Chapter 14 - Foreign Currency Flashcards

1
Q

Starndard dealing with foreign exchange

A

IAS 21

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2
Q

IAS 21

A

Governs the fair disclosure of gains and losses

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3
Q

IAS 21 Provisions

A

> > Objectives and definitions of functional and presentation currencies

> > Accounting for individual transactions in a foreign currency

> > Translating the Financial Statement of a foreign operation

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4
Q

Foreign Currency Activity

A

Individual foreign currency transaction
»>
Translate via Functional Currency

Foreign Operations
>>>
Translate via Presentation Currency 
>>>
Consolidate into Group Accounts
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5
Q

Two types of foreign activities

A

1) individual transactions in foreign currencies

2) Foreign Operations

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6
Q

Individual Transactions in Foreign Currencies

A

> > Purchase or sales denominated in a foreign currency

> > Borrowing or Lending funds denominated in a foreign currency

> > Acquisitions or disposals denominated in a foreign currency

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7
Q

Foreign Operations in foreign currency

A

A foreign operation, subsidiary, Associate, joint Venture, or branch conducting activities in a foreign currency

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8
Q

Types of Currencies

A

1) Functional Currency
2) Foreign Currency
3) Local Currency
4) Presentation Currency

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9
Q

Functional Currency

A

Currency of the primary economic environment

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10
Q

Foreign Currency

A

Currency other than the functional currency

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11
Q

Local Currency

A

Currency of the country in which the foreign entity is located

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12
Q

Presentation Currency

A

Currency in which the financial statements are presented

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13
Q

Determining the Functional Currency

A

> Currency that influences selling prices
Currency of the country whose competition and regulation influence prices
Currency of funds used to finance operations
Currency in which receipts are normally kept
Currency that influences direct and operational costs

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14
Q

Determining the Presentation Currency

A

According to IAS 21, its all up to the company.

Why Functional and Presentation may be different:

> Transparency
Main Investors
Funding

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15
Q

Foreign currency translation rule

A

IAS 21: Foreign currency transactions must be recorded by translating the foreign currency amount into the entity’s Functional currency based:

1) on when a transaction occurred
2) if any currency gain or loss be recorded if the exchange rate is different when the transaction is paid for

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16
Q

Initial Measurement Rule

A

Transaction recorded as:
> Spot exchange rate
> An average rate over a period of time
> Contract Rate

17
Q

Subsequent measurement rule

A

Retranslation

IAS 21: exchange rate gains or losses made from re-translation of individual transactions be recognized in profit and loss in the period they arise

18
Q

Subsequent Measurement

Monetary Items

A

Restated at the rate for the end date of the Financial Statement

19
Q

Subsequent Measurement

Non-Monetary Items

A

Items carried at historic cost are not restated

Items carried at fair value are restated at the rate for when the fair value was decided

20
Q

Translation of Financial statement of a foreign owned subsidiary

A

Financial Statement of the Subsidiary will be translated into the presentation currency of the parent

21
Q

Translation of Financial statement of a foreign owned subsidiary

Method

A

Consolidated SOFP

Goodwill, Assets and Liabilities are translated at the closing rate

22
Q

Translation of Financial statement of a foreign owned subsidiary

Method

A

Consolidated Income Statement

Income and expenses are translated at the actual rate or average rate

23
Q

Re-Translation of Goodwill

A

Restated from the closing rate of the previous reporting period to the closing rate of the current reporting period

24
Q

Re-translation of Group retained earnings

A

Profits are translated at the average rate

25
Q

Accounting for exchange rate gains and losses

Consolidated Income Statement

A

Total Exchange rate gains or losses are reported in other comprehensive income

26
Q

Accounting for exchange rate gains and losses

Consolidated SOFP

A

The group share of exchange rate gain or loss is reported as a component of equity in a foreign exchange reserve

27
Q

Foreign exchange reserve

A

This is an unrealised gain or loss, this will only be realised on its disposal.

The foreign exchange gain/loss is the reclassified as profit/loss

28
Q

Translation using presentation currency rules

A

> SOFP - Translate at average rate
Income Statement - Translate at average rate
Calculate the exchange rate difference and treat as a component of equity