Foreign Currency

Question 1

what does IAS21 Cover?

Answer 1

IAS 21 covers the effects of changes in foreign currency exchange rates.

Question 2

How is Functional currency defined and identified?

Answer 2

Functional currency is the currency of the primary economic environment an entity operates in. It is usually also the currency the majority of the entities transactions take place in.
Primary Factors that identify a functional currency are;

• The currency that mainly influences sales price for goods and services.
• Currency of the country who’s competitive forces and regulations influence sales price.
• Currency that mainly influences Labour, Material and other costs.

Secondary Factors;

• Currency that funds from investing are held in.
• Currency that receipts from sales activities are held in.

Question 3

What is a presentation currency?

Answer 3

Presentation currency is the currency that Financial statements are presented in.

This is not defined in IAS 21, functional currency is.

So basically you can present statements in any currency you choose, but the transactions must have initially been recorded in the functional currency.

Question 4

When are transactions in foreign currency translated to the functional currency and what other considerations are there?

Answer 4

Overseas transactions must be converted to an entities functional currency before they are recorded.

Initial Transaction - Translated at the exchange rate on the date of transaction, known as spot or historic rate.

Settlement date - The change in the exchange rate between transaction and settlement date will result in a ForEx gain or loss which is recorded in the SPL.

Question 5

How are unsettled balances for overseas transactions dealt with at the reporting date?

Answer 5

Monetary items - These are retranslated using the closing exchange rate, gains or losses are taken to the SPL.

• Trade receivables & Payables
• Bank balances

Non-Monetary items - These should not be retranslated. If an item is held at fair value this should be translated and gains/losses take to the P&L.

• Non-current assets
• Inventory, WIP & Finished goods.