14: Foreign transactions

Question 1

What is the goal of IAS 21?

Answer 1

To produce rules that an entity should follow in the translation of foreign currency activities

Question 2

What is the Historic exchange rate?

Answer 2

Rate in place at the date the transaction takes place

Question 3

What is another name for the Historic rate?

Answer 3

Spot rate

Question 4

What is the Closing exchange rate?

Answer 4

The rate at the reporting date

Question 5

What is the Average rate?

Answer 5

The average rate throughout the accounting period.

Question 6

Describe Monetary items and give three examples.

Answer 6

Items that can be easily converted into cash, e.g.

• Receivables
• Payables
• Loans.

Question 7

Describe Non-Monetary items and give two examples.

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 of an entity?

Answer 8

• The currency of the primary economic environment in which an entity operates
• Usually be the currency in which the majority of an entity’s 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 determining the entities functional currency?

Answer 10

• The currency that mainly influences sales prices for goods and services
• The currency of the country whose competitive forces and regulations mainly determine the sales price of goods and services
• The currency that mainly influences labour, materials and other costs of providing goods and services.

Question 11

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

Answer 11

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

Question 12

What rate do you use for the initial transaction? 2

Answer 12

• Historic rate at transaction date

- Average rate can be used if it does not fluctuate significantly during period

Question 13

What do you do when you settle a transaction?

Answer 13

• Translate at the date of payment / receipt using the historic rate prevailing at that date.
• Post Gain/Loss to statement of profit or loss

Question 14

What do you do with unsettled monetary items?

Answer 14

Retranslated at the closing rate.

Question 15

What do you do with unsettled non-monetary items?

Answer 15

Item it should remain at the historic rate

Question 16

Exchange differences will arise on the retranslation of the monetary items. What do we do with these?

Answer 16

Post to the statement of profit or loss.

Question 17

If the exchange difference relates to trading transactions then where is it disclosed?

Answer 17

Within other operating income/operating expenses.

Question 18

If the exchange difference relates to non-trading transactions where is it disclosed?

Answer 18

Within interest receivable and similar income/finance costs.

Question 19

What are the two models for non-monetary items?

Answer 19

• Cost model

- Revaluation/fair value model

Question 20

Describe cost model

Answer 20

• Non-monetary items that are held at cost are initially translated at the historic rate and carried forward at this value.
• They are not retranslated.

Question 21

Describe revaluation model

Answer 21

• Non-monetary items that are carried under the revaluation or fair value model are initially translated at the historic rate.
• When revalued, the fair value will incorporate the exchange rate on the date of the revaluation.
• Gains or losses on exchange are not separately recognised.

Question 22

Initial treatments

Answer 22

Transactions are translated at historic rate.

Question 23

Settled transactions

Answer 23

Settlement is translated at spot rate.

Question 24

Unsettled transactions

Answer 24

• Monetary items are retranslated at closing rate.

- Non-monetary items remain translated at historic rate when cost was first measured.

Question 25

Exchange gains/losses

Answer 25

Recorded in statement of profit or loss unless movement in fair value recorded in equity, in which case the exchange gain/loss is also taken to equity.