Advanced Accounting: Foreign Currency Hedging summary

Foreign currency – a currency other than the functional currency of the entity.

Foreign currency transaction – a transaction that is denominated or requires settlement in a
foreign currency.

1. Buy or sell goods or services at a price denominated in a foreign currency.
2. Borrow or lend funds such that the amounts payable or receivable are denominated in a
foreign currency.
3. Acquire or dispose of assets, or incur or settle liabilities, denominated in a foreign
currency.

Import Transaction

- A transaction wherein the entity acquires or buys goods outside its country of origin.
- Accounts Payable is exposed to the exchange rate.
- We use the selling rate to record the transaction and to compute the foreign currency
exchange gain or loss.
- Transaction date:
o Purchases xx
AP xx

*To record the purchase, use the selling spot rate at the date of transaction.

- Forex gain/loss:
o AP xx
Forex Gain xx

o Forex Loss xx
AP xx

*To compute the Forex gain or loss, get the change in the selling spot rate then
multiply the foreign currency denominated payable.

- Settlement date:
o AP xx
Cash xx

*Cash paid is equal to the selling spot rate on the settlement date.