PAS 21: Effects of Changes in Foreign Exchange Rates

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12 Questions

What is the purpose of PAS 21?

Prescribing the accounting for foreign currency transactions and balances

Which transactions are included in foreign currency transactions?

Transactions related to borrowing or lending funds

How should a foreign currency transaction be initially recorded?

Using the spot exchange rate on the date of transaction

What is the functional currency of an entity based on mainly?

The currency that mainly influences sales prices and costs

Which of the following is NOT part of translating an entity's results and financial position into the presentation currency?

Consolidation method

When identifying its functional currency, what should a reporting entity consider first?

The currency that mainly influences sales prices and cost of goods sold

How should an entity translate monetary items to the functional currency?

Using the spot exchange rate at the reporting date

What gives rise to an exchange difference in foreign currency transactions?

Translating a foreign currency transaction at different exchange rates

How should non-monetary items measured at fair value be translated?

Using the exchange rate at the date of fair value determination

When is it appropriate for an entity to use average rates for translation?

When exchange rates fluctuate significantly

How should an entity translate income and expenses to the presentation currency?

Using the spot exchange rates at the dates of the transactions

What is recognized in other comprehensive income as a result of translating financial statements to presentation currency?

Exchange difference between transaction date and reporting period end

Study Notes

PAS 21: The Effects of Changes in Foreign Exchange Rates

  • PAS 21 prescribes the accounting for transactions and balances in foreign currencies, except for derivative transactions and balances, and translation of foreign operations and presentation currency.

Foreign Currency Transactions

  • Include transactions denominated in foreign currency, such as buying or selling goods, borrowing or lending funds, acquiring or disposing assets, or incurring or settling liabilities.
  • Initially recorded in functional currency using the spot exchange rate at the date of the transaction.

Functional Currency

  • Identified in the following order:
    • Currency that mainly influences sales prices and cost of goods sold or services provided.
    • Currency in which an entity generates funds from financing activities.
    • Currency in which an entity retains receipts from operating activities.

Translation of Monetary and Non-Monetary Items

  • Monetary items (units of currency held and assets/liabilities) translated to functional currency using the closing rate at the reporting date.
  • Non-monetary items measured at historical cost translated using the exchange rate at the transaction date.
  • Non-monetary items measured at fair value translated using the exchange rate at the date of fair value determination.

Exchange Difference

  • Arises when a foreign currency transaction occurs in one period and settles in another period.
  • Recognized between the transaction date and the end of the reporting period in the transaction period.
  • Recognized between the end of the previous reporting period and the settlement date in the settlement period.

Change in Functional Currency

  • When a change occurs, the entity applies the translation procedures applicable to the new functional currency prospectively from the date of change.

Translation to Presentation Currency

  • Assets and liabilities translated using the closing rate at the date of the statement of financial position.
  • Income and expenses translated using the spot exchange rates at the dates of the transactions.
  • Average rates may be used for practical reasons, but not when exchange rates fluctuate significantly.
  • Resulting exchange difference recognized in other comprehensive income.

Test your understanding of PAS 21, which outlines the accounting treatment for transactions and balances in foreign currencies, as well as the translation of foreign operation results into the entity's financial statements. Explore the guidelines for foreign currency transactions and the presentation currency conversion.

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