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The foreign currency conversion and translation - Coggle Diagram
The foreign currency conversion and translation
Term and definition
Presentation currency = “the currency in which the financial statements are presented”
Spot exchange rate is defined as “ the exchange rate for immediate delivery”
Foreign currency is a currency other than the functional currency of the entity.
Functional currency = “the currency of the primary economic environment in which the
entity operates.”
Exchange difference is the difference resulting from translating a given number of units of one currency into another currency at different exchange rates.
The primary economic environment is where an entity primarily generates and spends cash
that mainly influences sales prices for goods / services*;
of the country whose competitive forces and regulations mainly determine the sales prices of an entity’s goods / services.
that mainly influences labour, material and other costs of providing goods / services
the currency in which funds from financing activities (ie issuing debt and equity instruments ) are generated
the currency in which receipts from operating activities are usually retained
Exchange rate is the ratio of exchange for two currencies.
Foreign currency item
Non-monetary carried at fair value
PPE
Inventory
Use exchange rate at the date that the item’s fair value was determined
Monetary items
cash and bank balance
account receivable/ other receivables
account payables / other payables
Use the exchange rate when the transaction happen.
At financial year end
Use exchange rate at the end of the reporting period
Non-monetary carried at historical cost
PPE
Inventory
Use exchange rate at the date of the transaction which gave rise to the item
Monetary Item
Foreign currency monetary items are translated at the SFP date using the closing rate
Step 1 find sales of good at year beginning
Step 2 record the transaction of sale in to receivables
Dr .Account receivables x
Cr. Sales x
Step 3 repeat step 1 at year end
Step 4 find difference between sales
Step 5 record profit or loss
Profit
Dr.Cash x
Cr Account receivables x
Cr. Profit on exchange x
Loss
Dr.Loss on exchange x
Cr Account receivables x
Non – monetary item
Non-monetary items translated using the historical exchange rate at the date of the transaction
Step 1 get cost of machine according to foreign currency
Step 2 Record transaction
Dr Machine (PPE) x
Cr Cash x
Step 3 record transaction of Acc Dep
Dr Depreciation x
Cr Accumulated depreciation x