foreign Currency IAS 21

Question 1

What is the currency that an entity should use under IAS 21

Answer 1

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

Question 2

Accounting for foreign transactions:

How to account at the initial recognition

Answer 2

Use th espot exchange rate at the date of the transaction. An average rate can be used if rates do not fluctuate significantly

Question 3

Accounting for foreign transactions:

How to account for monetary assets and liabilities at reporting date?

Answer 3

Translate at the closing rate (y/e rate)

e.g. Cash, trade receivables, loans, trade payables, pension liabilities

Gains are losses reported in P&L

Question 4

Accounting for foreign transactions:

Do you need to account for Non-monetary items at historic at historic cost?

Answer 4

Do not retranslate!

Remain at historic rate at date of original recognition transaction.

e.g. PPE, intangibles.

Question 5

Accounting for foreign transactions:

How to account for non-monetary items measured at FV at reporting date?

Answer 5

translate at exchange rate when FV was measured

treat exchange gains/losses consistently with FV gains/losses (P&L/OCI)

Question 6

Conceptual issues of IAS 21 functional currency:

Commentators have criticised IAS 21 that the standard recognises exchange gains and losses to P&L before they are recognised, why might this be an issue?

Answer 6

It constraints faithful representation of the financial statement as well as reliability to the users. making the information less useful.

Question 7

Conceptual issues of IAS 21 functional currency:

Commentators had also pointed out that IAS 21 causes volatility that exchange fluctuations on uncleared positions (e.g. receivables and payables) cause to the P&L. Why might this be a problem?

Answer 7

Because the volatility reduces the reliability of the information, making it less useful to the users. Not only to this, it could also affect companies badly that utilise a lot of uncleared positions.

Question 8

Conceptual issues of IAS 21 functional currency:

Standard setters justify the treatment as they highlight the symmetrical treatment of P&L and claim that short-term items (receivables/tradables) the ultimate cash realisation is reasonably certain. What does this mean?

Answer 8

It means the gains/loss meet the definition of income and expense from the conceptual framework.

And normally we recognise income/expense in the P&L

Question 9

Conceptual issues of IAS 21 functional currency:

However for longer term items, the standard setters’ argument is invalid and subject to criticism, why?

Answer 9

Because gains/losses reported in one period may reverse in future periods -> causes fluctuations.

Because of the volatility, some argue that it should be recorded in the OCI to limit the effect on the financial statement.