Foreign Currency

• Presentational Currency

  • The currency which the financial statements of an entity are presented.
  • Can be different from FC if the entity is a foreign owned subsidiary. May have to present its FS in the currency of the parent.
• Functional Currency

  • The currency of the primary economic environment which the entity operates.
  • Usually the currency which the majority of an entity's transactions take place.
• Factors to be considered when deciding FC:

  • Currency that mainly influences sales prices for goods/ services
  • Currency that mainly influences labour, material and other costs of providing goods/ services.
• Settled transactions

  • Exchange differences happen when transactions are not settled immediately
  • When transaction is settled the payment or receipt is translated using the exchange rate on the settlement date.
  • Any difference between initial value and settlement value is taken to the statement of profit or loss.
  • Trading transactions - presented in other operating income and expenses
  • Non-trading transactions - presented within interest receivable
• Unsettled transactions

  When a transaction is unsettled at the reporting date the accounting treatment will be determined by whether the outstanding asset or liability is a monetary or non-monetary item.

  • Monetary items
  • to be settled by the receipt or payment of cash e.g. receivables, payables
  • Re-translated using the exchange rate at the report date, to reflect the FV of the asset or liability - any difference is taken to the statement of profit or loss.
  • Non-monetary items
  • give no rights or obligations to receive or pay cash e.g. inventory, plant and machinery.
  • Carried at their historic rate.
• Purchases

  • Translated at rate applying to date of purchase - trade payable set up
  • Gain/Loss on exchange is recognised in Income Statement
  • Outstanding amount at y/e recognised in Statement of comprehensive income
  • Trade payable adjusted to y/e amount.
• Sales

  • Translated at rate applying to date of sale - trade receivable set up
  • Gain/loss on exchange recognised in Statement of comprehensive income
  • Balance outstanding at y/e recognised in Statement of comprehensive income
• Recording after Y/E

  • Trade payables settled and cash received from trade receivables
  • at each transaction date the rate applicable to the date used