Chapter 5 - Foreign Currency Flashcards
What are the different types of exchange rates?
Historic rate (HR): rate in place at the date the transaction takes place, sometimes referred to as the spot rate.
Closing rate (CR): rate at the reporting date.
Average rate (AR): average rate throughout the accounting period.
What is a monetary item?
Assets and liabilities to be received or paid in a fixed amount of currency.
e.g. Receivables, Payables, Loans.
What is a non-monetary item?
Items that give no right to receive or deliver currency.
e.g. Inventory, Property, plant and equipment
What is functional currency?
‘the currency of the primary economic environment in which the entity operates’ (IAS 21, para 8).
What is presentation currency?
‘the currency in which the financial statements are presented’ (IAS 21, para 8).
What is an initial transaction? What should you be wary of?
The initial transaction is normally translated using the exchange rate on the day the transaction was made. This is called the historic rate, sometimes referred to as the spot rate.
Be aware that the average rate throughout the accounting period can be used instead, but only if it does not fluctuate significantly.
What is a settled transaction?
The exchange rate is likely to change between the date of the initial transaction and the date it is settled (i.e. the date that cash is received or paid).
This will result in a foreign exchange gain or loss which must be recorded in the statement of profit or loss.
What do you do if the unsettled transaction remains at year-end?
If a transaction is still unsettled at the reporting date, there will be an outstanding receivable or payable (monetary items) on the statement of financial position
How do you treat monetary items in an unsettled transaction by year-end?
Monetary items such as receivables or payables should be retranslated at the closing rate.
Exchange differences will arise on the translation of the monetary items, These are also posted to the statement of profit or loss.
What do you do if the exchange difference relates to trading transactions?
If the exchange difference relates to trading transactions it is included within operating income/operating expenses
What do you do if the exchange difference relates to non-trading transactions?
If the exchange difference relates to non-trading transactions it is included within interest income/finance costs
How do you account for non-monetary items held at the cost model?
Non-monetary items that are held at cost are initially translated at the HR and carried forward at this value. They are NOT retranslated subsequently
How do you account for a non-monetary asset held at fair value?
A non-monetary asset held at fair value, is initially translated at the HR and retranslated at the spot rate at the date a fair value is determined.
If the change in the fair value of the item is recognised directly in equity, then any related exchange differences are also recognised directly in equity, for example, revalued property
If the change in the fair value of the item is recognised in the statement of profit or loss, then any related exchange differences are also recognised in the statement of profit or loss
How do you classify an intangible asset?
A non-monetary item
