In today’s global economy, it should not be hard to imagine situations in which a US company transacts business with a foreign company. This in and of itself does not necessarily present any accounting issues if the transaction is denominated in US dollars.
What happens, though, if the transaction is denominated in a foreign currency? On the face of it, the answer is that the transaction on the books of the US company needs to reflect the dollar equivalent of the foreign currency in which the transaction is denominated. In addition, if the date of the transaction and the date of the settlement are different, then the US company faces the risk of fluctuations in foreign currency exchange rates.
To protect itself from these fluctuations, the US company can purchase derivative instruments that hedge against the foreign currency exchange risks.
Chapter 10 delves into these and other issues related to foreign currency transactions. To find out more, go here.