Foreign Currency Transactions

Question 1

Foreign currency transactions

Answer 1

occurs in a different currency than the companys functional currency

Question 2

Functional currency

Answer 2

currency of the primary economic environment in which the company operates / the currency used in day to day operations

Question 3

Initial Measurement of foreign currency transactions

Answer 3

-when FX transaction entered, record the transactions using the spot rate aka the rate at the date of the transaction (or average rate for transactions that occur evenly during year such as sales, interest earned or paid, etc)

Question 4

Spot rate

Answer 4

exchange rate at the date of transaction of reporting date

Question 5

Subsequent Measurement of foreign currency transactions

Answer 5

• Monetary items (receivables/payables/loans): translated at closing exchange rate and G/L recognized in net income
• Non-monetary items (prepaid exp./PPE/Intangibles): measured at historical cost. the rate is not updated until sold. however, if using the revaluation method, the rate at the revaluation date will be used to translate.

Question 6

Foreign currency transactions - Disclosure rules

Answer 6

• entities functional currency
• FX G/L on the Income statement
• if change in functional currency during the year: nature and rationale

Question 7

Determining functional currency

Answer 7

-Primary factors (currency influences sales prices fore goods/services, currency of country whose competition determines the sale price, currency influencing input costs)
-Secondary factors (currency in which funds/receipts are generated from financing activities or trained from operating activities)