Chapter 10 - Foreign Currency Flashcards
What is IAS 21?
The effects of changes in foreign exchange rates
What is functional currency?
the currency of the primary economic environment in which an entity operates
when determining its functional currency a company should consider what 3 primary factors?
- 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
If primary factors are inconclusive what secondary factors should be considered?
- the currency in which funds from financing activities are generated
- the currency in which receipts from operating activities are retained
What is presentation currency?
the currency in which the financial statements are presented
When an entity enters into an overseas transaction, that transaction will be designation in what currency?
the currency of the country of the foreign country where the transaction is taking place.
What occurs with initial transaction?
normally translated using the exchange rate on the day the transaction was made. Normally called historic rate or spot rate
What occurs on the date of settlement?
The exchange rate is likely to change between the date of the initial transaction and the settlement date. There will be a difference between the value initially recorded and the value eventually paid. This will result in a foreign exchange gain or loss.
Where is the foreign exchange gain or loss recorded?
in the SPL
What are the journals made for recording exchange rate transactions?
Using historic rate:
Dr Purchases
Cr Payables
Using current date rate:
Cr Bank
Dr Payables ( same amount as above)
DR SPL - exchange loss (bal)
What is a monetary item?
Currency held and assets or liabilities to be received or paid in a foreign currency e.g., receivables, cash, payables, loans
What is a non-monetary item?
Other items in the SFP e.g., non-current assets, inventory, investments
What happens with monetary items at the year end?
Retranslated at the year-end closing rate
Any exchange difference on retranslation is treated as gain/loss in P&L
What happens with non-monetary items at the year end?
Do not retranslate
What is the double entry for monetary items at year end?
Initial transaction (initial rate) : Dr Purchases Cr Payables
Reporting Date (closing rate): if reduction in amount to pay - Dr Payables Cr SPL - foreign exchange gain
