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The effects of changes in Forex - Coggle Diagram
The effects of changes in Forex
About
The
functional currency
is the currency of the
primary economic environment
in which the
entity operates
. This is deemed to be
where the entity generates and expends cash
Factors in determining the
functional currency
The currency that most
influences operating costs
The currency in which an
entity's finances are dominated
is also considered
The currency
that dominates the determination of the sales prices
If a company deals with transactions in a
currency other than its own
, then it must
convert the amount into its own currency
before recording it in the general ledger.
The standard applies to three types of foreign exchange transactions:
borrowing/lending funds payable or receivable in a foreign currency
acquiring/disposing of assets or settling liabilities in a foreign currency
buying/selling goods in a foreign currency
Focus is on Un-Hedged Foreign currency transactions
Meaning we don't take steps to protect ourselves against changes in exchange rates
I.) Recognition And Measurement
Initial Recognition and Measurement
When goods are delivered free-on-board (FOB) at the port of departure, the significant risks and rewards associated with ownership are transferred to the buyer on delivery to the port of departure.
If goods are dispatched on a cost, insurance, freight (CIF) basis, the risks and rewards associated with ownership still pass to the buyer at the port of departure, but the seller arranges for the shipping of the items involved.
An approximate rate for a specific date or an average rate for a week, month, or even a longer period may be used as a substitute for the actual rate, as long as the exchange rate does not fluctuate significantly.
Foreign currency transactions are recorded on initial recognition in the functional currency using the spot exchange rate ruling at the transaction date.
closing rate is the spot exchange rate at the end of the business day on the final day of the reporting period.
Subsequent Recognition and Measurement
Non-monetary items recorded at a particular amount will not change subsequently due to currency fluctuations, unless they are remeasured at fair value after the date of acquisition
Differences between the converted amount and the original amount are taken to the profit or loss section of the statement of profit or loss and other comprehensive income
If a foreign non-monetary item must be written down to net realisable value or recoverable amount, the carrying amount is determined by comparing the cost or carrying amount translated at the spot rate on transaction or valuation date with the net realisable or recoverable amount translated at a spot rate on the reporting date when the value was determined
Foreign monetary items are converted at the closing rate ruling on the reporting date
The difference between the amounts is written off in the functional currency.
Currency fluctuations after the reporting date are accounted for in accordance with IAS 10, Events after the Reporting Period.
There are two types of Transactions
Monetary Items
Monetary items are assets and liabilities that can be measured in fixed or determinable amounts of money, such as
Foreign Creditors
Foreign Loans
Right to receive (Or an obligation to deliver) a fixed or determinable Foreign Currency
Foreign Debtors
Non-Monetary Items
Non-monetary items are assets and liabilities that cannot be measured in fixed amounts of money, such as
Inventories
Intangible Assets
PPE
There is no right to receive (Or an obligation to deliver) a fixed or determinable Foreign Currency
About the two types of transactions
Monetary Items
At the reporting date, monetary assets and liabilities are recalculated using the closing rate, and any resulting gains or losses are recorded in the profit and loss statement.
Non-Monetary Items
Non-monetary assets and liabilities are typically not adjusted for changes in exchange rates at the reporting date, unless they are carried at fair value
In such cases, the assets and liabilities are translated using the exchange rate that was in effect when the fair value was established.
II.) Settlement Date
If the transaction is settled in a subsequent period, the exchange difference recognized in each period up to the date of settlement is determined by the change in exchange rates during each period.
Settlement after the reporting date involves calculating exchange difference as (spot rate at reporting - spot rate at settlement date) x foreign currency amount.
For a gain or loss on a non-monetary asset or liability recognized in other comprehensive income, the foreign exchange difference must be recognized in other comprehensive income as well (IAS 21.30).
If the item is settled prior to the reporting date, any difference is taken to the profit or loss section of the statement of profit or loss and other comprehensive income (IAS 21.28).
Settlement before the reporting date involves calculating exchange difference as (spot rate at settlement - spot rate at initial recognition) x foreign currency amount.
The treatment of foreign exchange differences corresponds with the treatment of the gain or loss of the underlying non-monetary item.
Settlement date of a foreign monetary item affects how exchange differences are recognized.
Value Added Tax (VAT) and Foreign Exchange Transactions:
VAT is levied at the R-value (selling price) of exports when the seller becomes liable for VAT.
VAT is levied at the R-value (cost price) when importing non-current assets (PPE) and inventories.
The buyer can claim input tax as soon as they become liable for the VAT.
Loans received and exchange differences have no VAT implications.
Definitions
closing rate
is the spot exchange rate at the reporting date.
forward rate
Is the exchange rate available in terms of an FEC agreement for the exchange of two currencies at a future date.
spot exchange rate
is the exchange rate for immediate delivery of currencies to be exchanged at a particular time.
Presentation currency
Is the currency in which the financial statements are presented.
exchange rate
is the ratio at which the currencies of two countries are exchanged at any given point in time.
Disclosure
When the presentation currency is different from the functional currency, the following must be disclosed:
the fact that the presentation currency is different from the functional currency.
the functional currency used by the entity.
the reason for using a different presentation currency.
When there is a change in the functional currency of the reporting entity, the following must be disclosed:
the fact that there has been a change in the functional currency.
the reason for the change in the functional currency.
The disclosure must include the amount of foreign exchange differences recognized in the profit or loss section of the statement of profit or loss and other comprehensive income. However, this does not include foreign exchange differences arising on financial instruments measured at fair value through profit or loss in accordance with IFRS 9.
For financial instruments at fair value through profit or loss, the foreign exchange difference will be included in the total fair value adjustment and need not be separately disclosed.