Foreign Currency Financial Reporting from Euro to Yen to Yuan E-Book

Robert Rowan

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: SAS Institute Inc
• Sprache: Englisch

Seitenzahl: 325

Veröffentlichungsjahr: 2011

Beschreibung

The first A-to-Z guide for successfully working in foreigncurrency environments Destined to become an essential desktop tool helpingprofessionals build a solid foundation in the background, history,and fundamental mechanics of foreign currency and exchange rates,this must-have guide allows you to report past transactionsaccurately and also to forecast the impacts that volatile exchangerates could have on your business. Packed with everything you needto know about exchange rate requirements, including world currencyformats and key links to additional resources, this is the singlesource you'll want to have at your side to understand andsuccessfully use foreign currency reporting concepts. * Get from Yen to Euro without losing your way * Clarifies an intimidating topic into practical application * Helps you function effectively in the multicurrency reportingenvironment * Addresses common points of confusion * Demystifies IFRS Your company could swing from profit to loss without a singlechange in operations, simply by movement of exchange rates. Getready with the on-the-spot foreign currency answers you need inForeign Currency Financial Reporting from Euro to Yen toYuan. It's the easy-to-use, definitive source you can turn tofor a clear, concise, practical understanding of multicurrencyenvironments.

Leseprobe

Table of Contents

Cover

Table of Contents

Wiley & SAS Business Series

Title page

Copyright page

Dedication

Epigraph

Preface

Acknowledgments

Introduction to Foreign Currency and Exchange Rates

WHO YOU ARE

WHAT YOU KNOW

A CHANGING ENVIRONMENT

CERTAINTY IN UNCERTAIN TIMES

Notes

Part I: The Basics

CHAPTER 1: Isn’t Currency Conversion Just Multiplication?

CONVERSION

THE FIRST COMPLICATION: IT’S NOT JUST MULTIPLICATION

WHERE DO EXCHANGE RATES COME FROM?

THE MARKET

A SECOND COMPLICATION: TRIANGULATION

TRIANGULATION WITH CROSS RATES

QUOTES

CURRENCIES AND EXCHANGE RATES: HIGHLIGHTS OF THEIR RELEVANCE AND RECENT HISTORY

BURGERS AND CURRENCY

Notes

CHAPTER 2: Exchange Rate Tables

THE FOUNDATION AND CAVEATS

TERMS AND TERMINOLOGY

TRIANGULATION AND CROSS RATES—REDUX

EXCHANGE RATE TABLES

KEEP IT SIMPLE

Notes

CHAPTER 3: Approximation

THE ORIGINAL DATA: ACCURATE AND PRECISE

SIGNIFICANT DIGITS AND SCIENTIFIC NOTATION

PRECISION

ACCURACY

WHAT DIVISION MEANS FOR COMPUTERS

PRECISION WITH FLOATING POINT DATA

ACCURACY, PRECISION, AND CREDIBILITY

Notes

Part II: Key Concepts and Authoritative Standards

CHAPTER 4: What’s in a Name?

STANDARDS

A BRIEF BACKGROUND

IFRS PREDOMINANCE WITH A FASB PEDIGREE

THE ECONOMIC ESSENCE: FROM NAMES TO DEFINITIONS

FUNCTIONAL CURRENCY

ALL THE REST

A FOUNDATION

Notes

CHAPTER 5: The Gold Standard

THE GOLD STANDARD FOR FINANCIAL REPORTING

IAS21 AND ASC 830: CONVERGED, BUT NOT IDENTICAL

TRANSLATION OVERVIEW

TRANSLATION—NOT CONVERSION

TRANSLATION OF INCOME AND EXPENSE

AVERAGES

SIMPLE TRANSLATION

TRANSLATION 1: BASIC

TRANSLATION 2: INTERMEDIATE

CONVENIENCE TRANSLATION

THE STANDARD

Notes

CHAPTER 6: They’re Not Synonyms

TRANSACTIONS AND TRANSLATION

TRANSACTIONS IN A FOREIGN CURRENCY

REPORTING AT BALANCE SHEET DATES

REMEASUREMENT

BEST OF INTENTIONS: COMPANIES’ DIVERGENT PATHS

CHANGING FUNCTIONAL CURRENCY

KNOWLEDGE WORTH HAVING

Notes

Part III: Practical Applications (and More Concepts)

CHAPTER 7: The Intersection

TIME CONCEPTS: PA, PIT, AND POT

THE MISSING PIECE

EQUITY AND COMPLEX RATES

HYBRIDS

CASH FLOW AFFECTED BY EXCHANGE RATES

NEGATIVE EXCHANGE RATES

INTERCOMPANY TRANSACTIONS

FREQUENCY

MAKE THE TRANSFORMATION

Notes

CHAPTER 8: Practical Knowledge

EXCHANGE RATE IMPACT: BASIC INFORMATION

ANALYZING THE EXCHANGE RATE IMPACT

CONSTANT CURRENCY: A SECOND FIX

IMPROVING CONSTANT CURRENCY

ANALYSIS AND AUTOMATION

MULTIPLE EXCHANGE RATE SCENARIOS

CONSTANT YEAR: A THIRD FIX

LOOKING FORWARD: BEYOND THE CONSTANTS

PRACTICAL EXAMPLES OR CAUTIONARY TALES

FINANCIAL REPORTING AND MANAGEMENT REPORTING

Notes

CHAPTER 9: Practical Knowledge

A PROBLEM AT THE SOURCE

CHANGE IT, USE IT, ANALYZE IT

YEAR-TO-DATE TRANSLATION

CROSSING ZERO: A CHANGE IN SIGN

THE SCHOOL OF EXPERIENCE

Notes

CHAPTER 10: Cumulative Translation Adjustment

BAGGAGE FROM THE PAST: ACCUMULATING THE TRANSLATION ADJUSTMENT

RECALCULATING CTA

TRANSLATION ADJUSTMENT AND INTRAGROUP MONETARY TRANSACTIONS

CUMULATIVE TRANSLATION ADJUSTMENT IS NOT REMEASUREMENT

A LITTLE FUN WITH CTA

PROBLEM SOLVED

Notes

CHAPTER 11: The Residual

REDENOMINATION

DEVALUATIONS AND REVALUATIONS

HYPERINFLATIONARY ECONOMIES

EURO ADOPTION

NONMONETARY ASSETS (INVENTORY) MEASURED IN A FOREIGN CURRENCY

DISPOSAL OF A FOREIGN OPERATION

A SIMPLE FORWARD CONTRACT: HEDGING

HEURISTIC APPROACH

Notes

Conclusion: Reinvent the Triangle

THE BENEFIT

Notes

APPENDIX A: World Currency Formats and ISO 4217 Information

APPENDIX B: Useful Links, and Why They’re Useful

APPENDIX C: Exchange Rate Requirements

DEFINITION OF ACTUAL RATES

DEFINITION OF CONSTANT CURRENCY RATES

DEFINITION OF FORECAST RATES

DEFINITION OF VIEWS

DEFINITION OF HIGH (USH) AND LOW (USL) RATES

DEFINITION OF RATES IN THE TABLES

Glossary

About the Author

Index

Wiley & SAS Business Series

The Wiley & SAS Business Series presents books that help senior-level managers with their critical management decisions.

Titles in the Wiley and SAS Business Series include:

Activity-Based Management for Financial Institutions: Driving Bottom-Line Results by Brent Bahnub

Branded! How Retailers Engage Consumers with Social Media and Mobility by Bernie Brennan and Lori Schafer

Business Analytics for Customer Intelligence by Gert Laursen

Business Analytics for Managers: Taking Business Intelligence beyond Reporting by Gert Laursen and Jesper Thorlund

Business Intelligence Competency Centers: A Team Approach to Maximizing Competitive Advantage by Gloria J. Miller, Dagmar Brautigam, and Stefanie Gerlach

Business Intelligence Success Factors: Tools for Aligning Your Business in the Global Economy by Olivia Parr Rud

Case Studies in Performance Management: A Guide from the Experts by Tony C. Adkins

CIO Best Practices: Enabling Strategic Value with Information Technology, Second Edition by Joe Stenzel

Credit Risk Assessment: The New Lending System for Borrowers, Lenders, and Investors by Clark Abrahams and Mingyuan Zhang

Credit Risk Scorecards: Developing and Implementing Intelligent Credit Scoring by Naeem Siddiqi

Customer Data Integration: Reaching a Single Version of the Truth, by Jill Dyche and Evan Levy

Demand-Driven Forecasting: A Structured Approach to Forecasting by Charles Chase

Enterprise Risk Management: A Methodology for Achieving Strategic Objectives by Gregory Monahan

Executive’s Guide to Solvency II by David Buckham, Jason Wahl, and Stuart Rose

Fair Lending Compliance: Intelligence and Implications for Credit Risk Management by Clark R. Abrahams and Mingyuan Zhang

Information Revolution: Using the Information Evolution Model to Grow Your Business by Jim Davis, Gloria J. Miller, and Allan Russell

Manufacturing Best Practices: Optimizing Productivity and Product Quality by Bobby Hull

Marketing Automation: Practical Steps to More Effective Direct Marketing by Jeff LeSueur

Mastering Organizational Knowledge Flow: How to Make Knowledge Sharing Work by Frank Leistner

Performance Management: Finding the Missing Pieces (to Close the Intelligence Gap) by Gary Cokins

Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics by Gary Cokins

The Business Forecasting Deal: Exposing Bad Practices and Providing Practical Solutions by Michael Gilliland

The Data Asset: How Smart Companies Govern Their Data for Business Success by Tony Fisher

The Executive’s Guide to Enterprise Social Media Strategy: How Social Networks Are Radically Transforming Your Business by David Thomas and Mike Barlow

The New Know: Innovation Powered by Analytics by Thornton May

Visual Six Sigma: Making Data Analysis Lean by Ian Cox, Marie A. Gaudard, Philip J. Ramsey, Mia L. Stephens, and Leo Wright

For more information on any of the above titles, please visit www.wiley.com.

Copyright © 2011 by SAS Institute, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Portions of the FASB Accounting Standards CodificationTM, copyright by Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, have been reprinted with permission.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Rowan, Robert (Robert J.).

 Foreign Currency Financial Reporting from Euro to Yen to Yuan : A Guide to Fundamental Concepts and Practical Applications / Robert Rowan.

p. cm. – (Wiley and SAS Business Series ; 44)

Includes bibliographical references and index.

 ISBN 978-1-118-02442-3 (cloth); ISBN 978-1-118-05666-0 (ebk); ISBN 978-1-118-05667-7 (ebk); ISBN 978-1-118-05668-4 (ebk)

 1. Foreign exchange—Accounting. 2. Financial statements. I. Title.

 HG3853.7.R69 2011

 657'.3–dc22

2010050382

To Robinson Reeves Rowan, artist and architect,

who inspired me to create something of my own,

and without whom this book would not exist.

For Jamerson and Parker—true gifts.

I took one Draught of Life—

I’ll tell you what I paid—

Precisely an existence—

The market price, they said.

—Emily Dickinson1

1 Reprinted by permission of the publishers and the Trustees of Amherst College from The Poems of Emily Dickinson: Reading Edition, edited by Ralph W. Franklin, ed., Cambridge, Mass.: The Belknap Press of Harvard University Press, Copyright © 1998, 1999 by the President and Fellows of Harvard College. Copyright © 1951, 1955, 1979, 1983 by the President and Fellows of Harvard College.

Preface

There are men who can write poetry, and there are men who can read balance sheets. The men who can read balance sheets cannot write. … Of necessity, we made the discovery that it is easier to turn poets into business journalists than to turn bookkeepers into writers.1

—Henry R. Luce

My years of experience in multicurrency environments range from front-line work at public and private companies to research and development working side by side with software programmers. It was that broad experience that inspired this book.

I lacked a single resource to share with a wide group of people to help them understand and then use foreign currency reporting concepts. I could not hand a financial accounting standard or an accounting textbook to a software developer. I could not send a Java programming manual or a software user’s manual to the management reporting analyst who questioned the data from the financial reporting system.

This book distills a complex topic into what I consider the key concepts and practical applications required to function in a multicurrency reporting environment. My objective is to present a guide to foreign currency reporting for any reader. Regardless of your role or background, you can use this book to gain an understanding of foreign currency reporting. It serves as the bridge to understanding what otherwise would be disparate sources, each potentially presenting itself as arcane, recondite, or just plain difficult.

You should understand this subject from the view of multiple disciplines, even though you need not be an expert in any particular one. This book aids you in achieving that broad understanding.

That said, at times the text of the book and the examples are exacting. That is the nature of the subject. Do not expect everything to be intuitive. Reread sections until you grasp the concepts. All learning requires effort. Afterward, use and enjoy your newfound knowledge.

OVERVIEW OF THE BOOK

The chapters are grouped into three sections: The Basics, Key Concepts and Authoritative Standards, and Practical Applications (and More Concepts). Each chapter stands on its own. The chapters can be read in any order.

For the novice, reading the chapters in order takes you on a journey, first building a solid foundation in the background, history, and fundamental mechanics of foreign currency and exchange rates.

Part I: The Basics

Chapter 1 is packed with valuable material. It provides the starting context for discussion of foreign currencies and exchange rates. It dispels any misperception that the subject is as simple as multiplying a value by an exchange rate. It explains where exchange rates come from, the size of the foreign currency market, the major players in the market, and how those players “quote” exchange rates. You are introduced to exchange rates proper, including triangulation, cross rates, and the official codes by which currencies are known globally. Finally, exchange rates and foreign currencies are grounded in both their recent history and the macroeconomic role that they play globally.

Chapter 2 introduces the exchange rate table in detail. It allows you to “convert” any currency into any other currency. The concept of a base currency is emphasized, since it is the key to building the table. Common points of confusion such as reciprocals and “to” and “from” currencies are discussed so that you can avoid errors. The chapter includes six easy steps to building a reliable spreadsheet-based exchange rate table that will work for any currencies.

Chapter 3 focuses on just how precise and accurate exchange rates need to be, the limitations that computers place on exchange rates, and how extra precision can sometimes be meaningless.

Part II: Key Concepts and Authoritative Standards

Chapter 4 introduces the terminology used when referring to currencies for the purpose of financial reporting. It also introduces the dominant accounting standards from which the terminology arises. Understanding the various terms allows one to communicate and work effectively with foreign currency exchange rates.

Chapter 5 searches for the gold standard of authoritative financial reporting, the standard that best applies to foreign currency reporting. The concept of translation is introduced, the practice the uninitiated often refer to as conversion.

Chapter 6 clarifies definitively the misconceptions that even some experienced professionals have regarding different foreign currency processes and transactions. Included in the chapter are two cases where such misconceptions occurred.

Part III: Practical Applications (and More Concepts)

Chapter 7 focuses on the interplay of all the variables affecting foreign currency reporting. In particular it overlays various concepts of time onto the variables from the preceding chapters—specifically, mathematics, exchange rates, accounting standards, and economics.

Chapter 8 contemplates the impacts of exchange rates on an entity, both historically and looking into the future. Several practical examples for analyzing these impacts are introduced, as well as ideas for automating the analyses. Actual examples of how currency analysis can go wrong are included as mini case studies.

Chapter 9 continues the practical application discussion, but does so from the perspective of opportunities to improve systems and processes. Whereas Chapter 8 focused on things you should know, this chapter presents things you can learn or implement. Topics include how a chart of accounts is structured to easily segregate exchange rate effects, segregating cash from noncash exchange effects, and the merits and limits of year-to-date currency translation. Another mini case study is included as well.

Chapter 10 demystifies the topic of cumulative translation adjustment (CTA). It defines what CTA is and what it is not. The chapter shows how to calculate CTA, discusses how complex the calculation can become, and exposes some abuses both in the calculation and use of CTA. It concludes by displaying some mathematical fun in the calculation of CTA.

Chapter 11 highlights other highly relevant topics for foreign currency reporting. Currency redenomination, devaluations, and revaluations are discussed. It provides overviews of significant events such as hyperinflation, euro adoption, and disposal of a foreign operation. Inventory measured in a foreign currency and simple hedging are reviewed as well.

Appendix A presents the world’s currencies as standardized by the International Organization for Standardization (ISO). It includes the currency name, alpha and numeric codes, the names of the major and minor units (e.g., dollars and cents for U.S. dollars), and how the currency is displayed numerically.

Appendix B contains links to a wealth of resources available on the Internet, accompanied by descriptions that show why they are so useful.

Appendix C is an actual exchange rate requirements worksheet from a software implementation. It is presented “as is” so that you can see an unaltered high-level requirements document.

A glossary of key terms serves as a quick reference, especially given the importance of terminology when working with foreign currency exchange rates. Each term includes a reference to the chapter where it is discussed.

NOTE

1 Luce, H. R. (1967, March 10). “His Warm Remembrances of How It All Began.” Life 41: 38D.

Acknowledgments

Life leads you to places where your plans never would take you, and you meet incredible people along the way.

Many years later, I now have had the fortune to work with many people at several different companies, all permitting me to gain invaluable experience in multicurrency environments. At one company, John Burkett quizzed me during the interview process about the predecessor to Statement of Financial Accounting Standards No. 52—Foreign Currency Translation, and Craig Huke set me loose to implement a currency hedging program at another company.

After several years at SAS I transitioned to a multidisciplinary environment, working in research and development on a major release of a financial reporting software application. It needed to support both International Financial Reporting Standards and U.S. GAAP. I originally learned about currencies and financial reporting by gathering fragments from various sources or from direct experience. I needed to convey that knowledge to a diverse group quickly and in a concise manner without a technical veneer.

I want to thank the SAS Development team for providing me with that experience, one that prompted this book. Those colleagues included Chris Bailey, Ken Peressini, Enrico Stevanoni, Brian Young, John Madson, Ryan Norris, Qing Gong, Pete Bledsoe, Jia Li, Jon Segerstrom, Karl Moss, Yao Chen, David Dwin, Patti Brideson, Carl LaChapelle, and Deva Kumar.

My colleagues in SAS Finance proved to be valuable resources for exploring new ideas and new approaches to financial reporting applications. I am grateful to Jon Bouzigard, Jean Davidson, Matthew Rutherford, Jonathan Jones, Leigh Fernandez, David Davis, and David Schwerbrock for providing valuable feedback and acting as an in-house laboratory.

Gary Cokins, a well-known author and expert in his field, helped me navigate the publishing process. He provided insight, inspiration, and encouragement throughout the process.

I am grateful for Defne Garner, Amy Davis, and Cyndi Williams. They brought great depth and breadth of experience to the subject and willingly read every page, table, and exhibit. The book benefited greatly from their insights, comments, and edits.

Many thanks as well are due to the patient and talented people at SAS Publishing and John Wiley & Sons. I would like to acknowledge Stacey Hamilton, Shelley Sessoms, Shelly Goodin, and Julie Platt of SAS Publishing, and Sheck Cho, Stacey Rivera, Laura Cherkas, and Helen Cho of John Wiley & Sons. Also, thank you to those who reviewed the book anonymously—those were the edits that started me off on the right foot.

I especially want to thank Colin Squibb Reeves. To call her a writer would greatly understate her broad knowledge, ability, and wisdom. She painstakingly reviewed each sentence of my manuscript, applying her 40 years of experience.

Finally, I thank my family for enduring my absences as I worked on the manuscript. Without their patience and encouragement this book would not have been possible.

ROBERT ROWAN

[email protected]

(I welcome your e-mails.)

© Michael Maslin/The New Yorker Collection/www.cartoonbank.com.

Introduction to Foreign Currency and Exchange Rates

We know accurately only when we know little; with knowledge doubt increases.1

—Johann Wolfgang von Goethe, Sprüche in Prosa2

WHO YOU ARE

You are anyone in an organization working with multicurrency financial information—anyone from the chief executive officer, the chief financial officer, or the chief information officer to the manager, the computer programmer, the financial analyst, or the general ledger accountant. The world economy requires you, a citizen of the world, to have a fundamental working knowledge and awareness of the topics.