What is the appropriate exchange rate and how are the changes in the exchange rate accounted for?
When a U.S. company such as Empress imports or exports merchandise with the price stated in a foreign currency, the foreign currency must be stated in the terms of U.S. dollars for reporting purposes.
Sometimes, there will be a foreign exchange gain. When a U.S. company purchases goods denominated in a foreign currency on account and the foreign currency depreciates before payment, there is an exchange gain. For example, this happens when Empress buys paper dolls on account from Japan and the yen depreciates before they pay for them.
When a U.S. company sells goods denominated in a foreign currency on account and the foreign currency appreciates before payment, there is an exchange gain. This happens, for example, when Empress exports bears made in the United States to Japan, and the yen appreciates before Empress gets paid for them.
Other times, there will be a foreign exchange loss.
When a U.S. company purchases goods denominated in a foreign currency on account and the foreign currency appreciates, there is an exchange loss. This happens when Empress buys dolls from Japan on account, and the yen appreciates before payment. When a U.S. company sells goods on account denominated in a foreign currency and the foreign currency depreciates before payment, there is an exchange loss. This happens when Empress exports bears to Japan, and the yen depreciates before they receive payment.
Empress uses the two-transaction treatment, or accrual approach, for imports and exports in foreign currencies, such as the Japanese paper doll imports. Under this two-transaction treatment, the initial transactions are recorded at the U.S. dollar value using the sport exchange rate. The subsequent changes in the exchange rate, until collection of receivables or payment of payables, are reflected through a restatement of accounts receivable or payable with the offsetting foreign exchange gain or loss reported on the income statement.