Year 3 · Topic 19 of 20

IAS 21: Foreign currency transactions

Recording deals in other currencies, retranslating balances at the year end, and where exchange gains and losses go.

ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map

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What it is: What to do when a UK company buys or sells in another currency, such as US dollars.

The key idea: record the deal at the exchange rate on the day. At the year end, retranslate monetary items (cash, receivables, payables, loans) at the closing rate. The difference is an exchange gain or loss in profit or loss.

Example. A company buys goods for $50,000 when £1 = $1.25: £40,000. At the year end it still owes the money and £1 = $1.30. The payable is now £38,462, so there’s a £1,538 gain.

Key words

Functional currency
The currency of the main economic environment the company operates in.Example: Pounds sterling for a UK retailer.
Spot rate
The exchange rate on the date of a transaction.Example: £1 = $1.25 on the day goods are bought.
Closing rate
The exchange rate at the year end.Example: £1 = $1.30 on 31 December.
Monetary item
Money held, or amounts to be received or paid in a fixed number of currency units.Example: Cash, trade receivables and payables, loans.
Non-monetary item
Items not settled in a fixed amount of money.Example: Machinery, inventory, prepayments.

Learn

Step 1: record the transaction

Translate at the spot rate on the transaction date (an average rate for the period can be used if rates don’t change much).

Step 2: at the year end

ItemRate to use
Monetary: cash, receivables, payables, loansClosing rate. Retranslate, and put the difference in profit or loss
Non-monetary at historical cost: machinery, inventoryHistorical rate. Don’t retranslate
Non-monetary at fair valueRate on the date fair value was measured

Step 3: on settlement

When the invoice is paid, any difference between the amount paid and the recorded amount is an exchange gain or loss in profit or loss.

Reading the rate. “£1 = $1.30” means divide dollars by 1.30 to get pounds. A stronger pound (a higher number) makes dollar debts cheaper in pounds.

Watch it explained

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Videos from YouTube tutors

These videos are made by independent tutors on YouTube, not by Trial Balance. Some use US terms or older exam names (for example F7 for FR), but the principles are the same.

Worked example

On 1 November a UK company buys goods from a US supplier for $50,000, when £1 = $1.25. At the year end, 31 December, the invoice is unpaid and £1 = $1.30.

Working£
Purchase and payable recorded: 50,000 ÷ 1.2540,000
Payable retranslated at closing rate: 50,000 ÷ 1.3038,462
Exchange gain in profit or loss1,538
AccountDr £Cr £
Trade payables1,538
Exchange gain (P/L)1,538
(Retranslation of dollar payable at the closing rate)

The inventory stays at £40,000: it is non-monetary, so it isn’t retranslated.

Practice questions

Type or choose your answers, then press Check answer. Questions with a New numbers button can be repeated with different figures.