1. Foreign currency

Functional currency

Primary factors

Secondary factors

Currency of the primary economic environment in which an entity operates

Currency that influences the selling prices

Currency that influences labour, materials & other costs

Currency in which operating receipts are retained

Currency in which finance is obtained

Overseas transactions

INITIAL

CASH SETTLEMENT: translate using spot (historic) exchange rate

INITIAL: translate using spot (historic) exchange rate

REPORTING DATE

Monetary items

Non monetary items

retranslate using the closing rate of exchange

Exchange gains or losses to SPL

Do not retranslate

if held at FV: FV should be translated using rate on the date it was determined

Example

yen is also used to pay the major operating costs

Although Maior sometimes imports & sells its parent's products: this is only a small part of its business activity

Yen is the currency in which those sales prices are denominated and settled.

Some transactions are undertaken with China, but these are relatively small

Sales prices are determined by local legal & business conditions in yen.

Therefore, the yen is the functional currency of Maior & the entity doesn't need to consider the secondary factors.

Maior operates with autonomy, so its currency must be assessed separately from its parent

Ex:1

Receivables are monetary assets so are retranslated at reporting date using the closing rate

Receivables needs to be reduced to $1m (3m dinar / 3)& foreign exchange loss of $0.2m ($1.2m-$1m) recorded in SPL:

DR SPL $0.2M & CR Receivables $0.2m

DR Receivables $1.2M & CR Revenue $1.2m

The sale would be translated using the spot rate & recorded at $1.2m ((3m dinar/2.5)

Ex 2:

Intangible asset is amortised over its useful life of 5 years

The amortisation charge is $1m ((5m/5yrs)

DR Intangible asset $5m & CR Cash $5m

DR SPL $1M & CR Intangible asset $1m

The purchase of Intangible asset would be translated using the spot rate and recorded at $5m (10m dinar / 2)

The intangible asset is a non monetary asset so is not translated

Ex 3:

Its FV must be translated into dollars using the rate on the date it was determined

FV of the asset is therefore $11.7m (35m dinar/3)

PPE is not a monetary asset so it is not subsequently retranslated

PPE revaluation gains are recorded in OCI

DR PPE $10M & CR Cash $10M

DR PPE 1.7M & CR OCI $1.7M

The purchase of PPE would be translated using the spot rate and recorded at $10m (20m/2)