Lecture 10: Accounting for Foreign Currency Transactions

These flashcards cover key concepts from Lecture 10 on Accounting for Foreign Currency Transactions, including definitions, processes, and important accounting standards.

Why is it necessary to translate foreign currency transactions into Australian dollars?

To convert transactions denominated in foreign currencies into a common currency for financial reporting.

What is the spot exchange rate?

The exchange rate for immediate delivery at which one currency can be exchanged for another.

What does AASB 121 govern?

The accounting for foreign currency transactions and the effect of changes in foreign exchange rates.

Define functional currency.

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

What is the difference between functional currency and presentation currency?

Functional currency is used for the entity's operational transactions, while presentation currency is the currency in which financial statements are presented.

What happens to foreign currency monetary items at the end of the reporting period?

They must be translated at the reporting date spot rate.

What is a qualifying asset according to AASB 123?

An asset that takes a substantial time to bring to its intended use or sale.

What is the role of hedging arrangements?

To reduce the risks associated with an organization’s foreign currency transactions.

What is a foreign currency swap?

An agreement to exchange the obligation related to a loan in one currency for a loan in another currency.

How are foreign currency transactions recorded at the date of initial recognition?

They are recorded by applying the spot exchange rate at the date of the transaction.

What must happen to exchange differences on foreign currency monetary items?

They must be reported as part of profit or loss in the financial year in which the exchange rates change.

What is an example of a foreign currency transaction?

Acquisition of goods from a foreign supplier where the transaction is denominated in a foreign currency.

What type of expenses do exchange differences relating to qualifying assets lead to?

They are considered borrowing costs and must be capitalised as part of the cost of the asset.

What purpose do hedging contracts serve?

They are used to avoid or mitigate the financial effects of movements in exchange rates.

How does AASB 9 define hedging transactions?

As actions taken to offset potential adverse financial effects of exchange rate fluctuations.

What is the difference between a forward contract and an option in hedging?

A forward contract locks in an exchange rate for a future transaction while an option gives the right to exchange currencies at a specified rate.

Identify one example where the adjustments on foreign currency debts are applied.

When an entity has accounts payable in a foreign currency at the end of the reporting period.

What type of exchange rate is used for foreign transactions when reporting financial statements?

The closing rate, which is the spot exchange rate at the reporting date.