Foreign currency Transactions Flashcards
What is IAS 21 about
The effects of changes in foreign exchange rates.
It provides guidance on how an entity accounts for transactions that arise in a currency other than its own.
What 5 areas does IAS 21 cover:
1 Buying goods internationally
2. Selling goods internationally
3. Receiving income from foreign investments
4. Acquisition of foreign subsidiaries
5. Consolidation of the above into the group financial statements
What is the functional currency:
The currency in which the entity needs to prepare its financial statements.
This is the currency of the primary economic environment in which the entity operates.
What is the presentation currency:
This is the currency that may get used in financial statements for the purpose of for example raising finance in another country.
How to calculate the exchange rate for the purpose of IAS 21:
The base rate is 1.
So if the base rate is USD and the this needs to be converted to GBP. Then 1 USD is x GBP,
What is the spot exchange rate:
This is the exchange rate for immediate delivery
What is the closing rate:
This is the spot exchange rate at the end of the reporting period
What is Exchange difference?
This results from translating a currency into another currency using different exchange rates.
An exchange difference gets booked as a Loss in the accounts
Functional currency and subsidiaries:
- Subsidiaries are separately assessed on what their functional currency is.
- The relationship with the parent is taken into account.
- The more independent the subsidiary is the more likely that it will use its own functional currency.
- The assessment is based on how the subsidiary pays for goods and services, wages, and where their income stream comes from.
Recognition of a transaction in a foreign currency in the financial statements:
Initial recognition should be in the Functional Currency on the date that IFRS stipulates the transaction should be recognised.
The exchange rate used should be the spot exchange rate on that date.
What is the Settlement Date:
This is when the cash is actually paid. When the settlement date is different from the transaction date, this leads to an Exchange Difference.
What to do with FX rate when you have assets or monetary assets in your financial statements at the end of the financial year.
Monetary assets:
(Receivables, payables, cash and loans)
These need to be revalued at the spot exchange rate on the last date of the reporting period.
This may lead to a profit or loss. The Monetary Asset is revalued in the financial statements.
For Non-Monetary assets (inventory for example), these don’t get revalued. They stay on the financial statements at their historic exchange rate.
Rules for FX for subsidiaries, before consolidating financial statements with the parent’s financial statements:
- There is no distinction between monetary and non-monetary assets. (Which applies to single entities)
- All assets and liabilities are revalued at the end of the reporting period.
Share Capital and ‘Pre-acquisition’ reserves:
- the are translated using the exchange rate at the date of acquisition, at the historic rate
Post-acquisition reserves:
They are the balance =
(Total assets -/- Current liabilities -/- Share Capital and Pre-acquisition retained earnings)
What about the non-current liabilities in the above?
How to calculate Closing Net Assets in group accounting when FX applies:
= Opening Net Assets + Total Comprehensive Income (TCI)
How to calculate Opening Net Assets =
Total Assets -/- Total liabilities from the previous year’s SOFP (= last year’s total equity)
Net assets = Total Equity
Total Equity = Share Capital + Reserves and Retained Earnings
How to allocate exchange loss in group financial statements:
Take the total exchange profit or loss and allocate proportionately to:
1) Group translation reserve
Or Translated Post acquisition reserves
2) Non-controlling interest
How to calculate TCI (= Total Cash Inflow during a period) Or total comprehensive income.
= Closing retained earnings -/- Opening retained earnings
= often (profit + OCI)
How to translate Goodwill into another currency:
Use closing rate at the reporting date.
