Chapter 11 - Foreign Currency

Question 1

Objective of IAS 21

Answer 1

Produce rules an entity should follow in the translation of foreign currency activities.

Question 2

Exchange rates

Answer 2

Historic rates (HR): rate in place at the date of transaction takes place (Spot rate).

Closing rate (CR): rate at the reporting date.

Average rate (AR): average rate throughout the accounting period.

Question 3

Assets and liabilities

Answer 3

Monetary items: items easily converted into cash e.g. Receivables, payables, loans.

Non-monetary items: items that give no right to receive or deliver cash e.g. Inventory, PPE.

Question 4

Currency

Answer 4

Functional currency: the currency of the primary economic environment in which an entity operates. Usually the currency in which the majority of an entity’s transactions take place.

Presentational currency: the currency in which the financial statements are presented.

Question 5

Individual company - translating transactions

Answer 5

Initial transactions

• translate using the historic rate prevailing at the transaction date.
• the average rate can be used if it does not fluctuate significantly during the accounting period.

Question 6

Settled transactions

Answer 6

If a transaction is settled (payment or receipt occurs) during the accounting period:

• translate at the date of payment/receipt using the historic rate at the prevailing date.
• an exchange rate may arise and posted to the statement of profit or loss.

Question 7

Unsettled transactions

Answer 7

• there will be an outstanding asset or liability on e statement of financial position.
• if the asset is a monetary item, retranslate at closing rate.
• if the asset is a non monetary item, leave at historic rate.
• exchange differences will arise on the retranslation of the monetary items and posted to the statement of profit or loss.