22420 Chap.9 Foreign Currency Transactions
Foreign Currency Transactions
Translate, then retranslate the monetary items
Under AASB 121 a foreign currency transaction is recorded at the spot rate on the transaction date. Monetary items such as payables, receivables and borrowings are retranslated at the closing rate and on settlement, with exchange differences in profit or loss.
Non-monetary items at historical cost are not retranslated.
Functional currency
Translation of whole statements starts from the functional currency, the currency of the primary economic environment, judged first by the currency that drives selling prices and costs, then by financing and the autonomy of a foreign operation.
Realised and unrealised
An exchange difference is unrealised while the balance is still held and remeasured at a reporting date, and realised when cash settles it.
The adjustment at settlement makes the total recognised across periods equal the realised difference.
What this chapter covers
- 01
Spot, closing and forward exchange rates
- 02
Monetary and non-monetary items
- 03
Transaction date and delivery terms
- 04
Retranslation at the reporting date
- 05
Realised and unrealised exchange differences
- 06
Paragraph 28 and paragraph 30 rules
- 07
Net realisable value translated at the closing rate
- 08
Functional currency indicators
Worked example · free
Tracking a US dollar payable from purchase to payment
- 11 May: US$80,000 ÷ 0.64 = $125,000 to inventory and accounts payable.
- 130 June: the payable is US$80,000 ÷ 0.62 = $129,032, a $4,032 exchange loss; inventory stays at $125,000.
- 131 August: the payable is US$80,000 ÷ 0.66 = $121,212, a $7,820 exchange gain, then cash of $121,212 settles it.
- 1Realised result: $125,000 − $121,212 = $3,788 gain, equal to $7,820 less $4,032.
Key terms
- Monetary item
- Currency on hand, or a right or duty to receive or pay a fixed or determinable number of currency units.
- Closing rate
- The spot rate that applies on the last day of the reporting period.
- Exchange difference
- The difference from translating the same number of foreign currency units at different exchange rates.
- Functional currency
- The currency of the main economic environment an entity operates in.
Foreign Currency Transactions FAQ
Are shares held in another company a monetary item?
No. Shares do not give a claim to a fixed or determinable number of currency units, so they are non-monetary, even though they are financial assets that can be sold for cash.
Where do exchange differences on payables go?
Paragraph 28 of AASB 121 sends exchange differences on monetary items, whether they arise on retranslation at a reporting date or on settlement, to profit or loss in the period in which they arise.
What decides the transaction date for an import?
The delivery terms. Under FOB shipping point the buyer takes the goods at shipment, so that is the date; under FOB destination it is delivery to the buyer.
What are spot, closing and forward rates?
A spot rate is the rate for immediate delivery; the closing rate is the spot rate on the last day of the reporting period; a forward rate is agreed now for exchanging currency on a specified future date, which is the rate used in hedging contracts.
Is inventory written down in foreign currency or Australian dollars?
Net realisable value is translated at the closing rate and compared with the inventory’s historical A$ cost. If the translated amount is lower, the write-down goes to profit or loss, and its exchange component goes with it.
Exam move
For each question, write the transaction date, the reporting date and the settlement date on one line with the rate quoted beside each. Classify every balance as monetary or not before translating, then check that your unrealised and adjustment figures add to the realised difference. Add one export receivable so you see the direction of gains and losses reverse.
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