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Reporting foreign currency transactions in the functional currency – Initial recognition and subsequent measurement (where they exist at the balance sheet date)
Extract from FRS102: Section 30.6 -30.11
30.6 A foreign currency transaction is a transaction that is denominated or requires settlement in a foreign currency, including transactions arising when an entity:
(a) buys or sells goods or services whose price is denominated in a foreign currency;
(b) borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; or
(c) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency.
30.7 An entity shall record a foreign currency transaction, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.
30.8 The date of a transaction is the date on which the transaction first qualifies for recognition in accordance with this FRS. For practical reasons, a rate that approximates the actual rate at the date of the transaction is often used, for example, an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate.
Reporting at the end of the subsequent reporting periods
30.9 At the end of each reporting period, an entity shall:
(a) translate foreign currency monetary items using the closing rate;
(b) translate non-monetary items that are measured in terms of historical cost in a foreign currency using the exchange rate at the date of the transaction; and
(c) translate non-monetary items that are measured at fair value in a foreign currency using the exchange rates at the date when the fair value was determined.
30.10 An entity shall recognise, in profit or loss in the period in which they arise, exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous periods, except as described in paragraph 30.13.
30.11 When another section of this FRS requires a gain or loss on a non-monetary item to be recognised in other comprehensive income, an entity shall recognise any exchange component of that gain or loss in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognised in profit or loss, an entity shall recognise any exchange component of that gain or loss in profit or loss.
OmniPro comment
Monetary items
Definition of monetary items
A monetary item is defined in Appendix I of FRS 102 as ‘units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency’. Examples of monetary items include the below items denominated in foreign currencies on the balance sheet:
- Cash
- Debtors, other debtors, refundable deposits
- Loans payable and receivables
- Investment in preference shares which are considered to be debt in accordance with Section 22 and therefore carried at amortised cost
- Trade creditors
- Provision and accruals where they will be settled in cash
- Financial liabilities as determined by Section 11 (i.e. the debt portion of preference shares)
- Pension or other employee benefits to be paid in cash (IAS 21)
- Cash dividends recognised as a liability (IAS 21)
- Forward contracts, interest rate swaps and other derivative financial instruments
- Warranty provision where a cash refund is provided
Recognition of monetary items
Assets/liabilities denominated in foreign currencies should be translated on initial recognition at the spot rate at the date of the transaction. The date of the transaction will depend on the circumstances. (The shot rate is defined as the price quoted for immediate settlement.)
With regard to sales made in foreign currencies the date of the transaction will be the date the risks and rewards of ownership transfer, which will depending on the conditions of the sale, it can be on delivery to the customer or dispatch from the entities site.
With regard to purchases of physical goods, the transaction date would be the date the risk and rewards transfer. For purchases which are service type items, it would usually be the date the service is provided or the date of the invoice.
In practice the date of the invoice is used when deciding on the transaction date which in reality should equate to when the risk and rewards transfer.
Some entities use an average exchange rate for the week or month, when deciding the exchange rate to use. This method is acceptable as long as the exchange rate does not fluctuate hugely during the period. If it does, then the rate on the day should be used.
If at the period end date, the monetary assets have not been settled then the foreign currency amount is retranslated at the exchange rate at the reporting date i.e. the spot rate at the period end date. The difference between the amount at which it was initially booked and the year end retranslated amount is posted to foreign exchange gain/loss in the profit and loss account.
There are two exceptions to the above rules:
- where a loan is treated as a net investment in a foreign operation (which is discussed) below in the consolidated accounts the difference would be posted to other comprehensive income;
- where hedge accounting is adopted under Section 12, then the effective element of the hedge would be posted to other comprehensive income. This is discussed further in Section 12 of the website.
Section 30 does not allow entities to use a forward contract rate to translate foreign currency assets/liabilities at the period end date. This was permitted under old GAAP. Instead the forward contracts themselves must be fair valued in accordance with Section 12 of FRS 102.
Example 6: Retranslation of monetary asset – purchase
Company A whose functional currency is CU purchased good’s from a foreign supplier on credit for FC10,000 on 1 October when the exchange rate was CU1=FC0.80p. Company A’s year end is 31 December. The invoice was not paid by the year end date and exchange rate was CU1=FC0.85p. The invoice was paid on 30 January of the following year when the exchange rate was CU1=FC0.90p. The accounting treatment of this transaction is:
At date of transaction
|
|
CU |
CU |
|
Dr Inventory (FC10,000/.80p) |
12,500 |
|
|
Cr Accounts Payable |
|
12,500 |
Being journal to recognise the purchase at the transaction date
At year end date
|
|
CU |
CU |
|
Dr Accounts Payable |
735* |
|
|
Cr Unrealised Foreign Exchange Gain in P&L |
|
735 |
Being journal to recognise the foreign exchange gain for the movement in rate to year end
*the amount to be recognised as a foreign exchange gain is determined to be the difference between the amount recognised at the date of transaction of CU12,500 less the year end carrying amount using the year end spot rate of CU11,765 (i.e. FC10,000/.85)= CU735
At payment date
|
|
CU |
CU |
|
Dr Accounts Payable (being carrying amount at 31 December) |
11,765 |
|
|
Cr Bank (FC10,000/0.90) |
|
11,111 |
|
Cr Foreign Exchange Gain in P&L |
|
654
|
Being journal to reflect realised profit on settlement
Example 7: Retranslation of monetary asset – sale
Company A whose functional currency (but also sells goods in FC) is CU sold good’s to a foreign customer on credit for FC10,000 on 1 October when the exchange rate was CU1=FC0.80p. Company A’s year end is 31 December. The invoice was not paid by the year end date and exchange rate was CU1=FC0.85p. The invoice was paid on 30 January of the following year when the exchange rate was CU1=FC0.90p. We are ignoring the stock movement in the example. The accounting treatment of this transaction is:
At date of transaction
|
|
CU |
CU |
|
Dr Trade Debtors (FC10,000/.80p) |
12,500 |
|
|
Cr Revenue |
|
12,500 |
Being journal to recognise the sale at the transaction date
At year end date
|
|
CU |
CU |
|
Dr Unrealised Foreign Exchange Loss in P&L |
735 |
|
|
Cr Trade Debtors |
|
735* |
Being journal to recognise the unrealised foreign exchange loss for the movement in rate to year end
*the amount to be recognised as a foreign exchange loss is determined to be the difference between the amount recognised at the date of transaction of CU12,500 less the year end carrying amount using the year end spot rate of CU11,765 (i.e. FC10,000/.85)= CU735
At payment date
|
|
CU |
CU |
|
Dr Bank (FC10,000/0.90p) |
11,111 |
|
|
Dr Foreign Exchange Loss in P&L |
654 |
|
|
Cr Trade Debtors (being carrying amount at 31 December) |
|
11,765 |
Being journal to reflect realised loss on settlement
Definition of non-monetary items
Section 30 does not define non-monetary items instead they are taken to be the opposite of monetary items. In effect the essential feature of a non-monetary items is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency. Examples of non-monetary items include:
- Deferred income
- Warranty where cash refund not provided
- Prepaids for goods or services (e.g. prepaid rent, maintenance services, progress payments on assets which are non-refundable)
- Property, plant and equipment
- Provisions that are settled by non-monetary assets
- Investment in equity instruments as determined by Section 22
- Inventories
- Intangible assets
- Advances paid on purchases (if linked to specific purchases)
- Advances received on sales (if linked to specific sales)
Non-monetary assets not fair valued
Section 30 states that all non-monetary assets which are not fair valued i.e. held at historic costs should be retranslated at the exchange rate on the date of the transaction. It is then carried at that amount for the duration of its life. There is no retranslation of the item at each reporting date. Where such an asset is impaired, the recoverable amount is translated at the exchange rate applicable at the date when the value is determined. Comparing the previous historic cost with the new revalued recoverable amount may not result in an impairment as the historic amount may still be higher.
Example 8: Retranslation of non-monetary asset
Company A whose functional currency is CU purchased a fixed asset from a foreign supplier on credit for FC10,000 on 1 October when the exchange rate was CU1=FC0.80p. Company A’s year end is 31 December. The invoice was not paid by the year end date and exchange rate was CU1=FC0.85p. The invoice was paid on 30 January of the following year when the exchange rate was CU1=FC0.90p. The accounting treatment of this transaction is:
At date of transaction
|
|
CU |
CU |
|
Dr PPE (FC10,000/.80p) |
12,500 |
|
|
Cr Accounts Payable |
|
12,500 |
Being journal to recognise the purchase at the transaction date
At year end date
No foreign exchange adjustment is made as the asset is carried at the rate determined at the date of the transaction. It is not revalued to the year end rate. The creditor balance is retranslated at year end spot rate with the other side of the transnition hitting the profit and loss.
At payment date
|
|
CU |
CU |
|
Dr Accounts Payable (being carrying amount at 31 December) |
CU11,765 |
|
|
Cr Bank (FC10,000/0.90p) |
|
CU11,111 |
|
Cr Foreign Exchange Gain in P&L |
|
654 |
Being journal to reflect foreign exchange gain on payment
Example 9: Retranslation of non-monetary asset – impairment of asset
Take example 8 above and assume an impairment review has been carried out on this asset at the end of year 1. The recoverable amount of the asset is determined to be FC7,000 retranslated to CU at the date of the impairment was CU9,333 (FX rate CU1=FC.75). The carrying amount at the same date in the balance sheet is CU8,000. As the recoverable amount is still in excess of the carrying amount no impairment is required.
Non-monetary assets fair valued
For non-monetary items which are fair valued, the rules with regard to initial recognition are the same. Subsequently assets are translated at the exchange rate at the date the fair value was determined (Section 30.9(c)). An example would be an investment property. The difference between the prior period carrying amount and the current period is posted within the fair value adjustment in the profit and loss (i.e. the FX differences are subsumed within this).
Where movements in the value of non-monetary assets are posted to other comprehensive income the related foreign exchange differences are posted to the OCI also. Where a revaluation indicates an impairment, the foreign exchange differences should follow the write down i.e. into the profit and loss account.
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