a forward exchange contract.
Forward Exchange Contracts
A forward exchange contract (forward contract) is an agreement to
exchange currencies of two different countries at a specified rate (the
forward rate) on a stipulated future date.
5. Explain the use of forward contracts as a hedge of an
unrecognized firm commitment.
Which Kind of Forward Contract to Choose?
• Forward Contract used as a
1. Hedge of a(n):
– Foreign currency transaction.
– Unrecognized firm commitment (a fair value hedge).
– Foreign-currency-denominated “forecasted” transaction
(a cash flow hedge).
– Net investment in foreign operations.
2. Speculation:
– Forward contracts used to speculate changes in foreign
currency.
Using Forward Contracts as a Hedge
Fair Value Hedge—Hedging an Unrecognized Foreign
Currency Commitment
• A U.S. firm, at a date earlier than the transaction
date, may make a commitment to a foreign
company to buy or sell goods at a price established
in foreign currency.
• Changes in the exchange rate between the
commitment date and transaction date would be
reflected in the cost or sales price of the asset.
• The U.S. firm may enter a forward contract to
hedge its commitment.
Exercise 12-14: Consider the following information:
1. On December 1, 2014, a U.S. firm contracts to sell equipment (with an asking price of
10,000 peso) in Mexico. The firm will take delivery and will pay for the equipment on
March 1, 2015.
2. On December 1, 2014, the company enters into a forward contract to sell 10,000 peso for
$9.48 on March 1, 2015.
3. Spot rates and the forward rates for March 1, 2015, settlement were as follows (dollars per
peso):
Spot Rate Forward Rate
December 1, 2014 $9.54 $9.48
Balance sheet date (12/31/14) 9.49 9.44
March 1, 2015 9.47
4. On March 1, the equipment was sold for 10,000 peso. The cost of the equipment was
$40,000.
Exercise 12-14: Prepare all journal entries needed on December 1, December
31, and March 1 to account for the forward contract, the firm commitment,
and the transaction to sell the equipment.
Dec 1 Dollars Receivable from Exchange Dealer* 94,800
FC Payable to Exchange Dealer 94,800
Dec 31 FC Payable from Exchange Dealer** 400

Foreign Exchange Gain 400
Foreign Exchange Loss 400

Firm Commitment** 400
* (10,000 x $9.48 = $94,800)

** [(10,000 x ($9.48 - $9.44)] = $400
Mar 1 Foreign Exchange Loss 300
FC Payable from Exchange Dealer* 300
Firm Commitment* 300

Foreign Exchange Gain 300
Investment in FC 94,700
Firm Commitment 100
Sales (10,000 x 9.48) 94,800
* [(10,000 ´ ($9.44 - $9.47)] =$300

Mar 1 Cash 94,800
FC Payable to Exchange Dealer 94,700
Dollars Receivable from Exchange Dealer 94,800
Cost of Goods Sold 40,000

Inventory 40,000
6. Identiy some of the common situations in which a
forward exchange contract can be used as a hedge.
Economic Hedge of a Net Investment in a Foreign
Entity
– A U.S. firm that maintains an equity investment in a
foreign company may enter into a foreign currency
transaction or a nonderivative financial instrument
• in an effort to minimize or offset the effects of currency
fluctuations on an equity investment.
– The gain or loss on the hedging instrument is reported in
the same manner as the translation adjustment
• reported in the cumulative translation adjustment section
under comprehensive income. FASB ASC paragraph 815-35-35-
1
Forward Contracts Acquired to Speculate in the
Movement of Foreign Currencies
– A forward contract may be acquired for speculative
purposes in anticipation of realizing a gain.
Disclosure Requirements of the Various Hedges
– FASB ASC Section 815-20-50 specifies certain
minimal disclosures for derivative instruments and
nonderivative instruments designated as qualifying
hedging instruments.
Hedge of a Foreign Currency Exposed Liability
• Problem 12-2: Crystal Exporting Co. is a U.S. wholesaler
engaged in foreign trade. The following transaction is
representative of its business dealings. The company uses
a periodic inventory system and is on a calendar-year
basis. All exchange rates are direct quotations.
• Dec. 1 Crystal Exporting purchased merchandise from
Chang’s Ltd., a Hong Kong manufacturer. The invoice was
for 210,000 Hong Kong dollars, payable on April 1. On
this same date, Crystal Exporting acquired a forward
contract to buy 210,000 Hong Kong dollars on April 1 for
$.1314.
Problem 12-2: (additional facts)
April 1 Crystal Exporting submitted full payment of 210,000 Hong Kong

dollars to Chang’s, Ltd., after obtaining the 210,000 Hong Kong dollars on
its forward contract.
Spot rates and the forward rates for the Hong Kong dollar were as follows:
Forward Rate for
Spot Rate 4/1 Delivery
Dec. 1 $ 0.1265 $ 0.1314
Dec. 29 0.1240 0.1305
Dec. 31 0.1259 0.1308
April 1 0.1430
Problem 12-2: Prepare journal entries for the transactions including
the necessary adjustments on December 31.
Dec 1 Purchases 26,565

Hong Kong dollars 210,000

Dec. 1 Direct Spot Rate $ 0.1265
Dec 1 FC Receivable from Exch. Dealer 27,594

Dollars Payable to Exch. Dealer 27,594

Dec. 1 Forward Rate $ 0.1314
Dec 31 Accounts Payable 126

Transaction Gain 126

Dec. 31 Spot Rate $ 0.1259
Payable recorded on Dec. 1 26,565
Transaction gain $ 126
Dec 31 Transaction Loss 126
FC Receivable from Exchange Dealer 126

Dec. 31 Forward Rate $ 0.1308
Payable recorded on Dec. 1 27,594
Transaction loss $ (126)
Apr 1 Transaction Loss 3,591


Apr. 1 Spot Rate $ 0.1430
Payable established on Dec. 31 26,439
Transaction loss $ (3,591)
Apr 1 FC Receivable from Exch. Dealer 2,562


Apr. 1 Spot Rate $ 0.1430
Payable established on Dec. 31 27,468
Transaction Gain $ 2,562
Apr 1 Investment in Foreign Currency 30,030
Dollars Payable to Exch. Dealer 27,594
Cash 27,594
FC Receivable from Exch. Dealer 30,030
(payment to dealer and receipt of 210,000 Hong Kong dollars)

Investment in Foreign Currency 30,030
(payment of liability upon transfer of 210,000 Hong Kong dollars)
Problem 12-2: Transaction Summary
Transaction Transaction
Hedged Item Balance Gain/(Loss) Hedge Balance Gain/(Loss)
Accounts Payable FC Receivable
Dec. 1 $ 26,565 Dec. 1 $ 27,594
Dec. 31 26,439 $ 126 Dec. 31 27,468 $ (126)
Apr. 1 30,030 (3,591) Apr. 1 30,030 2,562
Total gain/(loss) $ (3,465) $ 2,436
Thus the net effect is a $1,029 loss when the forward

contract is used.
Hedge of a Foreign Currency Exposed Asset
• Accounting for a forward contract entered into
as a hedge of an exposed receivable position is
similar to an exposed liability position.
• Because the U.S. firm will be receiving foreign
currency in settlement of the exposed
receivable balance, it will enter into a forward
contract to sell foreign currency for U.S. dollars.
7. Decribe a derivative instrument and understand how it
may used as a hedge.
Using Options to Hedge Foreign Currency Changes
– Options, give the holder the advantage of right but not
the obligation to buy or sell the currency.
– If the exchange rate changes in a negative manner, the
firm can simply let the option lapse without a loss.
– Call Option:
• An option to purchase the foreign currency at a specified rate,
referred to as the exercise price.
– Put Option:
• An option to sell the foreign currency at a specified rate.
8. Explain how exchange gains and losses are reported
for fair value hedges and cash flow hedges.
Cash Flow Hedge-A Forecasted Transaction
– Cash Flow Hedge - hedging cash flows for future
transactions that have not yet occurred or for which
there are no firm commitments.
– Cash flow hedges may defer the income statement
recognition of gains and losses on forecasted
transactions if certain criteria are met.
– Amounts in accumulated other comprehensive income
are reclassified into earnings in the same period which
the hedged forecasted transaction affects earnings.
Exercise 12-13: Consider the following information:
1. On December 1, 2014, a U.S. firm plans to purchase a piece of equipment (with an
asking price of 100,000 francs) in Switzerland during January of 2015. The
transaction is probable, and the transaction is to be denominated in euros.
2. On December 1, 2014, the company enters into a forward contract to buy 100,000
francs for $1.01 on January 31, 2015.
3. Spot rates and the forward rates for January 31, 2015, settlement were as follows
(dollars per francs):
Spot Rate Forward Rate for 1/31/15
December 1, 2014 $0.99 $1.01
Balance sheet date (12/31/14) 1.01 1.02
Jan. 31 and Feb. 1, 2015 1.04
4. On Feb. 1, the equipment was purchased for 100,000 francs.
Exercise 12-13: Prepare all journal entries needed on Dec. 1, Dec. 31, Jan. 31,
and Feb. 1 to account for the forecasted transaction, the forward contract, and
the transaction to buy the equipment.
Dec.1 FC Receivable from Exchange Dealer 101,000
Dollars Payable to Exchange Dealer* 101,000
Dec.31 FC Receivable from Exchange Dealer** 1,000

Foreign Exchange Gain – OCI 1,000
* (100,000 x $1.01) = $101,000

** [(100,000 x ($1.01- $1.02)] = $1,000
Exercise 12-13: Prepare all journal entries needed on Dec. 1, Dec. 31, Jan. 31,
and Feb. 1 to account for the forecasted transaction, the forward contract, and
the transaction to buy the equipment.
Jan. 31 FC Receivable from Exchange Dealer 2,000
Foreign Exchange Gain – OCI 2,000
[(100,000 ´ ($1.02- $1.04)]
Dollars Payable to Exchange Dealer 101,000
Cash 101,000
FC Receivable from Exchange Dealer 104,000
Feb. 1 Equipment 104,000
Summary
1. A transaction that requires payment or receipt (settlement) in a
foreign currency is called foreign currency transaction.
2. A forward exchange contract (forward contract) is an agreement to
exchange currencies of two different countries at a specified rate (the
forward rate) on a stipulated future date.
3. There are two ways that can be used to minimize exchange risk:
a) Forward Contract
b) Option
4. Forward Contract used as a hedge or speculation.
5. Options, give the holder the advantage of right but not the obligation to
buy or sell the currency.
Thank you

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AKUNTANSI KEUANGAN LANJUTAN 2

Program Studi Akuntansi

Jeter, Debra C And Paul K. Chaney. 2016. Advance Accounting 6E.

• Mahasiswa mampu mencatat dan melaporkan

• Mahasiswa mampu menganalisis manfaat dari

• Indirect Exchange Quotation

Direct exchange rate Fewer dollars needed to

Transaction Balance sheet Settlement

Units of foreign currency x Current direct exchange rate (spot rate)

Increase or decrease is generally reported as a foreign currency transaction

Dec. 10 Sold seven office computers to a company located in

Sales price in peso 8,541,000

Receivable in peso 8,541,000

Cash (8,541,000 x $.00320) 27,331

Purchase price in Taiwan dollars 500,000

Payable in Taiwan dollars 500,000

Dec 31 FC Payable from Exchange Dealer** 400

Foreign Exchange Loss 400

* (10,000 x $9.48 = $94,800)

Firm Commitment* 300

* [(10,000 ´ ($9.44 - $9.47)] =$300

Cost of Goods Sold 40,000

April 1 Crystal Exporting submitted full payment of 210,000 Hong Kong

Dec 1 Purchases 26,565

Hong Kong dollars 210,000

Dec 1 FC Receivable from Exch. Dealer 27,594

Hong Kong dollars 210,000

Dec 31 Accounts Payable 126

Hong Kong dollars 210,000

Hong Kong dollars 210,000

Apr 1 Transaction Loss 3,591

Hong Kong dollars 210,000

Apr 1 FC Receivable from Exch. Dealer 2,562

Hong Kong dollars 210,000

Accounts Payable 30,030

Thus the net effect is a $1,029 loss when the forward

Dec.31 FC Receivable from Exchange Dealer** 1,000

* (100,000 x $1.01) = $101,000

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