Foreign Currency and Functional Currency Concepts

Definitions

• Closing Rate: Spot exchange rate at the end of the reporting period.
• Exchange Difference: Difference between translating one currency into another at different exchange rates.
• Foreign Currency: Any currency other than the functional currency of the entity.
• Functional Currency: Currency of the primary economic environment where the entity operates.
• Monetary Items: Currency held, assets, and liabilities to be received or paid in a fixed or determinable amount of currency.
• Presentation Currency: Currency in which the financial statements are presented.

Functional Currency

• Primary economic environment is where the entity primarily generates and expends cash.
• Factors to consider when determining functional currency:
  • Currency influencing sales prices of goods and services
  • Currency of the country whose competitive forces and regulations mainly determine sales prices.
  • Currency influencing costs of providing goods and services.
• Other factors:
  • Currency used for financing activities.
  • Currency in which receipts from operating activities are retained.

Initial Recognition (Conversion)

• Foreign Currency Transaction: Transaction denominated or settled in a foreign currency, including transactions involving:
  • Purchasing or selling goods or services with prices denominated in a foreign currency.
  • Borrowing or lending funds with amounts payable or receivable denominated in a foreign currency.
  • Acquiring or disposing of assets or incurring or settling liabilities denominated in a foreign currency.
• Initially recognize foreign currency transactions in the functional currency using the spot exchange rate at the date of the transaction.

Reporting at the Ends of Subsequent Reporting Periods (Translation)

• Translation is required at the end of an accounting period for assets or liabilities in foreign currency held on the statement of financial position.
• Translation differs based on whether the functional currency is the presentation currency or not.

Translation: Functional currency is the presentation currency

• Monetary Items: Translated using the closing rate.
• Non-Monetary Items & Related Accounts: Translated using the historical rate.
• Translation Difference: Recognized in Profit & Loss (P&L), unless gain or loss is treated in Other Comprehensive Income (OCI).

Translation: Functional Currency is NOT the presentation currency

• P&L statement Accounts: Translated using the weighted average rate.
• Assets and Liabilities: Translated using the closing rate.