- 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)