Foreign Exchange

Question 1

Using average rate

Answer 1

For profit and loos account for things like revenue, cost of sales, depreciation and other expenses

Question 2

Using the closing rate

Answer 2

For sofp for things like equipment depreciation inventory, assets loans

Question 3

Using the opening rate

Answer 3

Capital

Question 4

Finance currency

Answer 4

The currency of the primary economic environment in which a company operates

Question 5

Ias21 - functional currency : factors to consider for primary economic environment:

Answer 5

Functional currency - primary economic environment

Factors to consider are the currency of: sales price - currency of the country whose competitive forces and regulations determine sales and prices

Labour and material costs
Financing activities (loans, share issues)
Receipts from operating activities

Question 6

Ias21-

Answer 6

IAS 21 Functional Currency

The first issue is to decide which currency a company should use for its own accounts

This functional currency reflects the primary economic environment in which the entity operates

Other foreign subsidiaries use different currencies and will need or be translated using the closing rate method

Question 7

Presentation currency

Answer 7

Presentation currency is used to make accounts easier to understand by translating to the currency of the user

Question 8

Foreign subsidiaries

Answer 8

Foreign subsidiaries may share the same currency as the patent:

The foreign subsidiary may be in a common currency with the parent

The foreign subsidiary may have very little autonomy from the parent in which case IAS 21 stipulates that the subsidiary use the same functional currency as the parent

Question 9

Comments on closing rate method

Answer 9

Closing rate/net investment method is simple to use and easy to understand

Losses on exchange don’t affect the profits of the group (reserves)

Used by nearly all US companies and the requirement of IAS 21

Question 10

Temporal method

Answer 10

Monetary assets/liabilities use closing rate - e.g loan

Non monetary assets use historic date e.g. ppe

Income statement items are translated at av rate

The IAS is silent on the rate to be used for share capital so treat as same

Under temporal method exchange rate differences are taken to the profit and loss account, rather than through OCI as so the case with the closing rate method

IAS 21 does not permit use of the temporal method.

Question 11

Debate on IAS 21 (temporal method)

Answer 11

Differences in exchange only arise in relation to monetary items as non monetary items are translated at historic rate

More appropriate when subsidiary is closely integrated with the parent

It is effectively what happens for subsidiaries forced to adopt the parents functional currency as their own

Arguably less arbitrary than using the closing rate method

Question 12

Changes to account of subsidiary prior to consolidation

Answer 12

Before account of a subsidiary are translated for consolidation, Accounts must be adjusted to conform to international accounting standards. Under IAS 16, NCA must be depreciated over their useful life. Research expenditure must be written off as an expense when it is incurred, following IAS 38. It cannot be capitalised as an intangible asset

Question 13

Exchange rate for profit and loss

Answer 13

Under the closing rate method, income and expenses should be converted using the spot rate (rate at transaction date) but the average rate is permitted under IAS21 if it is not materially different