Chapter 9 - Foreign Exchange Flashcards
(17 cards)
What standard covers foreign exchange rates?
IAS 21
What is a functional currency under IAS 21?
The currency of the primary economic environment in which the entity operates
What is the primary economic environment defined as under IAS 21?
Normally the one in which it primarily generates and expends cash
True or false:
One set, a functional currency of an entity cannot be changed
True, unless there is a change in underlying activity that warrants a change.
How does the presentation currency differ from the functional currency under IAS 21?
Entity is required to translate foreign currency items into its functional currency.
The presentation currency is the currency in which the financial statements are presented.
What is meant by monetary items under IAS 21?
Units of currency held and assets / liabilities to be paid or received in a determinable number of units of currency.
Examples are cash, receivables, payables and loans.
What is meant by non-monetary items under IAS 21?
Absence of a right to receive or obligation to deliver a fixed or determinable amount of money.
For example, property plant and equipment, goodwill, inventories and intangible assets.
What 2 stages does IAS 21 and foreign currency issues take for a group of entities?
- Individual entity level - transactions in functional currency
- Consolidation level - translation of entities into the presentation currency
Under IAS 21, how does an entity recognise each transaction?
At the exchange rate (spot rate) on the date the transaction took place (IAS 21.21)
How are non-monetary items treated at the balance date under IAS 21?
No need to restate them at the end of the reporting period using the latest exchange rates.
Non-monetary items are always carried at a value based on:
(a) the rate of exchange at the date of the original transaction
(b) the rate of exchange at the date when the fair value was determined for assets carried at fair value
How are monetary items (e.g. cash) reported under IAS 21?
Initially recognised at cost at the exchange rate on the day of transaction.
Then, at the balance date, the asset is recognised at the exchange rate at the closing date.
Difference is an exchange difference.
Under IAS 21, for exchange rate differences that arise, how should these be recognised?
Directly to the P&L for the period.
Two exceptions that require these to be recognised in other comprehensive income:
- Gains and losses on non-monetary items are reported as part of comprehensive income
- Where an entity has a monetary amount receivable from, or payable to, a foreign entity that is not intended to be settled in the near future.
How does IAS 21 say that transaction to a different presentation currency be achieved?
- Retranslating assets and liabilities for each statement of financial position presented at the closing rate each period
- Retranslating income and expenditure recorded in each statement of profit and loss and other comprehesive income presented at the exchange rates at the dates of the transactions
- Recognising all resulting exchange differences in other comprehensive income.
If an entity does business in a hyperinflationary economy, what should happen?
It should restate the financial statements in accordance with IAS 29 (Financial Reporting In Hyperinflationary Economies).
In the case of a group, where a group entity is a foreign entity, should exchange rate differences from intra-group monetary assets / liabilities be eliminated?
No.
Such differences should be reported in the profit or loss.
Where a foreign entity is disposed of during a period, how should any exchange differences be treated?
Any exchange differences are required to form part of the profit or loss on disposal.
Any amounts previously classified should therefore be reclassified from equity to profit & loss as a reclassification adjustment.
Under IAS 21, what disclosures are required?
- Total amount of exchange differences that have been recognised in profit / loss for the period, and the net amount of exchange differences recognised in other comprehensive income / equity
- If a different current is used to present the financial statements versus the functional currency.
- If a change to a functional currency has occured, then the entity is required to disclose this and why the change has occurred.
