Foreign Exchange (FOREX) Flashcards

Flashcards about Foreign Exchange (FOREX) based on lecture notes.

Objective of PAS 21 (The Effects of Changes in Foreign Exchange Rates)

To prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency.

Functional Currency

The currency of the primary economic environment in which the entity operates; the entity’s own currency.

Presentation Currency

The currency in which the financial statements are presented.

Number of functional currencies an entity can have

Only one, but it can have one or more presentation currencies, if an entity decides to present its financial statements in more currencies.

Initial recognition of functional currency transactions

Shall be translated to functional currency by applying the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.

Subsequent reporting of functional currency transactions

You should translate all monetary items in foreign currency using the closing rate, all non-monetary items at historical cost using the exchange rate at the date of the transaction (historical rate), and all non-monetary items at fair value using the exchange rate when fair value was measured.

How all exchange rate differences are reported in foreign exchange

Shall be recognized in profit or loss, with the following exceptions:

• Exchange rate gains or losses on non-monetary items are recognized consistently with the recognition of gains or losses on an item itself.

• Exchange rate gain or loss on a monetary item that forms a part of a reporting entity’s net investment in a foreign operation shall be recognized:

  • In the separate entity’s or foreign operation’s financial statements: in profit or loss

  • In the consolidated financial statements: initially in other comprehensive income and subsequently, on disposal of net investment in the foreign operation, they shall be reclassified to profit or loss.

Procedure when there is a change in functional currency

The entity applies the translation procedures related to the new functional currency prospectively from the date of the change.

Translation rules for entities in non-hyperinflationary economies

An entity should translate:

• All assets and liabilities for each statement of financial position presented using the closing rate of that statement of financial position. This rule applies for goodwill and fair value adjustments.

• All income and expenses and other comprehensive income items using the exchange rates at the date of transaction. PAS 21 permits using some period average rates for the practical reasons, but if the exchange rates fluctuate a lot during the reporting period, then the use of averages is not appropriate.

• All resulting exchange differences shall be recognized in other comprehensive income as a separate component of equity.

• However, when an entity disposes the foreign operation, then the cumulative amount of exchange differences relating to that foreign operation shall be reclassified from equity to profit or loss when the gain or loss on disposal is recognized.

Primary economic environment

Is normally the one in which the entity primarily generates and expends the cash.

Date of transaction

The date when the conditions for the initial recognition of an asset or liability are met in line with PFRS.