Foreign currency

Question 1

The objective of IAS 21

Answer 1

• to produce rules that an entity should follow in the translation of foreign currency activities

Question 2

Definitions of exchange rates:

Answer 2

• Historic rate: rate in place at the date the transaction thanks place, sometimes referred to as the spot rate
• Closing rate: rate at the reporting date
• Average rate: average rate throughout the accounting period

Question 3

Monetary items:

Answer 3

items that can be easily converted into cash, e.g. receivables, payables, loans

Question 4

Non-monetary items:

Answer 4

items that give no right to receive or deliver cash, e.g. inventory, plant and machinery

Question 5

Types of currency

Answer 5

Functional currency: the currency of the primary economic environment in which an entity operates
Presentation currency: the currency in which the financial statements are presented

Question 6

Primary factors of functional currency

Answer 6

• the currency that mainly influences sales prices for goods and services
• the currency of the country whose competitive forces and regulations mainly determine the sales price of goods and services
• the currency that mainly influences labour, materials and other costs of providing goods and services

Question 7

Secondary factors of functional currency

Answer 7

• the currency in which funds form financing activities are generated
• the currency in which receipts from operating activities are retained

Question 8

Initial transactions / mechanics of translation

Answer 8

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

Question 9

What if transaction is settled?

Answer 9

• translate at the date of payment/receipt using the historic rate prevailing at that date
• as this may be different to the initial transaction an exchange difference may arise, this is posted to the statement of profit or loss

Question 10

Unsettled transactions

Answer 10

• at the reporting date, there will be an outstanding asset or liability on the statement of financial position
• if the asset/liability is a monetary item it should be retranslated at the closing rate
• if the asset/liability is a non-monetary item it should remain at the historic rate
• exchange differences will arise on the retranslation of the monetary items, and these are also posted to the statement of profit or loss

Question 11

Treatment of exchange differences

Answer 11

• if the exchange difference relates to trading transactions it is disclosed within other operating income/operating expenses
• if the exchange difference relates to non-trading transactions it is disclosed within interest receivable and similar income/finance costs