Diana Frias Mendez

CI2129

UNIVERSIDAD AUTONOMA DE SANTO DOMINGO (UASD)

FACULTY OF ECONOMICS AND SOCIAL SCIENCES

ACCOUNTING SCHOOL

SENIOR ACCOUNTING II (CON-316)

SUBJECT 3: FOREIGN CURRENCY TRANSACTIONS

1. State the number and title of the IAS and the section of IAS for SMEs that
regulates foreign currency transactions.
IAS 21 The Effects of Changes in Foreign Exchange Rates
Section 30 - IFRS for SMEs foreign currency translation.
2. State your understanding of foreign currency.
Foreign currency is the currency generally used as a means of payment in international
transactions, both for trade and investment.
3. Define "Foreign Currency Transactions" in your own words, taking as a
reference the concepts studied and the recommended bibliography.

A foreign currency transaction is a transaction whose amount is denominated or requires

settlement in a currency other than the functional currency. The functional currency is the
currency of the primary economic environment in which the company operates.
4. State the difference between functional currency and foreign currency.
Functional currency: is the currency of the main economic environment in which the
company operates (Dominican Peso).
Foreign currency: any currency other than the company's functional currency (Dollar,
Euro, etc.).
5. Find out which is the functional currency in the Dominican Republic and which
organization is in charge of establishing the reference exchange rate in our
country.

The Dominican peso is the official currency of the Dominican Republic.

Superintendency of Banks of the Dominican Republic

 6. Define exchange rate
The rate or exchange rate between two currencies is the rate or ratio of proportion that
exists between the value of one currency and the other. This rate is an indicator that
expresses how many units of one currency are needed to obtain one unit of the other.
7. What do you understand by Foreign Business?
Any subsidiary (subsidiary), associate, joint venture or branch of the reporting
enterprise (reporting enterprise) whose activities are conducted or carried out in a
country other than that of the reporting enterprise.
8. State what you understand by exchange difference and how it arises.
Exchange difference is the difference that arises when converting a certain number of
units of one currency to another currency, using different exchange rates.
9. What is meant by closing exchange rate. State what it is used for.
Closing exchange rate is the spot exchange rate at the end of the reporting period.
Exchange difference is the difference that arises when converting a certain number of
units of one currency to another currency, using different exchange rates.
10. How is a change in functional currency justified?
When there is a change in the entity's functional currency, the entity shall apply the
translation procedures applicable to the new functional currency prospectively from the date
of the change.
Use of a presentation currency other than the functional currency
Translation to the presentation currency: The results and financial position of an entity,
whose functional currency does not correspond to the currency of a hyperinflationary
economy, shall be translated into the presentation currency, if different, using the following
procedures:

1. The assets and liabilities of each balance sheet presented (including comparative
figures) are translated at the closing exchange rate at the corresponding balance
sheet date.
2. Revenues and expenses for each income statement item (including comparative
figures) are translated at the exchange rates in effect at the date of each transaction.
3. All exchange differences arising as a result of the above are recognized as a separate
component of equity (also referred to as translation differences).

The results and financial position of an entity whose functional currency is that of a
hyperinflationary economy shall be translated into a different presentation currency using
the following procedures:
1. All amounts shall be converted at the closing rate of exchange corresponding to the
most recent balance sheet date, except when,
2. The amounts are converted to those of a non-hyperinflationary economy, in which
 case the comparative figures will be those that were presented as current amounts
for the year in question in the financial statements of the preceding period (i.e., these
amounts will not be adjusted for subsequent changes in price levels or exchange
rates).

11. How and when should a foreign currency transaction be recorded? (see
paragraph 21 of IAS no. 21)

All foreign currency transactions shall be recorded at initial recognition using the
functional currency by applying to the foreign currency amount the spot exchange
rate at the date of the transaction between the functional currency and the foreign
currency.
The date of a transaction is the date on which the transaction qualifies for
recognition in accordance with IFRS. For practical reasons, an exchange rate
approximating the rate prevailing at the time of the transaction is often used, e.g., the
corresponding average weekly or monthly rate may be used for all transactions
occurring in that time interval in each of the classes of foreign currencies used by
the entity. However, when exchange rates vary significantly, the use of the average
rate for the period will be inappropriate.

12. Define what you mean by exchange gain.

An exchange gain consists of extraordinary income resulting from a movement in

the exchange rate. This variable is relevant for those companies and individuals that
carry out transactions in foreign currency.

13. Define what you mean by exchange loss.

An exchange loss is an extraordinary expense resulting from a fluctuation in the

exchange rate. This variable is relevant for those companies and individuals that
carry out transactions in foreign currency.

14. Exchange rate rises, accounts payable generate:

a. Foreign exchange gain _________________
b. Foreign exchange loss _x__
15. Exchange rate rises, accounts receivable generate:
a. Foreign exchange gain _x__
b. Foreign exchange loss ______

16. Comment on the following argument: "Accounting in foreign currency affects

the 4 basic financial statements".

Foreign currency transactions are transactions denominated in a currency other than

 the functional currency.
• Transactions may be:
Purchase of goods or services
Funds borrowed or loaned
Acquisition or sale of assets
Cancellation of liabilities.
• The measurement of a foreign currency transaction should be reported at initial
recognition in the functional currency, applying for such purpose the spot exchange
rate between the functional currency and the foreign currency.
• Exchange differences resulting from the settlement of monetary items should be
included in the statement of income.
The income statement and balance sheet of an entity whose functional currency is
not the presentation currency should be translated into the presentation currency
using: - The closing rate at the balance sheet date for all assets and liabilities.
• Exchange rates as of the transaction dates for income and expenses

17. How IAS 21 defines the concept of Fair Value.

Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement
date.

18. How is an exchange difference generated in a foreign investment treated? (see

paragraph 32)

Exchange differences arising on a monetary item that forms part of the net
investment in a foreign operation of the reporting entity are recognized in the results
of the reporting entity's separate financial statements or in the individual financial
statements of the foreign operation, as appropriate. In the financial statements
containing the foreign operation and the reporting entity (for example, the
consolidated financial statements if the foreign operation is a subsidiary), these
exchange differences are initially recognized in other comprehensive income, and
reclassified from equity to profit or loss when the foreign operation is disposed of.

19. What is the difference between Functional Currency and Presentation

Currency?

Functional currency is the currency of the primary economic environment in which

the entity operates.
Presentation currency is the currency in which the financial statements are
presented.
 20.How is the tax effect of exchange differences treated? (see paragraph 50)

Gains and losses arising from exchange differences on foreign currency transactions,
as well as differences arising from translation of the results and financial position of
an entity (including a foreign operation) into a different currency, may have tax
effects. IAS 12 Income Taxes is applied to account for these tax effects.

21.State three (3) items that should be disclosed in the notes to the financial
statements, relating to foreign currency accounting.

When an entity presents its financial statements in a currency that is different from its
functional currency, it may qualify its financial statements as complying with International
Financial Reporting Standards only if they comply with all the requirements of each
applicable Standard and with each applicable Interpretation of those Standards, including
the translation method.
Entities sometimes present their financial statements or other financial information in a
currency that is not their functional currency without complying with the requirements of
paragraph 55. For example, an entity may translate only certain items in its financial
statements into the other currency. Another example occurs when an entity, whose
functional currency is not that of a hyperinflationary economy, translates the financial
statements into the other currency using the most recent closing exchange rate for all items.
Such conversions are not made in accordance with International Financial Reporting
Standards, so disclosure is required.
When an entity presents its financial statements, or other financial information, in a
currency other than its functional currency and presentation currency and does not comply
with the requirements of paragraph 55:
(a) Clearly identify this information as supplementary, in order to distinguish it from
information that complies with International Reporting Standards. Financial;
(b) disclose the currency in which this supplementary information is presented; and

(c) disclose the functional currency of the entity, as well as the translation method
used to prepare the supplementary information.

22. When is a change in functional currency justified?

The functional currency reflects the transactions, events and conditions that underlie
and are relevant to it, so that once the functional currency is defined it will not be
changed unless there is a change in such transactions, events and conditions. In the
latter case, the translation procedures to the new functional currency will be applied
prospectively from the date of exchange.
23.It sets forth the aspects to be disclosed in the Financial Statements in accordance
with "IAS-21 The Effects of Changes in Foreign Exchange Rates (Full IFRS)"
and "Section 30 on Foreign Currency Translation (IFRS for SMEs)".

An entity shall disclose:

(a) the amount of exchange differences recognized in profit or loss for the period,
except for those arising from financial instruments measured at fair value through
profit or loss, in accordance with IFRS 9;
(b) the net exchange differences recognized in other comprehensive income and
accumulated in a separate component of equity, as well as a reconciliation between
the amounts of these differences at the beginning and end of the period.

24.Research and explain at least four possible foreign currency transactions

according to what has been studied.
25.Makes a personal commentary on the importance of IAS-21 The Effects of
Changes in Foreign Exchange Rates and the provisions of section 30 of IFRS
Pymes.
The exchange rate has a determining and important impact on the homogenization of
the financial statements of all companies, both those that consolidate their financial
statements and those that do not. The exchange rate is responsible for ensuring fair
and comparable presentation in the financial statements that are used in the
globalization of commerce worldwide.
The exchange rate is also important due to the impact on the increase or decrease in
the purchasing power of companies due to the devaluation or valuation of the local
currency. A representative charge in the balance sheet for liabilities in foreign
currency represents a considered foreign exchange loss at the time of reporting at the
end of the period for the foreign exchange adjustment. On the contrary, if the balance
sheet is significantly represented by foreign currency assets that will have a positive
impact on the result.