05 - Foreign Currency Transactions and IAS 21

A comprehensive set of flashcards covering key terms and definitions related to foreign currency transactions and IAS 21.

Foreign currency transactions

An entity can conduct transactions using a currency other than its functional currency.

Functional currency

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

Presentation currency

The currency in which the financial statements are presented.

Spot exchange rate

The exchange rate at a specific date.

Closing rate

The spot exchange rate at the reporting date.

Exchange difference

The difference occurring from translating a number of units of one currency into another at different exchange rates.

Monetary items

Units of currency held, and assets and liabilities to be received or paid in fixed currency units.

Group

A parent entity and all its subsidiaries.

Foreign operations

Subsidiaries, associates, joint ventures, or branches operating in a country or currency different from the reporting entity.

Net investment in a foreign operation

The reporting entity’s interest in the net assets of a foreign operation.

Primary indicators

Factors used to determine an entity's functional currency, such as the currency influencing sales prices.

Secondary indicators

Additional factors like the currency in which finance is raised and receipts from operations are retained.

Functional currency determination

The process of identifying the appropriate currency for an entity’s financial reporting.

Changing functional currency

When a business operation changes, leading to a new economic environment and different functional currency identification.

Initial recognition

Translating a foreign currency transaction into an entity's functional currency using the rate on the transaction date.

Average rate

A calculated rate used sometimes for translating multiple transactions instead of individual transaction rates.

Subsequent measurement

The ongoing accounting treatment of foreign currency transactions that may involve monetary or non-monetary items.

Non-monetary items

Items that do not represent rights to receive or obligations to deliver cash.

Retrospective retranslation

Retranslating monetary items held at reporting date using the closing rate.

Settlement date

The date at which the transaction is finalized and can incur exchange gains or losses.

Hedge accounting rules

Accounting rules for transactions that are hedged to mitigate risk.

Exchange gain or loss

The result of differences in currency value between the original transaction and the settlement.

Fair value

The estimated value of an asset or liability when traded in an active market.

Impairment

A reduction in the recoverable amount of a non-monetary asset below its carrying amount.

Goodwill

The excess of purchase consideration over the fair value of net identifiable assets acquired.

Translation of the balance sheet

The process of converting a subsidiary's financial statements into the parent’s functional currency.

Profit or loss translation

The translation of profits and losses that happens using actual transaction rates or average rates.

Reclassification on disposal

The treatment of exchange gains or losses that must be recognized upon disposal of a subsidiary.

Disclosures under IAS 21

Specific information that needs to be reported under IAS 21 relating to foreign currency transactions.

Audit risks in translation

Risks related to the incorrect translation of foreign currency transactions during audits.

Monetary position gain or loss

The result of a net position in monetary assets versus liabilities during inflation.

Exchange difference presentation

How exchange differences are reported in financial statements, including in OCI and profit or loss.

Credit transactions

Transactions where a currency payment is not made upfront but through a future settlement date.

Receipt translations

Recording the value of cash inflows at the exchange rate applicable when received.

Bank account currency retention

The currency that the entity keeps its operational receipts in, influencing the functional currency.

Translation of goodwill

The process of converting goodwill through accounting standards for foreign operations.

Historical cost

The original monetary value of an asset for accounting purposes that does not fluctuate over time in translations.

OCI (Other Comprehensive Income)

The component of financial statements capturing items that are not included in profit or loss.

Hyperinflationary economies

Economies that experience inflated currency values often leading to restatement of financial figures.

Financial statement restatement

The process of adjusting financial statements to reflect current currency measurements during hyperinflation.

Investment in overseas operations

Financial holdings and stakes a domestic entity has in foreign entities.

Market value assessment

The process of evaluating the value of assets in the current market against historical costs.

Repatriation of earnings

The process of returning profits from foreign investments back to the home country.

Net exchange gain or loss

The overall effect on profit or loss from translating all foreign currency transactions.

General prices index

An index used to inflate historical costs for accurate reporting in hyperinflationary economies.

Cumulative inflation measure

A method to determine if an economy has entered a hyperinflation state by assessing inflation over time.

Financial instrument exchange risks

The risks associated with exchange differences in financial contracts involving foreign currencies.

Exchange differences cumulative report

A statement showing all gains and losses from currency exchange over a reporting period.

Parent’s equity reporting

How the parent entity presents its share of exchange differences in its financial statement.

Translation loss recognition

The requirement to acknowledge losses in value due to currency translations in financial reporting.

Rate confirmation procedures

Auditing steps to verify exchange rates used for foreign currency translations.