Foreign Exchange

Question 1

Thinking Critically:
Functional Currency IAS21 Issue of recognising gains without cash recieved. For & Against 3&2

Answer 1

IAS21 can recognise ForEx gains before cash recieved, conceptually challenging

For:
Gains & Losses treated symmetrically
Cash realisation is reasonably certian
Exchange gains/losses meet the definition of income/expense in the framework

Against:
- Where cash realisation doesn’t happen in short term, gains could reverse in future periods causing fluctuations
- Thus for consistency could recognise exchange gains losses in Other Comprehensive Income

Question 2

$ is firm’s functional company. Bought machinery at E5m 20Nov23, remained unpaid at the year ended 31Dec23.

20 Nov: $1 = E2
31 Dec: $1 = E2.15

Show the accounting entries and amounts to be included in statements at 31Dec23

Answer 2

At 20Nov convert E5m to $ = $2.5m
Dr PP&E $2.5m
Cr Trade Payables $2.5m

At 31Dec restate trade payables (as its a monetary item): E5m / 2.115 = $2,325,581 ,’, Payable amount decreases ,’, P&L gain of $174,419

Dr Trade Payables $174,419
Cr P&L Exchange Gain

Question 3

Debate whether exchange gains should appear in P&L or be charged straight to equity?

Answer 3

Some argue is inconsistent w standards as gain recognised before it’s realised thus causing volatility.

But, this is prudent, as a loss would cause a loss in the P&L thus symmetrically treated.

For short term things like trade payables the volatility is temporary as it will be paid off in the short-term anyway. Debate to be had over gains on longer term payables like loans

Question 4

Type of Asset and whether we translate: Monetary, Non-monetary at historic cost, Non-monetary at Fair Value

Answer 4

Initial recognition we recognise at spot at transaction date

Monetary: Translate at year-end rate. Gain/Loss goes in P&L

Non-monetary Historic Cost: Do not retranslate

Non-monetary at FV: Translate at rate when FV was measured. Gain/Loss in P&L

Question 5

Spae sells goods to customer for SWFr 750,000 in May (£1=SWFr 3.5), customer pays in August (£1=SWFr 3.7). Year end is September, how do they show transaction?

What if Year end is June and rate = 3.6?

What if Year end still June but exchange rate is 3.4?

Answer 5

Dr Trade receivables (750k/3.5): 214,286
Cr Revenue 214,286

Once sold: Dr Cash (750k/3.7) = 202,703
Cr Receivables 214,286
Dr P&L Exchange Loss: 11,583

What if Year end is June and rate = 3.6?
As before Dr Receivables 214,286
Cr Revenue 214,286

At year end:
750k/3.6 = 208,333
So: Dr P&L Exchange Loss 5,953, Cr Receivables 5,953

When they pay:
Dr Cash 202,703
Cr Receivables 208,333
Dr P&L Loss: 5,630

What if Year end still June but exchange rate is 3.4?
As before Cr Receivables 214,286, Dr Revenue 214,286

Y/E: 750k/3.4 = 220,588
Dr Receivables: 6,302
Cr P&L Gain: 6,302