Foreign exchange ASPE 1651 IAS 21

Question 1

What are the two ways that an entity can enter into
foreign transactions?

Answer 1

ASPE 1651 and IAS 21

• It can enter directly into transactions denominated
  in a foreign currency
• It can have foreign operations (subsidiaries)

Question 2

How are transactions entered into directly (not through a subsidiary) in a foreign currency recorded at the time of the transaction and how are
the related foreign currency denominated balances treated at year-end?

Answer 2

ASPE 1651 and IAS 21

• Transactions entered into directly are recorded at the rate in effect on the date of the transaction (may use an appropriate weighted average if it produces a reasonable approximation if it is impractical to record each transaction at the rate in effect on the actual date)
• At balance sheet date translate all monetary
  assets/liabilities (and non-monetary assets/liabilities
  carried at FV) using the rate at the balance sheet date
  (all other items are left at the historical rate that was used on the date of the transaction)
• Resulting gains/losses are recognized in income

Question 3

When should the current rate method be used to
translate the financial statements of a foreign
operation?

Answer 3

ASPE 1651
* Current rate method used for self-sustaining
subsidiaries

IAS 21
* Current rate method used for operations
with a functional currency different than
the reporting currency

Question 4

What is the current rate method?

Answer 4

ASPE 1651

• Translate all assets/liabilities at current rate
• Translate revenues and expenses at rate in effect on date they occur (and average is usually used for
  practical reasons)
• Gains or losses on translation recognized in
  separate component of shareholder’s equity (there
  is no such thing as OCI under ASPE)

IAS 21
* Same except that gains or losses on translation are
recognized in OCI

Question 5

When should the temporal method be used
to translate the financial statements of a foreign
operation?

Answer 5

ASPE 1651
* Temporal method used for integrated subsidiaries

IAS 21
* Temporal method used when functional currency
is the same as the reporting currency

Question 6

What is the temporal method?

Answer 6

ASPE 1651 and IAS 21

• Translate monetary assets/liabilities at current rate
• Translate non-monetary assets/liabilities at
  historical rate
• Translate revenues and expenses at rate in effect
  on date they occur (and average
  is usually used for practical purposes)
• Gain or losses on translation recognized
  in income

Question 7

What are the factors to consider for classifying an
operation as integrated or self-sustaining?

Answer 7

ASPE 1651
* Whether cash flows of the reporting enterprise are insulated from or are directly affected by the day-to-day activities of the foreign operation

• Whether sales prices for the foreign operation’s products are determined more by local competition/regulations or by worldwide competition/prices
• Whether the sales market for the foreign operation’s products is primarily outside
  the reporting enterprise’s country or within it
• Whether labor, materials and other costs are primarily local costs, or whether the foreign operation depends on products and services obtained primarily from the country of the reporting enterprise
• Whether the day-to-day activities of the foreign operation are financed primarily from its own operations and local borrowings or primarily by the reporting enterprise or borrowings from the country of the reporting enterprise
• Whether there is very little interrelationship between the day-to-day activities of the foreign operation and those of the reporting enterprise, or whether intercompany transactions with the reporting enterprise form a dominant part of the foreign operation’s activities.
• None of the above factors are listed as being of more importance than the others

Question 8

What are the factors in determining an entity’s
functional currency?

Answer 8

IAS 21
* IFRS requires that both parent and Sub apply the factors below to determine their functional currency

‒ Primary factors
* Currency used for sales
* Currency used in regulatory and competitive
environment
* Currency used for salaries and material

‒ Other factors
* Currency for financing activities
* Currency for operating activities