Shaw is a Northeastern company that manufactures hockey sticks. Ozzie Nelson, Shaws president, has decided to expand operations and has entered into a contract with a German company to purchase specialty equipment for the expansion in manufacturing capacity. The contract fixes the price of the equipment at 5 million euros, and the equipment will be delivered in five months with payments due 30 days after delivery. Ozzie is concerned that the value of the euro versus the U.S. dollar could increase during the six months between the date of the contract and the date of payment, thus increasing the effective price of the equipment to Shaw. Chuck Connors, Shaws treasurer, has suggested that the company enter into a forward contract to purchase 5 million euros in six months, thereby locking in an exchange rate for euros. Ozzie Nelson likes the idea of eliminating the uncertainty over the exchange rate for Euros but is concerned about the effects of the forward contract on Shaws financial statements. Because Shaw has not had previous experience with foreign currency transactions, Chuck is unsure of the financial statement effects.

Research the accounting standards for foreign currency transactions by accessing the accounting standards in FARS and the FASB Codification. Chuck has asked you, a staff accountant, to research the accounting for a foreign currency forward contract. Write a memo to him reporting on the results of your research; specifically, how foreign currency forward contracts are accounted for. Support your recommendations with citations and quotations from the authoritative financial reporting standards.