Chapter 10 Foreign currency transactions IMAS 1 IAS

Chapter 10 Foreign currency transactions IMAS 1

IAS 21: The effects of changes in exchange rates Functional currency vis the currency of the primary economic environment in which the entity operates. In most cases this will be the local currency. ***An entity should consider the following when determining its functional currency: Primary reasons to consider v. The currency that mainly influences sales prices for goods and services. v. The currency of the country whose competitive forces and regulations mainly determine the sales prices of goods and services. v. The currency that mainly influences labour, material and other costs of pr oviding goods and services. IMAS 2

Functional currency & Presentation currency Secondary reasons to consider v. The currency in which funding from issuing debt and equity is generated. v. The currency in which receipts from operating activities are usually retained. An entity maintains its day to day financial records in its functional currency. The Presentation currency vis the currency in which the entity presents its financial statements. IMAS 3

Transaction settled in the same year Translation of foreign currency transaction An entity based in the USA sells goods to the UK for £ 300 000 on 31 March 2005 when the exchange rate was $/£ 0. 65 (that is $1 = £ 0. 65). The customer pays in May when the rate was $/0. 60. v. How should the company initially recognise the transaction? v. How does the US entity account for the transaction in its FS for the year ended 31 December 2005? IMAS 4

Transaction settled in different accounting periods Monetary items Examples Non-monetary assets Non-current assets inventory investments Treatment Cash Receivables loans Retranslate using the closing rate(year-end exchange rate) Do not retranslate IMAS 5