15 International Operations 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Why should we be interested in Foreign Currencies ? several foreign currencies throughout the course of our daily lives Turkish investors have been buying, selling, and keeping savings accounts in foreign currencies, to hedge against inflation companies have been conducting foreign currency transactions both in Turkey and abroad Foreign Currency Transactions Exports and imports borrowing in a currency other than the local currency Exchange Rates currency exchange rate is the price of a currency expressed in terms of another currency the price of one United States dollar was around TL 1,50 in August 2010 main reasons fluctuations are the demand for the currency, and the real returns in a given currency exchange rates are used to determine how much will be paid in terms of another currency strong weak strong currency- a currency that is in demand and its price is rising relative to other currencies weak currency- a currency that is less valuable than others and has little or no international market Foreign Currency Transactions trading goods and services that are priced in a foreign currency, borrowing and lending in foreign currencies, being a party to an unperformed foreign exchange contract, and acquiring or disposing assets through cash or credit that is denominated in a foreign currency Sale of Goods Denominated in Foreign Currency Balk A.. sells fish to a German company at a price of (Euro) , on 15 November The exchange rate on that date is TL 1,78 per , and the payment is due in 60 days Sale of Goods Denominated in Foreign Currency Adjusting entry at the end of the fiscal year: Adjusted balance: ( x TL 1,795/ ) TL Original balance: ( x TL 1,78 / ) Required adjustment: TL 750 Foreign Exchange Gain is determined as: Sale of Goods Denominated in Foreign Currency German company pays its debt on 15 January 2012 Adjusted balance: ( x TL 1,795/ ) TL Current balance: ( x TL 1,79 / ) Required adjustment: TL 250 Purchase of Goods Denominated in Foreign Currency Topmak A.. purchases toys worth USD from China, for resale in the domestic market, with a payment period of 30 days. The date of purchase is 1 March 2011, when the exchange rate is TL 1,45 per USD. Purchase of Goods Denominated in Foreign Currency Lets assume that the exchange rate has increased to TL 1,465 per USD on 1 April 2011 Adjusted balance: (USD x TL 1,465/USD) TL Original balance: (USD x TL 1,45 /USD) Required adjustment: TL 150 Borrowing Funds Denominated in Foreign Currency Bur A.. borrowed USD from a foreign bank on 31 January 2012, when the exchange rate was TL 1,49 per USD, with an interest rate of 8% for one year, to be paid back in two installments The company should record the amount borrowed in the functional currency, i.e., in Turkish liras. Borrowing Funds Denominated in Foreign Currency After a 6 month grace period, Bur A.. repays the first installment of USD plus interest, on 31 July At the time, the exchange rate is TL 1,505 per USD. Bur A.. pays: Principal- at current rate USD x TL 1,505 = TL Principal- at original rate USD x TL 1,49 = Foreign exchange loss TL 750 Interest expense USD x 8% x 6/12 = USD Interest expense USD x TL 1,505 = TL Total paid on 31 July 2012: TL = TL Borrowing Funds Denominated in Foreign Currency 31 December 2012, the end of the accounting period, Bur A.. needs to make an adjusting entry to show the accrued foreign exchange loss (gain) on the outstanding amount of the loan, and the interest accrued on the outstanding amount. Outstanding loan at current rate on 31 December 2012 USD x TL 1,52 = TL Loan at original rate USD x TL 1,49 = Foreign exchange loss TL Interest expense USD x 8% x 5/12 = USD Interest expense USD x TL 1,52 = TL 2.534 Borrowing Funds Denominated in Foreign Currency On 31 January 2013, Bur A.. pays the remaining amount of debt and the interest. Outstanding loan on USD x TL 1,525 = TL Outstanding loan on USD x TL 1,52 = Foreign Exchange loss on the loan TL 250 Accrued Interest on USD x TL 1,525 = TL Accrued Interest on USD x TL 1,52 = Foreign exchange loss on accrued interest TL 8 Total Foreign Exchange Loss on TL 258 Borrowing Funds Denominated in Foreign Currency The company will also pay the interest for January 2013, computed as follows Interest Expense USD x 8% x 1/12 = USD 333 Interest Expense USD 333 x TL 1,525 = TL 508 Foreign Exchange Translation and Hedging investments in foreign countries foreign investments will be restated in the home or reporting currency foreign exchange translation gain or loss will not be reported in the income statement, but will be disclosed within the shareholders equity section in the statement of financial position positive translation adjustment can be treated as an unrealized gain, and a negative adjustment can be treated as an unrealized loss cash effects of foreign currency translations are reported in the cash flow statement Hedging buying foreign currencies in order to hedge against possible losses