Foreign Exchange

• How does the treatment of changes in foreign exchange rates relate to the prudence concepts?

  The prudence concept suggests that when choosing between two options, the one that is less likely to overstate assets or income should be selected.

  • Choose the one that is less likely to overstate asset/income

  The prudence concept guides the immediate recognition of losses to avoid overstating assets or income. Exchange gains and losses on long-term monetary items are to be recognised in PL account.
• How does the treatment of changes in foreign exchange rates relate to the accrual concept?

  The accruals concept:

  • Recording foreign currency transactions @ rate of the transaction date
  • Exchange losses and gains on long-term monetary items are to be recognised in PL account throughout the accounting year period, not at the balance sheet date. This is to reflect movement in exchange rates and interest rates.
• Foreign Exchange Translation on 3 stages to find Foreign Exchange Profit/Loss

  Foreign current @ exchange rate on the date of:

  1. initial transaction
  2. settlement
  3. SOFP

  Receivables = + signage

  Payables = - signage
• Discuss the proposed amendments made in IAS21 concerning Long-term liabilities.

  If the currency ≠ exchangeable,

  • currency translation of long-term liabilities becomes hard.
  • ∴ companies may not have appropriately translated the long-term liabilities in FS.
  • Disclosure requirements: provide transparency about the uncertainties associated with managing foreign exchange for FS users' understanding.
• Discuss the proposed amendments made in IAS21 concerning average exchange rate

  For average exchange rates, IAS 21 allows flexibility in calculating its rate depending on factors like

  • transaction frequency,
  • value,
  • period duration, and
  • entity systems.

  Although there are numerous methods available to calculate the average rate, IAS 21 does not offer specific guidance on determining them.