Exchange rates

• Historic rate: rate in place at the date the transaction takes place,
sometimes referred to as the spot rate.

• Closing rate: rate at the reporting date.

• Average rate: average rate throughout the accounting period.

Assets and liabilities

• Monetary items: items that can be easily converted into cash, e.g.
receivables, payables, loans.

• Non-monetary items: items that give no right to receive or deliver cash,

e.g. inventory, plant and machinery.

Currency

• Functional currency: 'the currency of the primary economic

environment in which an entity operates' (IAS 21, para 8). This will
usually be the currency in which the majority of an entity's transactions
take place.

• Presentation currency: 'the currency in which the financial statements

are presented' (IAS 21, para 8).

Functional currency

IAS 21 says that an entity should consider the following primary factors
when determining its functional currency:

• the currency that mainly influences sales prices for goods and
services

• the currency of the country whose competitive forces and

regulations mainly determine the sales price of goods and services

• the currency that mainly influences labour, materials and other costs
of providing goods and services.

If the primary factors are inconclusive then the following secondary

 factors should also be considered:

• the currency in which funds from financing activities are generated

• the currency in which receipts from operating activities are retained.

Initial transactions

• Translate using the historic rate prevailing at the transaction date.

• The average rate can also be used if it does not fluctuate significantly
during the accounting period.

Settled transactions

If a transaction is settled (payment or receipt occurs) during the accounting

period:

• Translate at the date of payment / receipt using the historic rate prevailing
at that date.

• As this may be different to the initial transaction an exchange difference

may arise, this is posted to the statement of profit or loss (see
Treatment of exchange differences below).

Question

30000$
30000*1.80

Answer Initial transaction

Translate at historic rate on 1 April, Kr54,000/1.8 = $30,000 1$ = 1.80Kr

Dr Purchases $ 30000
Cr Payables $ 30000

On settlement 1$ = 1.75Kr
Translate at historic rate on 31 May, Kr54,000/1.75 = $30,857

Dr Payables 30000
Dr SPL – foreign exchange loss 857
 Cr Cash 30857

Unsettled transactions

• If a transaction is still unsettled at the reporting date, there will be an

outstanding asset or liability on the statement of financial position.

• If the asset/liability is a monetary item it should be retranslated at the

closing rate.

• If the asset/liability is a non-monetary item it should remain at the historic

rate.

• Exchange differences will arise on the retranslation of the monetary items,

and these are also posted to the statement of profit or loss.

Question

Answer Initial transaction

Translate at historic rate on 1 April, Kr54,000/1.8 = $30,000

Dr Purchases $30,000
Cr Payables $30,000

At the reporting date

Payables are monetary items, so retranslate at the closing rate on

30 June, Kr54,000/1.70 = $31,765
Dr SPL $1,765 ($31,765 – $30,000)
Cr Payables $1,765

At the reporting date

Leave closing inventory at the original cost, as inventory is a nonmonetary

item
Dr Inventory $30,000
 Cr Cost of sales $30,000

Treatment of exchange differences

• If the exchange difference relates to trading transactions it is disclosed

within other operating income/operating expenses.

• If the exchange difference relates to non-trading transactions it is

disclosed within interest receivable and similar income/finance costs.

Question

Answer (a) Original transaction

25 October 20X1 Value = 286,000/11.16 = $25,627

Dr Purchases 25,627
Cr Payables 25,627

16 November 20X1 Payment 286,000/10.87 = $26,311

Dr Payables 25,627
Dr SPL 684 (Balancing figure, 26,311 – 25,627)
Cr Cash 26,311

(b) If the amount remains outstanding:

31 December 20X1 Retranslate payable 286,000/11.02 = $25,953

Dr SPL 326 (25,953 – 25,627)
Cr Payables 326
Non-monetary Items

• Cost model
Non-monetary items that are held at cost are initially translated at the
historic rate and carried forward at this value. They are not retranslated.
30000*1.80

1$ = 1.80Kr 54000/1.80

1$ = 1.75Kr
1 $ =11.16 SEK

286000/11.16

Payable Inv Rec

A/L Yes Yes Yes
R/P Yes Yes Yes
RP- fixed unit Yes No Yes