12. Group Accounts - Foreign Exchange Transactions

Question 1

What is a company’s functional currency?

Answer 1

The currency of the primary economic environment in which the entity operates - FACT

Question 2

What is a company’s presentation currency?

Answer 2

Currency in which the financial statements are presented - CHOICE

Question 3

What 4 things does an entity use to determine its functional currency?

Answer 3

1. Currency that sales prices are set in
2. Currency that receipts are kept in
3. Primary labour and materials currency
4. Currency in which finance is raised

Question 4

When will a foreign subsidiary use the same functional currency as the parent?

Answer 4

When they are an extension of the operating activities of the reporting entity, and/or transactions with the parent represent a high proportion of total activities

Question 5

How are foreign currency transactions initially measured?

Answer 5

Using the spot rate at the date of transaction

Question 6

What is the entry when a foreign currency transaction is settled? E.g. a liability

Answer 6

Dr Cash X + x
Cr/ Dr Foreign exchange gain or loss x
Cr Receivables X

Question 7

How are unsettled monetary items resulting from foreign currency transactions recorded at the end of the reporting period?

Answer 7

Retranslated using the exchange rate at year end and take gain/loss to the P&L

Question 8

How are non-monetary items resulting from foreign currency transactions recorded at the end of the reporting period?

Answer 8

If held at historic cost - no retranslation

If revalued - held at exchange rate at which fair value was determined

Question 9

How do we translate a subsidiary’s P&L for consolidation?

Answer 9

ALL items are translated at the average rate for the year

Question 10

How are assets and liabilities translated when consolidating the SFP with a foreign subsidiary?

Answer 10

At year end closing rate

Question 11

How is goodwill translated when consolidating the SFP with a foreign subsidiary?

Answer 11

At year end closing rate with exchange gains or losses taken to reserves

Question 12

How are share capital and reserves translated when consolidating the SFP with a foreign subsidiary?

Answer 12

At historic rate at the date of acquisition

Question 13

How are post acquisition reserves calculated when consolidating the SFP with a foreign subsidiary?

Answer 13

As a balancing figure (Share cap and Pre acqn reserves at historic rate + X = net assets at Closing rate)