Chapter 5 - Foreign currency

Question 1

Historic rate

Answer 1

rate in place at the date the transaction takes place, sometimes referred to as the spot rate.

Question 2

Closing rate

Answer 2

rate at the reporting date

Question 3

Average rate

Answer 3

average rate throughout the accounting period.

Question 4

Monetary items

Answer 4

Assets and liabilities to be received or paid in a fixed amount of currency.

e.g. Receivables, Payables, Loans.

easily converted into cash

Question 5

Non­-monetary items

Answer 5

Items that give no right to receive or deliver currency/cash

e.g. Inventory, Property, plant and equipment.

Question 6

Functional currency

Answer 6

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

Question 7

Presentation currency

Answer 7

the currency in which the financial statements are presented

Question 8

Initial transaction

Answer 8

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.

Question 9

Settled transaction

Answer 9

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.