Accounting for Foreign Currency Transactions – Quick-Review Notes

Which of the following statements best describes subsequent measurement of non-monetary items at fair value in a foreign currency under IFRS?

They are translated using the spot exchange rate at the date when the fair value was last determined

Which of the following statements accurately describes an entity’s functional and presentation currencies?

Functional currency is the currency of the primary economic environment in which the entity operates

Which of the following statements regarding the subsequent measurement of monetary items for a foreign currency transaction is true?

They are translated using the sport rate at the end of the reporting period

Which of the following best describes non-monetary items?

Assets and Liabilities that are not cash, and will not be received or paid in a fixed or determinable number of units of currency. 

Examples: inventory, prepaid expenses, ppe and intangible assets

Which of the following best describes a foreign currency transaction?

A transaction that occurs in a different currency than the one in which a company normally operates

Stanislav Inc. (SI) made a Kč157,500 (Czech koruna) sale to a company in the Czech Republic on May 20. The inventory had a cost of C$5,700. SI received payment on July 2. SI’s functional currency is the Canadian dollar, and the company prepares its financial statements in accordance with IFRS. SI’s year end is June 30.

Relevant exchange rates are as follows:

May 20	Kč1 = C$0.057
June 30	Kč1 = C$0.061
July 2	Kč1 = C$0.060
Average rate May 20 to July 2	Kč1 = C$0.058

Which of the following debits and credits forms part of the journal entries recorded on July 2?

Accounts receivable is a monetary item so was updated to the spot rate at the June 30 year end and would be updated to the spot rate again just before derecognition on July 2. It is a loss because the rate has decreased from year end, meaning SI will receive less cash when the receivable is collected. Kč157,500 × (C$0.060 – C$0.061) = $158 loss.

Which of the following statements best describes the differences between IFRS and ASPE when accounting for transactions in a foreign currency?

The requirements under IFRS and ASPE are very similar

Which of the following is a required disclosure for foreign currency transactions under IFRS?

Functional currency of the reporting company

Which of the following best describes how a company records its own non-monetary assets and liabilities denominated in a foreign currency and when they are not measured at fair value at the reporting date?

At the historical Exchange rate

On August 5, Chad Michaels Inc. (CMI), a company that reports in Canadian dollars, received inventory from a French supplier costing €125,000. The invoice was paid on September 5. On September 20, the inventory was sold. The relevant exchange rate information is as follows:

 

August 5	€1 = C$1.52
September 5	€1 = C$1.56
September 20	€1 = C$1.60
Average for the period August 5 to September 20	€1 = C$1.57

What is the cost of goods sold reported on CMI's September 30, year-end financial statements related to this inventory? CMI reports under IFRS.

The cost of the inventory is recorded at the historical exchange rate (the rate in effect on the date of delivery), and this will be the amount expensed to cost of goods sold when the inventory is subsequently sold. €125,000 × C$1.52 = $190,000.

Archibald Inc. (AI) is a Canadian company whose year-end is December 31. On December 1, Year 1, it invested US$200,000 in a short-term guaranteed investment certificate (GIC). The principal amount of the GIC, together with interest, is receivable at the GIC’s January 31, Year 2, maturity date. AI accrued US$2,000 interest revenue for the year ended December 31, Year 1. Exchange rates of significance are as follows:

 

December 1, Year 1	US$1.00 = C$1.30
December 31, Year 1	US$1.00 = C$1.36
Average rate Year 1	US$1.00 = C$1.34
Average rate December, Year 1	US$1.00 = C$1.33

What is the total value relating to the GIC investment (principal plus accrued interest) that AI will report on its SFP for the year ended December 31, Year 1? AI’s functional currency is the Canadian dollar and the company reports under IFRS.

The GIC investment and the accrued interest are monetary assets (a fixed or determinable payment). The year-end investment of US$200,000 plus accrued interest receivable of US$2,000 is translated at the Year 1 closing rate of US$1.00 = C$1.36. (US$200,000 + US$2,000) × C$1.36 = $274,720.

On June 1, Year 1, Slam Inc. borrowed ₹5.9 million (Indian rupees) from an Indian bank. Interest is payable at the annual rate of 9% on May 31 each year. Slam’s fiscal year end is December 31.

Relevant exchange rate information follows:

 

June 1, Year 1	₹1 = C$0.016
December 31, Year 1	₹1 = C$0.019
Average for January to December, Year 1	₹1 = C$0.018
Average for June to December, Year 1	₹1 = C$0.017

What amount of interest expense will Slam record in its December 31, Year 1, financial statements regarding this loan? Assume Slam’s functional currency is the Canadian dollar and the company prepares its financial statements in accordance with IFRS.

Interest expense is accrued evenly over the period of June 1 to December 31, so the average rate for that period can be used. ₹5,900,000 loan × 9% interest × 7/12 months = ₹309,750 interest × C$0.017 = $5,266.

Suess Metal Inc. has a euro-denominated accounts payable of €18,000. The company uses the Canadian dollar for its day-to-day currency. The current exchange rate is €1 = $1.42. What is the Canadian dollar equivalent for the account payable?

The exchange rate provided is a direct rate, which is multiplied by the payable in euros to arrive at the Canadian equivalent. €18,000 × $1.42 = $25,560

Gail Corp., a Canadian public company operating in Canada, paid US$150,000 to acquire machinery from a U.S. equipment manufacturer on January 12, when the exchange rate was US$1.00 = C$1.20. The equipment was estimated to last five years with no residual value. Gail’s year end is December 31 and it depreciates all equipment on a straight-line basis.

Other exchange rates were as follows:

 

Average exchange rate during the year	US$1.00 = C$1.21
Closing rate at December 31	US$1.00 = C$1.22

Assuming Gail’s functional currency is the Canadian dollar, which of the following is the journal entry required to record the purchase of the equipment on January 12?

The transaction is translated at the rate in effect on the date it occurred. US$150,000 × C$1.20 = $180,000.

Honest Shipping Co. (HSC) is a Canadian public company that reports under IFRS, with the Canadian dollar as its functional currency. In Year 1, HSC purchased land and a building as an investment property in Malaysia for RM415,000. At that time, the exchange rate was RM1 = C$0.30. HSC measures its investment properties at fair value.

At March 31, Year 3, HSC’s year end, the property had a fair value of RM395,000 based on the last appraisal, which was performed on January 15, Year 3. The other relevant exchange rates are as follows:

 

January 15, Year 3	RM1 = C$0.34
March 31, Year 3	RM1 = C$0.33
Average for fiscal Year 3	RM1 = C$0.31

At what value is the land and building recorded at HSC’s March 31, Year 3, year end?

The investment property is measured at fair value; therefore, the exchange rate from the date of the last appraisal is used to translate the property to Canadian dollars. RM395,000 × C$0.34 = $134,300.

Which of the following are monetary items under ASPE?

Cash and other assets and liabilities that will be received or paid in an undeterminable number of units of currency

On October 1, KLO Inc. received equipment purchased from a supplier in India for ₹2,500,000 (Indian rupees). The equipment has an estimated useful life of eight years with no residual value, is depreciated on a straight-line basis, and is measured at historical cost. KLO paid half the purchase price on October 1, with the balance due on January 1. KLO’s fiscal year end is December 31. Relevant exchange rate information follows:

October 1	₹1 = C$0.0192
December 31	₹1 = C$0.0190
Average, October 1-December 31	₹1 = C$0.0188

What is the amount of depreciation expense and foreign exchange gain or loss to be reported on the SCI of KLO for the year ended December 31, related to the equipment purchase transaction? Assume KLO reports under IFRS and uses the Canadian dollar for its functional currency.

Depreciation for the three months is translated using the spot rate when the equipment was purchased. Foreign exchange gain or loss relates to the monetary item, which is the account payable balance.

Depreciation = (2,500,000 × 0.0192) / 8 × 3/12 = $1,500.

Foreign exchange gain on accounts payable = (2,500,000 × 50% due in January) × (0.0192 – 0.0190) = $250 gain.