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Demystifying foreign currency issues

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Dealing with foreign currency matters in financial statements often causes difficulty among preparers of financial reports. In this article, we address some common issues on the treatment of foreign currency matters.

Foreign Currency Transactions

Dealing with foreign currency matters in financial statements often causes difficulty among preparers of financial reportsWhere an entity has the same functional currency – the currency in which it conducts its operations – and presentation currency – the currency in which it presents financial statements – the only foreign currency matter to consider is the treatment of transactions which happen in a currency different to its functional currency.

The steps required under AASB 121 The Effects of Changes in Foreign Exchange Rates are straightforward:

  • At the date of the transaction, recognise the transaction in the accounting records at the spot rate on that date
  • In subsequent reporting periods:
     
    • Retranslate any monetary items (including financial assets and liabilities), at the closing rate at the reporting date
    • Do not retranslate non-monetary items (including tangible and intangible assets), unless they are held at fair value – in which case, translate using the exchange rate at the date when the fair value is determined

Exchange differences on the settlement of monetary items, or on the retranslation of monetary items at the reporting date, are recognised in profit or loss, with one exception, covered below.The steps required under AASThe effects of changes in foreign exchange rates are straightforward

For non-monetary assets held under a revaluation model, this means that the revaluation is done first in the foreign currency, and the revalued amount is then converted using the exchange rate at the date of the valuation.

Foreign Operations

Foreign operations are treated differently. To incorporate the results and financial position of a foreign operation into those of the reporting entity through a consolidation, these items must be reported in the reporting entity’s presentation currency...

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