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Unit 7 Lesson 1 Effects of changes in Forex

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Unit 7 Lesson 1 Effects of changes in Forex

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Mia Khumo
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© © All Rights Reserved
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ACCOUNTING 3

UNIT 7 FOREIGN EXCHANGE AND BORROWING COSTS


LESSON 1 - IAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

OBJECTIVE Recognition, measurement and disclosure of foreign exchange transactions


When is the standard, IAS 21 applicable?

Foreign transactions Foreign operations

Need to be converted into the A subsidiary, associate, joint arrangement or


functional currency of the entity branch of a reporting entity whose activities
are conducted in a country or currency other
than that of the reporting entity

• buy/sell goods denominated in FC Not in Accounting 3 scope for the year


1
• borrow/lend funds payable or receivable in FC
2
• acquire/dispose assets or incur/settle liabilities in
3 FC

1
LESSON 2 FOCUS

A foreign currency transaction

UN-HEDGED HEDGED
(IAS21 EFFECTS OF (NOT APPLICABLE TO
CHANGES IN FOREX RATES) ACCOUNTING 3)

P/L - Not protected against


the effects of changes in
foreign exchange rates

RECOGNITION
Relevant Dates

Transaction Date Reporting Date Settlement Date

The date the transaction first Date on which payment is


qualifies for recognition Year-end date of the entity
made to the foreign creditor
When do significant risks and
rewards transfer
FOB, CIF, Etc Use the applicable exchange rate on each of the above dates
Any exchange differences go to P/L

2
RECOGNITION CONT…
A foreign currency transaction

Monetary items Non – Monetary item

Foreign Debtors, Foreign PPE, Inventories, intangible


Creditors and Foreign Loans assets, etc – there is no right
- right to receive (or an to receive (or an obligation to
obligation to deliver) a fixed deliver) a fixed or
or determinable FC determinable FC

MEASUREMENT
INITIAL MEASUREMENT SUBSEQUENT MEASUREMENT

If not settled before year end


Spot Rate on transaction
 remeasure @ closing rate
Date
on reporting date

Exchange rate for immediate


Spot exchange rate at year-end
delivery of currencies to be
date
exchanged at a particular time

Exchange Difference – P/L

3
Example
1. On 15 June 20x7 East Ltd ordered plant from a manufacturer in Orlando (USA). The invoice price of the
plant is $200 000. The outstanding amount must be settled on 30 April 20x8.
2. The plant was shipped free on board (fob) on 15 September 20x7 and arrived in Durban on 1 October
20x7.
3. Customs duty, shipping and freight charges amounted to R25 000 and was paid to customs on 30
September 20x7, together with VAT of R111 300. The R111 300 VAT includes the VAT on the customs duty,
shipping and freight charges.
4. The engineer from Orlando who monitored the installation of the plant requested payment in Rands. His
fee was R15 000 and was paid on 7 October 20x7.
5. The plant was available for use and became operational on 1 November 20x7. The directors are of the
opinion that the useful life of the plant is five years, with no residual value.
Spot rate
Journalise (also cash transactions) all the foreign $1 = R?
currency exchange transactions incurred between 15 June 20x7 5,60
15 September 20x7 5,80
15June20x7 and 31December20x7, and the results
30 September 20x7 5,85
thereof for the reporting period ended 1 October 20x7 5,86
31December20x7. 7 October 20x7 5,89
1 November 20x7 6,03
31 December 20x7 6,10
7

Example cont…
1. Plot Timeline (very NB)

15 Jun 15 Sept 30 Sept 07 Oct 01 Nov 31 Dec 30 April

`
Order date Transaction Year end Settlement
date (FOB) (reporting date
date)

2. Plot only the spot rates relating to the relevant dates

$1 = R5.80 $1 = ?
$1 = R6.10
3. Identify the exchange difference from one relevant date to the next.
$1 = R0.30 8

4
THANK YOU

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