Foreign Currency

Question 1

Foreign activities

Answer 1

Need for translation
Exchange rates
IAS 21: the effects of changes in foreign exchange rate

Question 2

Translation needed for:

Answer 2

Transactions in foreign currencies

Foreign operations into home currency

Question 3

Spot rate

Answer 3

Rate when transaction occurs

Question 4

Closing rate

Answer 4

Spot rate at the end of the period

Question 5

Monetary items

Answer 5

Received/paid in a fixed number of units of currency
E.g cash, accounts receivable, liabilities to be settled in cash such as accounts payable, debts, pensions
Examples of non-monetary items: inventory, PPE, intangible assets

Question 6

Accounting for foreign transactions

Answer 6

One transaction approach 
Two-transaction approach 
- Required by IAS21
Initial recognition: spot rate 
End of each period:
Monetary items---> closing rate 
Non-monetary items: spot rate 
Historical cost ---> date of acquisition 
Fair value -----> when fair value is determined

Question 7

Functional currency

Answer 7

Currency of primary economic environment in which the entity operates.
Primary indicators = sales prices, country that mainly influences sales prices, costs
Secondary indicators = funds from financing activities, receipts from operating income
If foreign operation = degree of autonomy, frequency of intra-group transactions, currency of cash flows, currency of financing

Question 8

Presentation currency

Answer 8

Currency in which the financial statements are presented

Question 9

Translation into presentation currency (current rate method)

Answer 9

-functional currency of subsidiary = presentation currency of parent
- functional currency the same as local = self sustaining
-parent is a reporting channel
Current rate/closing fate
Translation gain or loss in OCI

Question 10

Translation into functional currency (temporal method)

Answer 10

Functional currency of subsidiary = presentation currency of parent
Functional currency differs from local —–> integrated
Subsidiaries transactions as if undertakers by parent
- historical rates/spot rates
-translation gain/loss in P/L

Question 11

Current rate method - translation into presentation currency

Answer 11

Assets and liabilities —–> closing rate
Share capital —-> spot rate when the investment was acquired
Income and expenses ——> spot rate at the date of transaction/average rate
Depreciation and amortisation —–> average rate for the year
Transaction differences —–> OCI

Question 12

Translation into functional currency (temporal method)

Answer 12

Monetary assets and liabilities —-> closing rate
Non momentary assets and liabilities —-> spot rate
Share capital —-> spot rate when the investment was acquired
Income and expenses ——> spot rate at the date of transaction/average rate
Depreciation and amortisation —> spot rate used to translate the related non-monetary item
Translation differences —–> P/L

Question 13

Temporal method

Answer 13

Retains measurement unit
Translation gain/loss difficult to interpret
Extra volatility in income statement