Work Text:
“Okay I think I understand all this.”
“You do? Wait that fast?”
“Of course. I’m the best. Now okay, which chapter did you need to review specifically?”
“Okay so… I think i got chapter 7 pretty down pat… can probably use a few review rounds but it’s not a big deal. Chapter 8 is pretty short but I dunno what that second page of the excel is at all… Chapter 9 is a lot but i think i remember all of it. Pretty straightforward. Um… chapter 10, oh god all those entries… chapter 11 is all memorization so i gotta do that too…”
“...that’s literally every chapter you’re getting tested on. That doesn’t narrow down anything at all.”
“Yeah yeah and that’s why i’m hereeeee.”
“Fine alright. Chapter 10 was it? Let’s look at that. Frankly i don’t understand what you might be confused about.”
“Hedges! What the fuck even is hedge accounting?”
“I mean your slides kinda lay it out pretty frank…”
“No no. Seriously. What does, what does it mean?”
“Look, it says here. Hedging is transferring risk. Yeah? Like moving risk from someone who wants to avoid it to someone who’s willing to take it. In your chapter it’s about foreign exchange rates but honestly I haven’t had to deal with that ever since shanx became the universal currency.”
“God please let earth governments adopt shanx when you guys take over please i don’t wanna do exchange rates anymore.”
“Sure i’ll pass that along. Okay so that’s what hedging means. Do you remember what’s a hedged item?”
“No.”
“You did review right?”
“Shut up”
“So a hedged item is the thing exposed to risk.”
“Oh so like the cash! Ah no um… the A/R? Or i guess A/P if you’re the buyer… supplier? Wait, which side are we normally?”
“Uhh supplier. Most of your examples use A/R.”
“Right right so the hedged item is what’s exposed to risk. And when using uhhhh non-hedge accounting you directly adjust value of that account on the… transaction date, reporting date and… succession…. Date???”
“What?”
“No no i got it i know it starts with S uhhhhhhh… SETTLEMENT on the settlement date.”
“Yes but small correction. No adjustments on the-”
“NO ENTRY ON THE FIRST DAY YES yep just memo to record the deal. I think in cash flows and fair value hedges nothing is recorded on transaction date but something is recorded on the uhhh date that the… God i know the acronym is FC but what does that stand for…..?”
“Forward…”
“Forward contract! Yes! Nothing on TD, contract created on FC wherein adjustment is made to record the difference between… uh current forward rate vs initial spot rate?”
“Okay I have no idea where you even are right now.”
“Monetary hedge item? No, firm commitment! No… wait. Was it both? I think it’s both right? Just depends if you’re using hedge accounting.”
“Not quite the correct distinction. The two things your example recorded entries on for monetary item are on the item itself versus on the instrument, so the forward contract. That other stuff with FV and CF are for unrecognized firm commitment.”
“Fuck… okay… Can you have a monetary hedged item when using an unrecognized firm commitment?”
“I think so, that’s just the first example in Q3 right?”
“Yeah i think that’s it. Okay! Okay good. We’re on track.”
“So were you trying to remember the steps for the entries to make for the 3 methods under unrecognized firm commitment?”
“Think that’s a good place to start yeah. So for no hedge accounting. On TD I’m fairly sure it’s no entry. That’s the same for all of them. When the FC is created we uh… we do? Record something? Wait that doesn’t feel right.”
“Yeah that’s cuz you’re confusing it with the entries on hedged item.”
“FUCK legit? Damn it! Okay wait what the fuck do you even record for that? Like… difference between initial spot rate and current forward rate?”
“Nah, initial spot rate and current spot rate.”
“Right! Right cuz entries for the item itself never deals with forward rate, just spot rate. FC only deals with spot rate until we reach settlement and by then it’s the same as forward rate anyway right?”
“Yes… Yep that’s right.”
“YES! Okay good! That’s good. So step by step. First with no hedge accounting on the financial instrument aka the FC. on TD we do nothing, on contract date it’s also no entries. On first RD we record debit—and it’s always debit—exchange gain or loss and credit FC. amount would be the total amount times the difference between the forward rate now vs the amount when the FC was created… right?”
“Good so far.”
“Okay so we continue that for however many periods there are until the settlement date. On that day we get the inventory so we’ll… hey weren’t we the supplier?”
“Yeah i think your example swaps between the two.”
“Okay whatever. Debit cash credit A/R for supplier and debit inventory credit cash for buyer. And this is recorded at current spot rate for the foreign currency.”
“Yes.”
“And then… for the difference we gotta record that by… ah as always in exchange gain or loss. Debit exchange gain/loss, credit FC again. And then a new entry clearing all of that out into uhhhhhhhh…. Just cash right?”
“I mean, that’s one way to look at it.”
“Right yes! Cuz we’ve been adjusting FC this entire time to make up for the changes the difference between the final cash in the foreign currency at spot rate vs what we get from the bank at the forward rate when the FC was created should be the exact aggregate of what’s in the current FC account. And since we’ve been crediting FC this entire time no matter if it’s gain or loss then we can just adjust whether it’s credit or debit foreign vs cad cash based on that.”
“That definitely works.”
“Good! Good very good. And that’s how it works for no hedge accounting, tho frankly i’m still not too sure why it’s called that… but still let’s see for cash flows hedge it should all be the same with the previous process except we use OCI - exchange gain/loss rather than just exchange gain/loss. And at the end we empty it out directly into inventory or A/R. i feel like there’s probably another entry I’m forgetting but i’m not sure…”
“That was it actually. Emptying out the OCI into inventory is the only step that doesn’t directly match with another one in the other.”
“Oh perfect! That’s wonderful good good good. Everything else all the same? Down to the numbers?”
“Yeah it all looks exactly the same. What even is the point of this whole system if it’s exactly the same?”
“Yeah i’m not getting tested on that i don’t care. Okay finally! Fair value! So for this one i know we create a whole new commitment asset that we empty the FC into every time it gets filled up with something. So entry is… debit FC credit commitment asset, at every reporting date and at the end. Everything else should look just like the entries without hedge accounting. And at the very end there’s some kinda emptying thing just like OCI…”
“Mmhm.”
“Is it also into inventory?”
“That’s right!”
“HOLY FUCK YEAH! That’s it! Right? That’s the whole chapter!”
“Well there are a whole bunch of trial balances at the end there…”
“Oh, ugh, ughhhhhh god i didn’t even look at those… hmmmghm”
“I mean it’s not a whole lot. Just like the entries they seem pretty much the same.”
“...oh it’s literally just listing the differences. Alright then that’s fine. Okay! I’m all set for this chapter!”
“I feel like you need some more practice.”
“Nooo no shush no i’m good i’m done chapter 10 is over! Okay chapter 11 oh god oh my god.”
“Do i need to call a medic?”
“No it’s fine it’s okay i just, god i really didn’t practice for this chapter like it’s literally just exchange rates it’s ALL exchange rates and which historical costs to use hhhnghh…”
“Uh, yeah?”
“And like, when i was working i didn’t have to do ANY of this shit!!! And i specifically did cross-border tax! And none of this even mattered! Like genuinely I get that this class is all about consolidations which wasn’t my job but you’d think? I would’ve at least encountered it? Like, my JOB was cross-border tax returns!”
“So are you gonna keep complaining or are we gonna get this final chapter reviewed?”
“Technically there’s also a chapter 12 but that one’s just theory so i’ll beat it into my brain tomorrow. Oh god it’s nearly 9pm my brain shuts off at 9pm oh no.”
“Maybe then you’ll finally let me go…”
“No i’ll start i’ll start! Alright so, chapter 11. Uhh FCT versus PCT, functional currency and presentation currency. Not too sure when which should be used but i don’t care at this point. The important thing is that they use different historical costs for different things.”
“Different procedures too for some areas.”
“God i need to memorize those too. Ok so the rates. FCT first. Assets first. Monetary and non-monetary at FV are at YE spot rate, non-monetary at historical cost, so equipment, are at um.. Historical cost?”
“Yes but historical cost when?”
“Uh, beginning of the year. I think. I feel like it should be when it was purchased but i know we don’t go back that far so.”
“You’re correct, it’s at start of year.”
“Good! So after that it’s equity, dividends, and… most revenues and expenses. Equity is at historical cost when acquired, so start of year. Dividends always when declared. Most revenues and expenses are average rate over the year. I can’t remember which account is next….”
“It’s tied to one of the asset accounts.”
“Depreciation! That should also be at historical cost start of year, whatever it was for equipment. For PCT i think it’s average over the year, right? Most of it takes the average. All assets use YE spot rate under PCT, equity, dividends, revenues/expenses are all the same between FCT and PCT. and COGS… oh god does PCT even have COGS? I know it’s missing the last ones at the bottom but COGS…. Wait. FCT doesn’t have COGS, but PCT does and uses average rate?”
“You’re right! Damn i really didn’t think you’d get that!”
“Holy fuck let’s go! Okay down to the last three! I know they’re all under FCT, for uhh purchases and… inventory! Cuz they don’t use COGS so you gotta figure it out. So opening inventory uses opening spot rate, purchases uses… average rate? I know the ending inventory uses the rate for whenever that group of inventory was purchased. Actually i think that might be the case for the opening inventory too if it’s provided.”
“Basically yeah. Opening and ending inventory uses spot rate on the dates acquired, purchases uses average rate throughout the year.”
“FUCK YEAH! Perfect we can move on from that. I need to remember all the goddamn process for the goddamn statements. Just… long as i remember these rates, i just need to know for what accounts i need to figure shit out instead of directly converting them.”
“Yeah with the way things are moving there’s no way you know this stuff. So I’ll just read them out for you. FCT first. You’re looking at the I/S, RE, and B/S, okay?”
“Mmhm…”
“For IS there are two accounts that you’ll need separate schedules for, change in inventory and FX gain/loss.”
“Ah right change in inventory cuz they don’t use COGS.”
“Exactly, wanna guess how you get that?”
“So… opening inventory plus ending inventory minus purchases? All using the rates previously described?”
“Ah not quite. That’s how you get COGS, not change in inventory.”
“MOTHER FUCK-”
“Change in inventory would be just opening inventory minus ending.”
“Hhhnngggg…”
“And how would you get the FX gain/loss?”
“Uhhhh… i think…. Change in… monetary position?”
“Not quite, that’s one of the first steps in the schedule for finding FX g/l.”
“Oh my god…”
“I could leave you know.”
“No no i got this. I can do this. Um. to find the FX gain/loss you need to separately calculate what the… um, NET monetary position is at end of year, then compare to the actual net monetary position.”
“Correct.”
“And to get that, you would… uh, find the opening net monetary position, add up all the changes throughout the year at the correct rates, right?”
“Correct again. And how would you get the opening net position?”
“...the question gives me that?”
“No.”
“Ugh… add up the starting monetary accounts?”
“Which ones are those?”
“I don’t know… Cash, A/R… oh current liabilities?”
“Yeah pretty much. Your example has loan payable but i think you’ll know that.”
“Oh yeah i would. Okay so that’s how you get the starting net position. Just stack on all the monetary changes throughout the year with like… sales, expenses, dividends n all… all at average rate except for dividends which uses issue spot rate… right opening net position uses opening spot and end using end spot… compare with actual amount… yeah?”
“Yeah that’s it!”
“Holy fuck wait that’s it?”
“That’s it.”
“Oh my god I’m free.”
“I mean, I can tell you’re barely holding all this information in your brain at all. Like any second now you’ll get jostled and it’s all gonna tumble out your ears.”
“That’s fine, I’ll review everything when I’m sleeping tonight.”
“...humans can do that?”
“Nah, just me. Not reliably but eh I’ve done it enough times. Anyway thanks a ton for the help!”
“Yeah, yeah whatever. Long as you keep signing that lease on the hanger it’s not like I got much of a choice.”
“Honestly I’m still surprised nobody found out yet.”
“What, your name on the building that we’re using as a base?”
“Yeah! I mean, in this economy? Someone like me leasing a whole aircraft hanger? For private property? Genuinely no idea how that ever got through.”
“Don’t ask me. Anyway are we done? It’s like 5 minutes till 9pm.”
“Oh you’re right. Sorry for the bother. I’ll sign off now. Thanks again! I’ll pay you back somehow!”
“Get me some gullible idiots who falls for simple scams and we’ll call it even.”
“Hah sure, I’ll direct some of my classmates your way. Anyway see ya!”