This is a summary of the Effects of Changes in Foreign Exchange rates. This will spare you time and give you understanding of the standard, to give you more time to do exercises and practice questions for the coming assessment.
Financial Accounting (FAC3764)
SUMMARY of Learning Unit 6
STANDARDS:
- IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors
- IAS 21: The Effects of Changes in Foreign Exchange Rates
IAS 21: THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
IAS 21 shall be applied:
(a) In accounting for transactions and balances in foreign currencies.
(b) In translating the results and financial position of foreign operations that are included in
the financial statements of the entity by consolidation or the equity method.
(c) In translating an entity’s results and financial position into presentation currency.
IMPORTANT DEFINITIONS
Foreign currency transaction – A transaction that is denominated; or requires settlement in a
foreign currency.
Functional currency - The currency of the primary economic environment in which the entity
operates.
Spot exchange rate – The exchange rate for immediate delivery
Monetary items – Units of currency held and assets and liabilities to be received or paid in a
fixed determined number of units of currency this includes cash, accounts receivable and
accounts payable.
Transaction date – the date on which we recognise the transaction.
Settlement date – the date on which cash exchanges hands in settlement of the transaction.
• A foreign creditor is fully paid/partially
• Full/partial payment is received from a foreign debtor.
Reporting date – financial year end of the local entity.
, • Every time that the reporting date falls between the transaction date and
settlement date, there will be will be a foreign currency monetary item
(creditor balance) that will need to be translated into local currency.
Exchange difference – Arises if a monetary item is not settled by the end of the reporting
period, and if there is a difference between the spot rate on transaction date and the spot rate
on reporting date.
• Recognised in Profit & Loss
Free on Board (F.O.B) – the risks and rewards transfer when goods are loaded onto the ship at
the port of shipment.
Carriage, Insurance and freight (C.I.F) – the seller arranges and pays for the carriage and
insurance of shipping the goods so one might think the risks and rewards remain with the seller
until the goods reach the destination port.
Delivery at terminal (D.A.T) – the risk and rewards transfer when goods are offloaded at the
named destination terminal.
Delivery Duty Paid (D.D.P) – the risk and reward transfer when goods have arrived at the named
destination port or other place and the import clearance have been obtained.
INITIAL RECOGNITION AND MEASUREMENT: MONETARY AND NON-
MONETARY ITEMS
A foreign currency transaction shall be recorded, on initial recognition on the transaction date.
A foreign currency transaction shall be initially measured by:
SUBSEQUENT MEASUREMENT: MONETARY ITEMS
Monetary items are translated to the latest exchange rates on each subsequent reporting date
and in settlement date.
EXCHANGE DIFFERENCES: MONETARY ITEMS
➢ Import and export transactions
- Transactions and settlement on the same day (cash transaction): No exchange
differences to account for.
- Settlement deferred (credit transaction): exchange difference arise when the settlement
date occurs after the transaction date.
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