M4: Foreign Currency Transactions

Question 1

How should you translate and recognise a foreign currency transaction?

Answer 1

Translate: You should translate the current using. the spot exchange rate (the immediate delivery exchange rate)

Recognise: Convert into the function currency of the business.
e.g. payable of $26,000 into GBP. at 1.3 rate = £20,000
Dr SPL - Purchases 20,000
Cr Bank 20,000
Being the purchase of goods for cash

Question 2

How should you recognise the settlement of credit transactions?

Answer 2

We record a Trade payable instead of cash.

I.e.
Dr SPL Purchases
Cr Trade payables
Being the purchase of goods on credit

Question 3

How should you present exchange differences when the goods at not immediately paid for in cash?

Answer 3

We calculate the difference between the payment on the day we if we paid cash vs day we actually paid. Any Gain or loss is recorded in the SPL

Question 4

Explain what the journal would be if we recorded a 20k Trade payable on the day we received the goods but on the day we settle the credit transaction the actual cost is now 21k.

Answer 4

We reverse the 20k and record an additional 1k to Exchange loss

Dr Trade payables 20,000
Dr SPL - exchange loss 1,000
Cr Bank 21,000

Question 5

How do you present exchange differences on settlement for the following type of transactions:
- Trading transactions (Goods/Services)
- Financing transactions (Loans)

Answer 5

Trading transactions:
We present exchange different in the operating expense/income section of the P&L

Financing transactions:
We present as a finance cost or finance income part of the P&L

Question 6

If we sell goods on credit in foreign currency, what is the journal entries to record on the day and if we made an exchange loss?

i.e. the exchange rate worsened resulting in less revenue when we settled on the receivable date

Answer 6

Journal recorded on the day:
Dr Receivable
Cr SPL - Revenue

If we made a loss:
Dr Bank
Dr SPL - Exchange loss
Cr Receivable

Question 7

When should ‘foreign’ assets and liabilities be retranslated at the reporting date?

Monetary and non-monetary (historical and FV)

Answer 7

Monetary: Re-translate using the closing rate

Non-monetary at historical cost: Do not re-translate. Measured using exchange rate at acquisition

Non-monetary at Fair Value: Re-translate using the spot exchange rate on the day of the most recent valuation

Question 8

If we buy an asset at cost in July on credit, with a y/e of 31.12.2025. What do we do at the year-end with the Trade payable we initially recorded?

Answer 8

We re-translate the trade payable using the closing exchange rate. Any differences go to the SPL.

Question 8

How are exchange differences on retranslation recognised?

Answer 8

Monetary: Recognised in the SPL

Non-monetary (Historical): Recognised in the SPL

Non-monetary (Fair value): Differences recognised in OCI for PPE Reval. If its an investment property, we recognise difference in SPL.

Question 9

When we have re-valuation on PPE, what can a gain or loss be broken down into when we have different exchange rates from purchase?

Answer 9

We can break the gain/loss into:
- Exchange rate loss/gain
- Revaluation gain/loss

i.e. what would it be if the cost stayed the same at the new rate = exchange rate gain/loss

We can then analyse what the revaluation gain/loss is at the actual value/new rate