Foregen curency
97
IAS 21 The Effects of Changes in Foreign Exchange Rates defines the term ‘functional
currency’.
Which of the following is the correct definition of ‘functional currency’?
A The currency in which the financial statements are presented
B The currency of the country where the reporting entity is located
C The currency that mainly influences sales prices and operating costs
D The currency of the primary economic environment in which an entity operates
98
Sunshine is an entity with a reporting date of 31 December 20X1 and a functional currency
of dollars ($) On 30 June 20X1, it purchased land from overseas at a cost of 30 million dinars.
The land is an item of property, plant and equipment and is measured using the cost model.
Exchange rates are as follows:
Dinars: $1
As at 30 June 20X1 3.0
As at 31 December 20X1 2.0
Average rate for year‐ended 31 December 20X1 2.5
The fair value of the land at 31 December 20X1 was 32 million dinars.
What is the carrying amount of the land as at 31 December 20X1?
A $10 million
B $15 million
C $12 million
D $16 million
ANSWER
A
99
In relation to IAS 21 The Effects of Changes in Foreign Exchange Rates, which of the
following statements are true?
(i) Exchange gains and losses arising on the retranslation of monetary items are
recognised in other comprehensive income in the period.
(ii) Non‐monetary items measured at historical cost in a foreign currency are not
retranslated at the reporting date.
(iii) An intangible asset is a non‐monetary item.
A All of the above
B (ii) and (iii) only
C (i) and (iii) only
D (i) and (ii) only
100
An entity took out a bank loan for 12 million dinars on 1 January 20X1 It repaid 3 million
dinars to the bank on 30 November 20X1 The entity has a reporting date of 31 December
20X1 and a functional currency of dollars ($) Exchange rates are as follows:
Dinars: $1
1 January 20X1 6.0
30 November 20X1 5.0
31 December 20X1 5.6
What is the total loss arising (to the nearest $000) on the above transactions in the year
ended 31 December 20X1?
$_______________,000
$207,000
ANSWER
$207,000
The loan should initially be translated into dollars using the spot rate of 6.0.
The repayment of the loan should be translated using the spot rate of 5.0.
The outstanding loan at the reporting date is a monetary item so is retranslated using the
closing rate of 5.6.
The exchange loss is calculated as follows:
Dinar
(000) Rate $000
1 January 20X1 12,000 6.0 2,000
30 November 20X1 (3,000) 5.0 (600)
Foreign exchange loss – 207
–––––– –––– ––––––
31 December 20X1 9,000 5.6 1,607
101 A manufacturing entity buys a machine (an item of property, plant and equipment) for 20
million dinars on 1 January 20X1. The machine is held under the cost model and has a useful
life of 20 years The entity has a reporting date of 31 December 20X1 and a functional currency
of dollars ($) Exchange rates are as follows:
Dinars: $1
1 January 20X1 2.0
31 December 20X1 3.0
Average rate for year‐ended 31 December 20X1 2.5
What is the carrying amount of the machine as at 31 December 20X1?
A $9.7 million
B $9.6 million
C $9.5 million
D $6.3 million
SOLUTION
20M/20=$10M
LESS DEP
$10M/20=$.5M
CARRYING AMOUNT=10-.5=$9.5M
The following scenario relates to questions 306–310
Vance buys and sells goods in Kromits (Kr), but has a functional currency of dollars ($).
Vance purchased goods for Kr 10,000 on 1 September 20X1. At Vance’s year‐end of 31 December 20X1
this amount remains unpaid.
Vance sold goods on 1 September 20X1 for Kr 60,000. On 1 October 20X1 Vance received Kr 30,000
The remaining Kr 30,000 is unpaid at 31 December 20X1.
Vance’s assistant accountant estimated the tax expense for the year ended 31 December 20X1 at
$43,000. However, he had ignored deferred tax. At 1 January 20X1 Vance had a deferred tax liability of
$130,000. At 31 December 20X1 Vance had temporary taxable differences of $360,000. Vance pays tax
at 25%. All movements in deferred tax are taken to the statement of profit or loss.
Relevant exchange rates are:
1 September Kr10:$1
1 October Kr10.5:$1
31 December Kr8:$1
Average rate Kr9:$1
306
What gain or loss should be recorded in the statement of profit or loss for the year ended
31 December 20X1 in relation to the payable recorded for the purchase of goods?
A Loss of $111
B Gain of $111
C Loss of $250
D Gain of $250
ANSWEER
306 C
307
What gain or loss should be recorded in the statement of profit or loss for the year ended
31 December 20X1 in relation to the sale of goods?
A Loss of $607
B Gain of $607
C Loss of $893
D Gain of $893
ANSWER
307 B
308
Which of the statements below is/are true?
Statement 1: The inventory purchased on 1 October 20X1 should be retranslated at the
closing rate if the goods remain in inventory at 31 December 20X1.
Statement 2: The foreign exchange gains will be added to the revenue for the year.
True False
Statement 1 FALSE
Statement 2 FALSE
ANSWER
Inventory should not be retranslated as it is not a monetary item. Foreign exchange gains will
not be included in revenue.
