Foreign Currency Flashcards
Chapter 10
What factors influence functional currency?
Primary:
- Sales prices
- Labour, material and other costs
- Where competitive forces and regulations mainly determine the sales prices of goods and services
Secondary:
- Funds from financing activities (e.g. loans)
- Receipts from operating activities are retained
What is presentation currency?
The currency in which the financial statements are presented
What is functional currency?
The currency of the primary economic environment in which an entity operates. This can be determined by looking to see if the conditions meet either the primary or secondary factors:
Primary:
- Sales prices
- Labour, material and other costs
- Where competitive forces and regulations mainly determine the sales prices of goods and services
Secondary:
- Funds from financing activities (e.g. loans)
- Receipts from operating activities are retained
How should overseas transactions be initially recorded in the financial accounts?
They should be translated into the entity’s functional currency before they are recorded
What are the potential consequences of exchange rates moving between the initial transaction and the settlement date?
A foreign exchange gain or loss will arise. This is recorded in the statement of profit or loss.
If someone is buying something from overseas on credit, what is the initial journal entry for this transaction? And what would the subsequent journal entry be for when this is transaction is finally settled, assuming a foreign exchange loss arises?
Initial:
Dr Purchases xxx
Cr Payables xxx
Settlement:
Dr Payables xxx
Dr Foreign exchange loss (SOPL) xxx
Cr Bank xxx (a Cr because the settlement is finally paid).
True or false, non-monetary items are not re-translated at the reporting date?
True
Only monetary items are translated at the reporting date (YE)
Out of monetary and non-monetary items, which are re-translated at the reporting date?
Monetary items are re-translated using the closing rate of exchange. The exchange gains or losses will go to the SOPL.
What are monetary items in terms of foreign exchange?
Monetary items are those assets or liabilities that will lead to the receipt or payment of cash. E.g. receivables, payables, loans, cash.
If a foreign exchange transaction is settled during the accounting period, where do the exchange gains/losses go to?
Any exchange gains or losses will be taken to the SOPL
If a foreign exchange transaction is non settled at the reporting date, what needs to happen?
Determine whether it’s a monetary or non-monetary item. If not a monetary item, leave at historic rate. If a monetary item, re-translate at closing rate. Any exchange differences will be posted to the SOPL.
What is the difference between functional and presentation currency?
Functional currency is the primary economic environment in which the entity operates. Presentation currency is the currency in which the financial statements are presented.
Give some examples of non-monetary items in terms of foreign exchange?
Non-monetary items give no right to receive or deliver cash, e.g. inventory, plant & machinery.
What is the difference between historic/spot rate, closing rate and average rate?
Historic/spot rate is the rate in place at the date the transaction takes place. Closing rate is the rate at the reporting date (YE). Average rate is an average rate throughout the accounting period - only use if the rates is fairly stable.
If an exchange difference relates to a trading transaction, where is it disclosed?
Within other operating income/operating expenses.
