Foreign currency –

IAS 21

Corporate Reporting
Important Terms
Exchange rates:
1) Historic rate (HR)/ Spot Rate (SR): rate in
place at the date the transaction takes place.
2) Closing rate (CR): rate at the reporting date.
3) Average rate (AR): average rate throughout
the accounting period.
Important Terms
Currency:
1) Presentational currency: the currency in
which the financial statements are presented.
2) Functional currency: Currency in which the
majority of an entity's transactions take
place.
Practice Q 1
On 1 April 20X8 Collins Ltd, a company that uses $ as its
Presentation currency, buys goods from an overseas supplier,
who uses Kromits (Kr) as its functional currency. The goods are
priced at Kr54,000. Payment is made 2 months later on 31 May
20X8.

The prevailing exchange rates are:

1 April 20X8 Kr1.80 : $1
31 May 20X8 Kr1.75 : $1

Required:
Record the journal entries for these transactions.
Practice Q 1
Step 1 - Conversion
Convert Kr. to $ using Conversion Rate prevailing on the
date of transaction (Historic Rate/ Spot Rate)
So, HR on 1 April 20X8 Kr1.80 : $1

Kr54,000/1.8 = $30,000
Step 2 – Initial Recording (Journal Entry)
$
Purchases (Dr.) 30,000
Trade Payables (Cr.) 30,000
Practice Q 1
Payment / Settlement – On 31 May 20X8.
Step 1 – Conversion
Payment is made on 31 May 20X8 So, convert using HR/ SR
Kr1.75 : $1
Kr54,000/1.75 = $30,857
Step 2 – Recording (Journal Entry)

$
Trade Payables (Dr.) 30,000
Foreign Exchange Loss (Dr.) 857
Bank (Cr.) 30,857
Practice Q 1
Summary – Solution
1 April-- Goods purchased costing Kr. 54,000 (Kr.54,000/1.8)
$
Purchases (Dr.) 30,000
Trade Payables (Cr.) 30,000

31 May-- Payment / Settlement of Kr. 54,000 (Kr.54,000/1.75)

$
Trade Payables (Dr.) 30,000
Foreign Exchange Loss (Dr.) 857
Bank (Cr.) 30,857
Important Terms
Monetary & Non-Monetary Items:
Monetary items: items that can be easily
converted into cash e.g. Receivables, Payables,
Loans.
Non­monetary items: items that give no right to
receive or deliver cash e.g. inventory, PPE.
Unsettled transactions
Transaction unsettled at the reporting date,
 outstanding asset or liability on the statement of
financial position. (Trade Payables / Receivables)

So If the asset/liability is a monetary item-

retranslate at closing rate.

If the asset/liability is a non­monetary item- leave at

historic rate.
Practice Q 2-
Collins Ltd, a company that uses $ as its presentation
currency, buys goods from an overseas supplier on 1 April
20X8. The goods are priced at Kr54,000. Payment is still
outstanding at the reporting date 30 June 20X8.

The prevailing exchange rates are:

1 April 20X8 Kr1.80 : $1
30 June 20X8 Kr1.70 : $1

Required:
Record the journal entries for this transaction.
Practice Q 2-
Step 1 - Conversion
HR on 1 April 20X8 Kr1.80 : $1
Kr54,000/1.8 = $30,000

Step 2 – Initial Recording (Journal Entry)

$
Purchases (Dr.) 30,000
Trade Payables (Cr.) 30,000
Practice Q 2-
On 30 June 20X8(Reporting Date)
Transaction is unsettled means yet to be paid
Step 1 - Conversion
Payable is monetary items, so retranslate at CR on 30 June,
Kr54,000/1.70 = $31,765
Step 2 – Initial Recording (Journal Entry)

$
Foreign Exchange Loss (Dr.) 1,765
Trade Payables (Cr.) 1,765
Practice Q 3-
ABC plc has a year end of 31 Dec 20X1 and uses the dollar ($) as
its presentation currency.
On 25 Oct 20X1 ABC buys goods from a Swedish supplier for
Swedish Krona (SWK) 286,000.

Rates of SWK:
 25 Oct 20X1 $1 = SWK 11.16
 16 Nov 20X1 $1 = SWK 10.87
 31 Dec 20X1 $1 = SWK 11.02
Required:
Show the accounting treatment for the above transactions if:
a) A payment of SWK286,000 is made on 16 November 20X1.
b) The amount owed remains outstanding at the year end date.
Practice Q 3-
Original transaction
Historic / Spot Rate On 25 Oct 20X1 $1 = SWK 11.16

So, Conversion to US $-- SWK286,000/11.16 = $25,627

Journal Entry $
Purchases (Dr.) 25,627
Trade Payables (Cr.) 25,627
Practice Q 3-
(a) A payment of SWK286,000 is made on 16 November 20X1.

Historic / Spot Rate On 16 Nov 20X1 $1 = SWK 10.87

1. Conversion to US $-- SWK286,000/10.87 = $26,311

2. Payment Entry

Journal Entry $
Trade Payables (Dr.) 25,627
Foreign exchange Loss(Dr.) 684
Bank (Cr.) 26,311
Practice Q 3-
(a) A payment of SWK286,000 is made on 16 November 20X1.
ABC Plc
Extracts- Statement of Profit & Loss
For the period Ended : 01 Jan 20x1- 31 Dec 20x1

$ $
Revenue xxxx
Cost of Sales
-- --Opening Inventory Xxx
Add: Purchases 25,627
Less: Closing Inventory xxx
Gross Profit
Expenses:
Foreign exchange Loss (684)
Practice Q 3-
(a) A payment of SWK286,000 is made on 16 November 20X1.
ABC Plc
Extracts- Statement of Financial Position
As At: 31 Dec 20x1

$ $
Current Liabilities
Trade Payables (because paid) 0
Practice Q 3-
(b) The amount owed remains outstanding at the year end
date.
Closing Rate On 31 Dec 20X1 $1 = SWK 11.02
1. Purchases is Nonmonetary and Trade Payables are Monetary
item
2. So, Retranslate Monetary Item using Closing Rate
SWK286,000/11.02 = $25,953 -25,627

Journal Entry $
Foreign exchange Loss(Dr.) 326
Trade Payables (Cr.) 326
Practice Q 3-
(b) The amount owed remains outstanding at the year end
date.
ABC Plc
Extracts- Statement of Profit & Loss
For the period Ended : 01 Jan 20x1- 31 Dec 20x1
$ $
Revenue xxxx
Cost of Sales
-- --Opening Inventory Xxx 25,627
Add: Purchases 25,627
Less: Closing Inventory xxx
Gross Profit
Expenses:
Foreign exchange Loss- OCI (326)
Practice Q 3-
(b) The amount owed remains outstanding at the year end
date.
ABC Plc
Extracts- Statement of Financial Position
As At: 31 Dec 20x1

$ $
Current Liabilities
Trade Payables 25,953
Practice Q 4-
An entity buys land on credit for Kr100,000 when the exchange
rate was 1Kr/$0.85. At the year end the entity has not paid its
supplier. The exchange rate at the year end is 1Kr/$0.92.
Which THREE of the following amounts would be recorded in the
financial statements at year end?

A Property, Plant & Equipment $85,000

B Trade Payables $85,000
C Foreign Exchange Loss $7,000
D Property, Plant & Equipment $92,000
E Trade Payables $92,000
F Foreign Exchange Loss Nil
Practice Q 4-
At the Date of Buying Land Exchange Rate (Historic / Spot Rate)
1Kr/$0.85
So, 100,000*0.85 = $85,000
$
Property, Plant & Equipment 85,000
Trade payables 85,000

At Year End- Unsettled Transaction (No Paid Yet)

Monetary Item- Trade Payables
Non Monetary - PPE
Practice Q 4-
Retranslate Monetary Item- Trade Payables using Closing Rate
1Kr/$0.92
So, 100,000*0.92 = $92,000
Now Trade Payables are increased from $ 85,000 to $ 92,000
(difference $ 7,000)

$
Foreign Exchange Loss 7,000
Trade payables 7,000
Practice Q 4-
Conclusion-
Trade Payable are at $ 92,000
Property, Plant & Equipment at $ 85,000
Foreign Exchange Loss at $7,000

So, Correct Options are:

A, C & E