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Changes in Foreign
Exchange Rates
Day 10
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Accounting issues
A company may engage in foreign currency
operations in two ways:
entering directly into transactions which are
denominated in foreign currencies
conducting foreign operations through a foreign
entity
Resultant transactions and balances must be
translated into the reporting currency for
inclusion in financial statements
Key issues
Which exchange rate to use?
How to treat any exchange differences?
2
Key definitions
Closing rate – spot exchange rate at the end of
the reporting period
3
Key definitions (contd)
Functional currency – Currency of the primary
economic environment in which the entity
operates
4
Key definitions (contd)
Monetary items – money held and assets (and
liabilities) to be received (or paid) in a fixed or
determinable number of units of currency.
Examples include cash, loans, receivables and
payables
Non-monetary items
Examples include non-current assets, goodwill,
inventory.
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Accounting for transactions
6
Monetary settlements
7
Year-end balances
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Case study – Aston
On 25 October Aston buys goods from a Mexican supplier for
Peso 286,000. The goods remain in inventory at the year end.
Required:
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Solution – Aston (supplier paid)
$ $
25 Oct Dr Purchases
(286,000 ÷ 11.16) 25,627
Cr Trade payable 25,627
25 Oct Dr Purchases
(286,000 ÷ 11.16 ) 25,627
Cr Trade payable 25,627
31 Dec Dr Profit or Loss
– exchange loss
(other operating expense) 326
Cr Trade payable
(286,000 ÷ 11.02 – 25,627) 326
Required:
12
Solution – Warrior
US $000 US $000
29 Nov Dr Cash
(1,520,000 ÷ 1.52) 1,000
Cr Loan 1,000
31 Dec Dr Loan 84
13
Net investment in a foreign operation
An entity may have a monetary item that is receivable
from/payable to a foreign operation
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