Advanced Accounting

ACCOUNTING FOR BUSINESS
COMBINATIONS
(Advanced Accounting 2)
LECTURE AID
2018
ZEUS VERNON B. MILLAN

Chapter 10 The Effects of Changes in Foreign
Exchange Rates
Learning Objectives
• Define an entity’s functional currency.

• Account for foreign currency transactions.
• Translate the financial statements of a
foreign operation.

COMBINATIONS (Advanced
Accounting 2) - (by: MILLAN)
Two ways of conducting foreign activities
1. Foreign currency transactions – individual

entities often enter into transactions in a foreign
currency.
2. Foreign operations – groups often include overseas

entities.

Two main accounting issues
• Exchange rates are constantly changing. Therefore, the

principal issues in accounting for foreign activities are
determining:
1. Which exchange rate(s) to use; and
2. How to report the effects of changes in exchange rates
in the financial statements.

Functional currency
• When preparing financial statements, a reporting entity must

identify its functional currency.
• Functional currency is the currency of the primary

economic environment in which the entity operates.
• The primary economic environment in which an entity

operates is normally the one in which it primarily generates
and expends cash.
Factors in determining functional currency
Primary factors
An entity’s functional currency is:
1. The currency that mainly influences:
o Sales prices
o Cost of goods sold / Cost of services provided
Secondary factors
2. The currency in which funds from financing activities are
generated.
3. The currency in which receipts from operating activities are
usually retained.

Foreign currency transactions
• Initial recognition :
The foreign currency amount is translated at the spot exchange
rate at the date of the transaction.
• Subsequent recognition: At the end of each reporting period:

1. Foreign currency monetary items are re-translated using
the closing rate;
2. Non-monetary items that are measured at historical cost in a
foreign currency shall be translated using the exchange rate at
the date of the transaction; and
3. Non-monetary items that are measured at fair value in a
foreign currency shall be translated using the exchange rates at
the date when the fair value was determined.
Monetary items
• Monetary items – are units of currency held and assets

and liabilities to be received or paid in a fixed or
determinable number of units of currency.

Recognition of exchange differences
• When a foreign currency transaction occurred in one period and

settled in another period:
a. The exchange difference between the transaction date and the
end of reporting period is recognized in the period of
transaction, while
b. The exchange difference between the end of the previous
reporting period and the date of settlement is recognized in the
period of settlement.
• When a foreign currency transaction occurred and settled in the

same period, all the exchange difference is recognized in that period.
Foreign operations
• A foreign operation is an entity that is a subsidiary,

associate, joint venture or branch of a reporting entity,
the activities of which are based or conducted in a
country or currency other than those of the reporting
entity.

Translation to the presentation currency
1. Assets and liabilities are translated at the closing rate at the date
of the statement of financial position.
2. Income and expenses, including other comprehensive income, are
translated at spot exchange rates at the dates of the
transactions. For practical reasons, average rates for a period
may be used, if they provide a reasonable approximation of the spot
rates when the transactions took place. However, if exchange rates
fluctuate significantly, the use of the average rate is inappropriate.
3. The resulting exchange difference is recognized in other
comprehensive income.

APPLICATION OF
CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION
ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced Accounting 2) -

(by: MILLAN)
 QUESTIONS????
 REACTIONS!!!!!
ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced Accounting 2) - (by:

MILLAN)
END
ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced Accounting 2) - (by:
MILLAN)

Advanced Accounting

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ACCOUNTING FOR BUSINESS

ZEUS VERNON B. MILLAN

• Define an entity’s functional currency.

ACCOUNTING FOR BUSINESS

1. Foreign currency transactions – individual

2. Foreign operations – groups often include overseas

ACCOUNTING FOR BUSINESS

• Exchange rates are constantly changing. Therefore, the

ACCOUNTING FOR BUSINESS

• When preparing financial statements, a reporting entity must

• Functional currency is the currency of the primary

• The primary economic environment in which an entity

ACCOUNTING FOR BUSINESS

• Subsequent recognition: At the end of each reporting period:

• Monetary items – are units of currency held and assets

ACCOUNTING FOR BUSINESS

• When a foreign currency transaction occurred in one period and

• When a foreign currency transaction occurred and settled in the

• A foreign operation is an entity that is a subsidiary,

ACCOUNTING FOR BUSINESS

ACCOUNTING FOR BUSINESS

ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced Accounting 2) -

ACCOUNTING FOR BUSINESS COMBINATIONS (Advanced Accounting 2) - (by:

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