Lynn Construction enters into a firm purchase commitment for equipment to be delivered on June 30, 2013,
Question:
Lynn Construction enters into a firm purchase commitment for equipment to be delivered on June 30, 2013, for a price of 10,000 GBP. It simultaneously signs a forward foreign exchange contract for 10,000 GBP. The forward rate on June 30, 2013, for settlement on
June 30, 2014, is $1.64 per GBP. Lynn designates the forward foreign exchange contract as a fair value hedge of the firm commitment.
REQUIRED
a. U.S. GAAP and IFRS do not require Lynn to record the purchase commitment or the forward foreign exchange contract on the balance sheet as a liability and an asset on June 30, 2013. What is the logic for this accounting?
b. On December 31, 2013, the forward foreign exchange rate for settlement on June 30,
2011, is $1.73 per GBP. Using the financial statement effects template, show the financial statement effects of recording the change in the value of the purchase commitment and the change in the value of the forward contract for 2013. Ignore discounting.
c. On June 30, 2014, the spot foreign exchange rate is $1.75 per GBP. Show the financial statement effects of recording the change in the value of the purchase commitment and the change in the value of the forward contract due to changes in the exchange rate during the first six months of 2014.
d. Show the financial statement effects of the June 30, 2014, purchase of 10,000 GBP with U.S. dollars and acquisition of the equipment.
e. Show the financial statement effects on June 30, 2014, to settle the forward foreign exchange contract.
f. How would the effects in Requirements b-e differ if Lynn had chosen to designate the forward foreign exchange contract as a cash flow hedge instead of a fair value hedge?
g. Suggest a scenario that would justify Lynn treating the forward foreign exchange contract as a fair value hedge and a scenario that would justify the firm treating the contract as a cash flow hedge.
GAAPGenerally Accepted Accounting Principles (GAAP) is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP to the International Financial Reporting Standards (IFRS), the... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...
Step by Step Answer:
a The purchase commitment and the forward foreign exchange contract are mutually unexecuted contracts as of June 30 2013 US GAAP and IFRS do not curre...View the full answer
Financial Reporting Financial Statement Analysis And Valuation A Strategic Perspective
ISBN: 1088
8th Edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
