Foreign Currency Transactions & Forward Exchange Contracts Flashcards
Define Functional Currency.
The currency of the primary economic environment that the company operates in.
What is Spot Rate?
For immediate delivery
What is Closing Rate?
End of the day
What is a Realised Exchange Difference?
- Arises on settlement
- Based on change from initial recognition and cash settlement.
What is a Unrealised Exchange Difference?
Arises on re-measurement at the end of the reporting period.
What are the 3 stages of Accounting for Foreign Currency Monetary items?
- Transaction Date - using spot rate
- End of Reporting Period - using closing rate; difference settled in P&L
- Cash Settlement Date - using spot rate; difference in P&L
What are non-monetary items?
Inventory, PPE
How is Non-monetary items accounted for?
- Initially measured at historical cost
2. Subsequent - no exchange differences if original translated cost still applies
What are 3 scenarios where exchange differences affect measurement?
- Qualifying assets
- Fair Value assets
- Write-downs & impairment
What is a Qualifying asset?
an asset that takes a substantial period of time to get ready for its intended use or sale.
What are fair value assets?
- Translated using spot rate at date of revaluation
- Recognised in OCI
What is a Foreign Exchange Risk?
Risk that entity’s financial position/ performance or cash flows will be affected by fluctuations in exchange rates.
What is a Forward contract?
Agreement between 2 parties to exchange a specified quantity of currency for another at a specified exchange rate.
What are the 3 characteristics of a Forward Contract?
- Value changes with exchange rate
- No initial outlay
- Settled in future
What is hedge accounting?
Hedge accounting attempts to reduce the volatility created by the repeated adjustment of a financial instrument’s value, known as marking to market.
