Foreign currency

Functional currency
Definition (IAS 21)
The currency of the primary economic environment in which the
entity operates.

It is the currency in which the financial statement transactions are

measured.
 Determining an entity's functional currency
An entity considers the following factors in determining its
functional currency.
a) The currency:
I. that mainly influences sales prices for goods and services
(this will often be the currency in which sales prices for its
goods and services are denominated and settled); and
II. of the country whose competitive forces and regulations
mainly determine the sales prices of its goods and services.
b) The currency that mainly influences labour, material and other
costs of providing goods or services (this will often be the
currency in which such costs are denominated and settled).
 Determining an entity's functional currency
The following factors may also provide evidence of an entity's
functional currency.
a) The currency in which funds from financing activities are
generated.
b) The currency in which receipts from operating activities are
usually retained.
 Reporting foreign currency transactions in the functional currency
Where an entity undertakes a transaction which is not in its
functional currency this is known as a foreign currency
transaction.

The foreign currency transaction must be converted into the

entity's functional currency before it can be recognised in the
financial statements.
 Initial recognition
Translate each transaction by applying the spot exchange rate
between the functional currency and the foreign currency at the
date of the transaction.

Note that an average rate for a period may be used as an

approximation if exchange rates do not fluctuate significantly.
 At the end of the reporting period
Some values may need to be translated at the end of the reporting
period depending on the nature of the item in the financial
statements:
Item Accounting teatment
Monetary assets and liabilities. Restate at closing rate.

Non-monetary assets measured at Do not restate - these items

historical cost (e.g.: non-current remain at historical rate.
assets, inventories).

Non-monetary assets measured at Restate at exchange rate

fair value. when the fair value was
determined.
 Recognition of exchange differences
Exchange differences are recognised as part of profit or loss for the
period in which they arise.

Any differences that relate to items charged to Other Comprehensive

Income, such as revaluations, should also be charged to OCI.
 Lecture example
San Francisco Co, a company whose functional currency is the
dollar, entered into the following foreign currency transaction.

31.10.X8 Purchased goods from Mexico SA for 129,000

Mexican pesos
31.12.X8 Payables have not yet been paid
31.01.X9 San Francisco Co paid its payables.

The exchange rates are as follows.

Pesos to $1
31.10.X8 9.5
31.12.X8 10
31.01.X9 9.7
 Lecture example
Required
How would this transaction be recorded in the books of San
Francisco Co for the year ended 31 December 20X8?
A. Dr Payables 12,900 Cr Purchases 12,900
B. Dr Payables 1,358 Cr Purchased 1,358
C. Dr Purchases 13,579 Cr Profit or loss 13,579
D. Dr Payables 679 Cr Profit or loss 679
Solution
D
$ $
31.10.X8 Purchases (129,000 @ 9.50) 13,579
Payables 13,579

31.12.X8 Payables (Working) 679

Profit or loss - exchange 679
gains

31.01.X9 Payables 12,900

Profit or loss - exchange 399
losses
Cash (129,000 @ 9.7) 13,299
 Solution
Working
$
Payables as at 31.12.X8 (129,000 @10) 12,900
Payables as previously recorded 13,579
Exchange gain 679
 Q51- Rose(06/11) - Question

(c) Rose has a property located in the same country as Stem. The
property was acquired on 1 May 20X7 and is carried at a cost of
30 million dinars. The property is depreciated over 20 years on
the straight-line method. At 30 April 20X8, the property was
revalued to 35 million dinars. Depreciation has been charged for
the year but the revaluation has not been taken into account in
the preparation of the financial statements as at 30 April 20X8..
 Q51- Rose(06/11) - Question
The following exchange rates are relevant to the preparation of the
group financial statements.
Dinars to $
1 May 20X7 6
30 April 20X8 5
Average for year to 30 April 20X8 5.8.
 Q51- Rose(06/11) - Answer
W3 Foreingn property
Dinar Dinar:$ $
2007/05/01 30 6 5
Dep -0.25
2008/04/30 4.75
2.25
Revalued amount 35 5 7

DR CR
PPE 2.25
OCE 2.25
OT 1
 B213 IAS21
Steeplechase sold a machine to a Greek company which it agreed to
invoice in €. The sale was made on 1 October 20X6 for €250,000.
€125,000 was received on 1 November 20X6 and the balance is due on
1 January 20X7.
The exchange rate moved as follows:
1 October 20X6 – €0.91 to $1
1 November 20X6 – €0.95 to $1
31 December 20X6 – €0.85 to $1
At what amount will the receivable be shown in the financial
statements at 31 December 20X6?
$ (to the nearest $) (2 marks)
 B213
Answer $147,059
€125,000 / 0.85
 Bravado - Question
(e) On 1 June 20X7, Bravado purchased an equity instrument of 11
million dinars which was its fair value. On that date an election
was made to hold it at fair value through other comprehensive
income. The relevant exchange rates and fair values were as
follows:
Fair value of
$ to dinars instrument – dinars
1 June 20X7 4.5 11
31 May 20X8 5.1 10
31 May 20X9 4.8 7

Bravado has not recorded any change in the value of the

instrument since 31 May 20X8. The reduction in fair value as at
31 May 20X9 is deemed to be as a result of impairment.
 Bravado - Answer
W3 Foreign transation - IEI
Dinar $:Dinar $
2008/5/31 10 5.1 51
OCI -17.4
2009/05/31 7 4.8 33.6

DR CR
IEI 17.4
OCI 17.4
 B214 IAS21
IAS 21 sets out how entities that carry out transactions in a foreign
currency should measure the results of these transactions at the year
end.
At what exchange rate should non-monetary items carried at
historical cost be measured?
A. The closing rate
B. The rate at the date of the transaction
C. The average rate for the year
D. The rate at the beginning of the year (2 marks)
 B214
The correct answer is:
The rate at the date of the transaction
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