10. Foreign currency

Question 1

What is IAS 21?

Answer 1

The effect of changes in foreign exchange rates

Question 2

What are the three types of exchange rate?

Answer 2

• Historic rate
• Closing rate
• Average rate

Question 3

What is the historic rate?

Answer 3

The rate in place at the date of the transaction

Also know as the spot rate

Question 4

What is the closing rate?

Answer 4

Rate at reporting date

Question 5

What is the average rate?

Answer 5

Average rate throughout the accounting period

Question 6

What are monetary items?

Answer 6

Items that can be easily converted into cash

e.g
Receivables
Payables
Loans

Question 7

What are non-monetary items?

Answer 7

Items that give no right to receive or deliver cash

e.g
Inventory
Plant and machinery

Question 8

What is the functional currency?

Answer 8

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

Usually the currency in which the majority of the transactions take place

Question 9

What is the presentational currency?

Answer 9

The currency in which the financial statements are presented

Question 10

What are the three primary factors in considering an entities functional currency?

Answer 10

• The currency that mainly influences the sales prices for goods and services
• The currency of the country who’s competitive forces and regulations mainly determine the sales price of the goods or service
• The currency that mainly influences labour, materials and other costs of providing goods or services

Question 11

What are the two secondary factors in determining an entities functional currency?

Answer 11

• The currency in which the funds from financing activities are generated
• The currency in which receipts from operating activities are retained

Question 12

How do we translate initial transactions in a foreign currency?

Answer 12

Translate using the historic rate at transaction date

Average rate can also be used if it does not fluctuate significantly during the accounting period

Question 13

How do we translate settled transactions in a foreign currency?

Answer 13

Translate at the date of payment using historic rate at that date.

Question 14

What do we do with the exchange rate differences that arise as a result of settling a transaction in a foreign currency?

Answer 14

Post to the statement of profit or loss

Question 15

If a monetary asset/liability is unsettled at the reporting date then how do we retranslate this?

Answer 15

Translate at closing rate

Question 16

If a non - monetary asset/liability is unsettled at the reporting date then how do we retranslate this?

Answer 16

It remains at historic rate

Question 17

What do we do with the exchange differences that arise on the re-translation of monetary items?

Answer 17

Post these to the statement of profit or loss

Question 18

How do we treat exchange differences relating to trading transactions?

Answer 18

Disclosed in operating income/operating expenses

Question 19

How do we treat exchange differences relating to non-trading transactions?

Answer 19

Disclosed in interest receivable and similar income/finance costs

Question 20

What are the two models for non-monetary items?

Answer 20

Cost model

Revaluation/fair value model

Question 21

Explain cost model for valuing non-monetary items

Answer 21

Initial translated at historic rate and carried forward at this value

Question 22

Explain revaluation/FV model for valuing non-monetary items

Answer 22

When revalued, the fair value will use the exchange rate on date of revaluation.

Gains or losses on exchange are not separately recognised.