| Author |
|
Payal123
Major Contributor
Joined: 08 Jan 2009
Location: United States
Online Status: Offline
Posts: 330
|
| Posted: 22 Aug 2009 at 14:25 | IP Logged
|
|
|
The Functional Currency of Nash Incs subsidiary is the French Franc. Nash borrowed French Francs as a partial hedge of its investment in subsidiary. In preparing consolidated F/S, Nash's translation loss on its investment in the subs exceeded its exchange gain on the borrowing. How should the effects of the loss & gain be reported in Nash's consolidated F/S?
The correct answer is: The Translation Loss Less the exchange gain is reported as OCI.
I thought the correct answer should be: Translation Loss in OCI & Exchange gain in Net Income.
Can any1 explain why is translation loss & exchange gain netted and shown in OCI?
__________________
BEC - 87
REG - 91
FAR - 93
AUD - 87
Texas
|
| Back to Top |
|
| |
Jams
Major Contributor
Joined: 26 Apr 2007
Location: United States
Online Status: Offline
Posts: 547
|
| Posted: 22 Aug 2009 at 15:21 | IP Logged
|
|
|
this is translation as well as hedging problem, translation loss goes to "OCI" so is effective portion of hedging. thats why they have netted it. if it was ineffective portion your answer would be correct.
__________________
jams
BEC-76
AUD-80
REG-84
FAR-81 !!!
|
| Back to Top |
|
| |
Payal123
Major Contributor
Joined: 08 Jan 2009
Location: United States
Online Status: Offline
Posts: 330
|
| Posted: 22 Aug 2009 at 17:50 | IP Logged
|
|
|
Thanks Jams,
But how do we know that it is effective hedging?
I cannot distinguish between effective & ineffective hedge.
__________________
BEC - 87
REG - 91
FAR - 93
AUD - 87
Texas
|
| Back to Top |
|
| |
Jams
Major Contributor
Joined: 26 Apr 2007
Location: United States
Online Status: Offline
Posts: 547
|
| Posted: 22 Aug 2009 at 18:10 | IP Logged
|
|
|
The problem says that Nash borrowed francs as a hedge. Its a cash flow hedge and not a fair value because he is hedging the fluctuation of currency which is going to affect the cash flows in future. the problem tells you that he was successful in hedging it because he had a gain on the borrowing, so the currency fluctuation (translation)loss will be compensated by the borrowing gain, its a gain thats why its effective.
__________________
jams
BEC-76
AUD-80
REG-84
FAR-81 !!!
|
| Back to Top |
|
| |
Mangorange
Regular
Joined: 05 Sep 2008
Online Status: Offline
Posts: 240
|
| Posted: 22 Aug 2009 at 18:14 | IP Logged
|
|
|
In becker's book it says "gains/losses on the ineffective portion of a cash flow hedge are reported in current income" So when there is a gain how do we know if it's effective or ineffective?
__________________
REG-Apr.06 - 97
BEC-Apr.29 - 86
FAR-Aug.31 - 92
AUD-Nov.23 - 97
|
| Back to Top |
|
| |
Active Topics 
Memberlist 
Search 
Help
Register 
Login
Topic: Foreign Currency
Topic Closed)
