Options on the other hand are contractual agreements where one is given a right to exchange foreign currencies at a pre-agreed rate on a specific date in future. In this case however, the buyer has an option to exercise the contract or not therefore in the event that the foreign currency depreciates, he can opt to pay at the spot rate (Hull, 2006). It is therefore clear that forward currency options are more advantageous than forward contracts in the case of ABC.
The calculation of income using the historical cost model means that costs are recorded in the income statement at their historical value or the actual cost when they were incurred. This method does not consider the current market value of the item. Liabilities are therefore recorded at their actual historical cost and it is assumed that there is no change in their value (money has a constant purchasing power) (Power, 2010). The calculation of income using the current cost model on the other hand means that the liabilities and assets are measured using their current realisable or market value. In this case, the measurement of the costs is considered to be more relevant and therefore the amount of income calculated using this method is also considered to reflect the current state of affairs in the firm. It is therefore clear the current cost model provides a more accurate calculation of income since the costs are measured at fair value (Laux & Leuz, 2009).
Translation of financial statements prepared in a foreign currency is a critical part of financial reporting in that it allows for foreign investors to understand the financial statements in terms of the principles used in the preparation as well as the figures in terms of the local currency. An investor will therefore be able to make their decisions based on the specific valuations of the company in their local currency while in a case where they are not translated.