Chapter 21 Melville - FX

Question 1

What is IAS 21?

Answer 1

IAS 21 - the effects pf changes in foreign exchange rates

Question 2

What does IAS 21 state?

Answer 2

that an entity may carry on foreign activities in two ways. On the one chard, the entity may have transactions which are exposed in a foreign currency. On the other hand, the entity may have a foreign operation. Furthermore, an entity might present the financial statements in a foreign currency.

Question 3

Define an entity functional currency

Answer 3

The currency of the primary economic environment to which the entity operates

Question 4

Define foreign currency

Answer 4

a currency other than the functional currency of the entity

Question 5

what is an entity’s presentation currency?

Answer 5

the currency in which the financial statements are presented

Question 6

What is a foreign operation?

Answer 6

An entity that is a subsidiary, associate, joint arrangement or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity.

Question 7

What factors determine functional currency? 3

Answer 7

1. The currency that mainly influences sales prices for its goods and services (which is often the currency in which these prices are denominated and settled.
2. the currency of the country whose competitive forces and whole regulations mainly determine the sales prices of its goods and services
3. the currency that mainly influences labour, materials and other costs of providing goods and services

Further factors such as
Financing currency - loans etc
Receipts from operating activities

Question 8

How does IAS21 define a foreign currency transaction?

Answer 8

a transaction that is denominated or requires settlement in a foreign currency. this includes:

1. the purchase of sale or goods whose price is denominated in a foreign currency
2. the borrowing or lending of amounts which are denominated in a foreign currency

Question 9

How are FX transactions initially recognised? 3

Answer 9

by applying the spot enhance rate between the functional currency and the foreign currency as at the date of the transaction.

1. foreign currency monetary items should be translated using the post exchange rate at the end of the reporting period (the closing rate)
2. non-monetary foreign currency items carried at historical cost should be translated using the exchange rate at the date of transaction which gave rise to the item
3. non-monetary foreign currency items carried at fair value should be translated using the exchange rate at the date that the items fair value was measured

Question 10

The carrying amount of inventory which is measured in a foreign currency is determined by taking the lower of: 2

Answer 10

1. its cost translated at the exchange rate at the date that it was acquired and
2. its NRV, translated using the closing rate at the end of the reporting period

Question 11

Process of translation to a presentation currency 3

Answer 11

1. assets and liabilities in the statement of financial positions are translated at the closing rate at the end of the period
2. income and expenses shown in the statement of comprehensive income are translated at the exchange rate in which the transaction took place. Average exchange rates may also be used
3. the resulting exchange differences are recognised in other comprehensive income and are accumulated in a separate component of equity