Chapter 20: PAS 21 The Effects of Changes in Foreign Exchange Rates

1. Foreign currency transactions

2. Foreign operations

Two ways of conducting foreign activities:

Foreign currency transactions

A way of conducting foreign activities where individual entities often enter into transactions in a foreign currency

Foreign operations

A way of conducting foreign activities wherein groups often include overseas entities

1. Which exchange rate(s) to use; and

2. How to report the effects of changes in exchange rates in the financial statements.

Two principal issues in accounting for foreign activities are determining:

Functional currency

The currency of the primary economic environment in which the entity operates

True

T or F: The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash.

The currency that mainly influences:

• Sales prices

• Cost of goods sold / Cost of services provided

Primary factors in determining functional currency:

• The currency in which funds from financing activities are generated.

• The currency in which receipts from operating activities are usually retained.

Secondary factors in determining functional currency:

True

T or F: At initial recognition, the foreign currency amount is translated at the spot exchange rate at the date of the transaction.

Monetary items

These are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency

Foreign operation

It is an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity

b. Cancellation of an existing loan from the government

Which of the following is considered a government grant under PAS 20?

a. Award of major government contracts

b. Cancellation of an existing loan from the government

c. Free technical advice

d. Public improvements

c. Tax breaks

Which of the following is not considered a government grant under PAS 20?

a. Financial aid

b. Benefit of subsidized loans

c. Tax breaks

d. Forgivable loans

c. matching

The main concept used in recognizing income from government grants is:

a. capital approach

b. historical cost

c. matching

d. materiality

b. prospectively

According to PAS 20, a government grant that becomes repayable is accounted for:

a. retrospectively.

b. prospectively.

c. a or b

d. not accounted for

c. over the period of the project as expenses are incurred

In 20x1, Entity A proposes an environmental clean-up project for a river. The government supports this project and gives Entity A a ₱1M monetary grant conditioned that the money will only be spent on the proposed project. The proposed project is expected to take about 2 years to complete. Entity A starts the clean-up project in 20x2. How should Entity A recognize income from the government grant?

a. in full when Entity A receives the grant

b. over 2 years starting in 20x1

c. over the period of the project as expenses are incurred

d. the grant is not recognized as income

b. Non-monetary items

These are those which do not give rise to a right to receive (or an obligation to deliver) a fixed or determinable amount of money.

a. Monetary items

b. Non-monetary items

c. Financial items

d. Non-financial items

b. accounts payable

On December 1, 20x1, you imported a machine from a foreign supplier for $100,000, due for settlement on January 6, 20x2. Your functional currency is the Philippine peso. When preparing the December 31, 20x1 statement of financial position, which of the following will you translate to the closing rate?

a. machine

b. accounts payable

c. a and b

d. none of these