Accounting

2
IAS 21 Foreign currency
transactions
Lecture 1
Chapter 20
(RV & RGV)
 LEARNING OUTCOMES
GAIN AN
UNDERSTANDING ACCOUNT FOR
OF THE ROLE FOREIGN
PLAYED BY CURRENCY
FOREIGN MONETARY
CURRENCY 2
ITEM 4
EXCHANGE RATES TRANSACTION
IN TRANSACTIONS S UNDERSTAND
CONVERT
1 EXCHANGE 3 AND APPLY
RATES FROM PRINCIPLES
DIRECT TO FOR
INDIRECT TRANSACTIONS
QUOTED INVOLVING
RATESFROM SCOPE IMPORT AND
EXCLUDED
EXPORT
3.8. Subsequent measurement: non-monetary
amounts
3.9. Exchange differences: non-monetary items
4. Presentation and functional currencies
5. Presentation and disclosure
 INTRODUCTION
• Economic activity and transactions occur across the
world
• Transactions can be between companies in different
countries, and different currencies (currencies are
specific to a country)
• We require a translation method to record a
transaction which originated in a “foreign” currency
to company’s own
• Exchange rates are available which allows for such
translation
 What is our currency worth?

Do you know the following exchange rates:

 1 USD = ZAR ?
 1 Euro = ZAR?
 1 Pound = ZAR?
Important dates for translation

01 Transaction date
when the foreign denominated
transaction is recognized in our
accounting records

02 Settlement date
when cash is exchanged for the
transaction

03 Reporting date
year-end of the entity (also
referred to as translation date)
 01 Transaction date

• Established with regards to IFRS rules for that type

of transactions (eg. IAS 2 for inventory, IAS 16 for
PPE etc.)

• Consider when the risks and rewards of ownership

transfers from seller to buyer

• To assist with this, INCOTERMS have been developed

and is used internationally to ensure some
consistency in determining date on which R&R ofis
‘Incoterms’
ownership transfers the short and
snappy way of
saying
International
Commercial
Terms.
 01 Transaction date (cont)
• The following INCOTERMS are relevant for Acc2
purposes:
- FOB (free on board): R&R pass when goods are loaded
onto ship at port of shipment

- CIF (carriage insurance and freight): R&R pass when

goods are loaded onto ship at port of shipment

- DAT (delivered at terminal): R&R pass when goods are

offloaded at named destination terminal

- DDP (delivered duty paid): R&R pass when goods have

arrived at named destination and import clearances
have been obtained
 Determining the relevant dates
Example 2 (pg 964)
 How exchange rates are quoted
An exchange rate is defined as: “the price of one
currency in another currency” To convert from
Exchange rates can be quoted direct to indirect:
GIVEN $1: R12
To get ZAR to R1,
DIRECTLY INDIRECTL you divide by 12,
and do the same on

Y
$ side.
So: $1/12 = $0.083
And R12/12 = R1
FC1: LC4 LC1: FC 0.25
(e.g. $1: ZAR12) (e.g. ZAR1: To convert from
indirect to direct:
(how much of YOUR $0.083 GIVEN: ZAR1: 0.083$
currency do you need (how much To get $ side to $1,
you divide by 0.083.
to buy 1 unit offoreign currency Do the same on ZAR
foreign currency) does 1 unit of side:
So R1 / 0.083 = R12
your currency And $0.083 / 0.083 =
Example 1 (pg 962) give you) $1
Initial recognition and measurement

Initially
Initially measured
recognis • Multiplying the
FC amount
ed
Transaction • By the spot rate
date • On transaction
date

SPOT RATE:
The exchange rate
for immediate
delivery
Subsequent recognition and measurement

On each
subsequent If the exchange rate
reporting between SPOT rate
MONETARY date and CLOSING rate
ITEMS ARE differs – this causes a
TRANSLATE exchange differences
D TO THE
LATEST If the exchange rate
EXCHANGE On between CLOSING
RATE: settlement rate and SPOT rate
on settlement date
date
differs – this causes
a exchange
difference
CLOSING RATE:
The exchange rate
at reporting date
 Exchange differences

• Exchange rate differences can be positive or

negative (income or loss)

• Exchange rate differences are recognized in P/L with

one exception that is recognized in OCI, but this is
EXCL from Acc2 scope

Example 3 (pg 966)

 Example 3 (pg 966)

 A sale transaction on 31 Jan results in foreign debtor

of FC 2 000.

31 Jan 28 Feb 31 March

FC1: LC4 FC1: LC7 FC1: LC6
R14 R12
R8 000
+R6 000 -R2 000
000 000
Dt: Debtor 8
Dt: Debtor 6 000 Dt: FE loss 2 000
000
Ct: FE Gain 6 Ct: Debtor 2
Ct: Sales 8
000 000
000

 Consider the effect on sales? (Important principle)

 Would we translate every month?
 Import VS export transactions
• IMPORTING = we buy from a FOREIGN supplier
• EXPORTING = we sell to a FOREIGN customer

• This will have an impact on the accounts you

created (asset vs liability) and whether an increase
or decrease in exchange rate becomes a profit or a
loss
 Import and export transactions

There are three scenarios that could occur when we

import or export:

1. Transaction date and settlement date is on the

same day
- There will be no exchange rate differences as it is
recognized and settled at the same rate

Transacti Reportin
01 on 03 g date
date
Settleme
02 nt
date
(example 4 and 5: self study)
 Import and export transactions
2. Settlement date is deferred, but before reporting
date
- Record the initial transaction on transaction date
at spot rate
- Translate from spot rate to settlement date spot
rate when payment is made or received

Transacti Settlemen Reportin

01 on date 02 t 03 g date
date

Example 6 – Import
Example 7 – Export 16
 Import and export transactions

3. Settlement date is deferred and after reporting

date
- Record the initial transaction on transaction date
at spot rate
- Translate the balance to closing rate at reporting
date
01 02 03
- Translate the balance again to spot rate at
settlement date
Transacti Reporting Settlemen
on date t date
date

Example 8 and 10 – Import

 Example 10 C
A company in the UK ordered inventory to the value of $900 from a US
company on 16 Jan 20x1. Transaction date is 5 Feb 20x1.
Year-end is 31 March 20x1 and payment was made 5 April 20x1.

Date Spot rate

16 Jan 20x1 £1: $2.20
5 Feb 20x1 £1: $2.50
31 March 20x1 £1: $2.25
5 April 20x1 £1: $3.00

Transactio Reporting Settlement

n date 31 date 5 April
Date 5 Feb March
Dt: Foreign exc loss £40
Dt: Inventory £360 Dt: Acc Payable £100
Ct: Accounts Payable
Ct: Accounts Payable Ct: Foreign exc gain
£40
£360 £100
(900/2.25 = 400) – 360 =
(900 /2.5 = 360) (900 /3 = 300) - 400
40 Dt: Acc Payable £300
Ct: Bank £300
 CLOSING

In summary, when dealing with a foreign exchange

transaction, use the following approach when reading
a question:

 Identify the transaction date, settlement date &

reporting date
 Plot these on a timeline so that you are clear about
whether you need to translate on all of those dates
or only some
 Add the exchange rate on each of these dates
where you need to translate to the timeline
 Identify whether you have an IMPORT or EXPORT
transaction
 Calculate the amounts by using exchange rate (pay
attention to direct vs indirect quoted)