FX Flashcards
Define functional currency
According to IAS 21 (the effects of changes in foreign exchange rates) functional currency is the currency of the primary economic environment in which the entity operates. In most cases this will be the local currency.
What factors should be considered when determining the functional currency?
1 - the currency that mainly influences sales prices for goods and services
2 - the currency of the country whose competitive forces and regulations mainly determine the sales prices of goods and services
3 - the currency that mainly influences labour, material and other costs of providing goods and services
Define presentational currency
According to IAS 21 (The effects of changes in exchange rates) presentational currency is the currency in which the entity presents its financial statements
When a business enters into a contract where the consideration is expressed in a foreign currency how is the transaction initially recorded?
The transaction will be recorded by applying the spot exchange rate at the date of the transaction
When a transaction is settled at a later date, how is this recorded?
The settlement amount should be translated at the spot rate on the settlement date. If there is a difference between the settlement and the initial recognition there will be an FX difference which should be taken to the SPL in the period in which it arises
Describe the different treatment of unsettled transactions for monetary and non monetary items
Monetary items - eg currency held/assets/liabs to be received or paid for in a foreign currency, eg cash, receivables/payables - retranslate at the year end closing rate
Non-monetary items such as NCAs, inventory, investments - do not translate, leave at historic rate
