CAF 7 – IAS 21

The Effects of Changes in

IAS 21 Foreign Exchange Rates 06
Page | 1
INTRODUCTION
Many businesses have transactions and investments that are denominated
in a foreign currency. Individual companies often enter into transactions in a
foreign currency. These transactions need to be translated into the
company’s own currency, in order to record them in its ledger accounts. For
example:
Background
 a Pakistani company may take out a loan from a French bank in
Euros but will record the loan in its ledger accounts in Rupees; or
 a Pakistani company may sell goods to a Japanese company
invoiced in Yen but will record the sale and the trade receivable in
Rupees in its ledger accounts.
The two main accounting issues when accounting for foreign currency items
are:
Accounting
 What exchange rate(s) should be used for translation?
issues
 How to account for the gains or losses that arise when exchange
rates change?

DEFINITION: CURRENCY
Presentation
The currency in which the financial statements of an entity are presented.
currency
Functional The currency of the primary economic environment in which an entity
currency operates.
Foreign
A currency other than the functional currency of the entity
currency

EXPLANATION: CURRENCY
An entity is permitted to present its financial statements in any currency.
Presentation This reporting currency is often the same as the functional currency but
currency does not have to be. An entity may have more than one presentation
currency.
A reporting entity records transactions in its functional currency. It will also,
typically, prepare its financial statements in its functional currency. These
financial statements may also be translated into a different presentation
Functional
currency, according to the rules in IAS 21.
currency
The functional currency is not necessarily the currency of the country in
which the entity operates or is based.

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 CAF 7 – IAS 21

Primary indicators
 The currency that mainly influences sales prices for goods and
services
 The currency of the country whose competitive forces and regulations
mainly determine the sales prices of its goods and services; and
Indicators of
Page | 2  The currency that mainly influences labour, material and other costs
Functional
currency
Secondary indicators
 The currency in which funds from financing activities (raising loans
and issuing equity) are generated; and
 The currency in which receipts from operating activities are usually
retained.

DEFINITION: EXCHANGE RATE

Exchange
The rate of exchange between two currencies.
rate
Spot rate The exchange rate at the date of the transaction for immediate delivery.
Closing rate The spot exchange rate at the end of the reporting period.
Exchange A difference resulting from translating a given number of units of one
difference currency into another currency at different exchange rates.

DEFINITION: OTHER
Units of currency held and assets and liabilities to be received or paid (in
Monetary cash), in a fixed number of currency units. Examples of monetary items
items include cash itself, loans, trade payables, trade receivables and interest
payable.
Non- Non-monetary items are not defined by IAS 21, but they are items that are
monetary not monetary items. They include tangible non-current assets, investments
items in other companies, investment properties and deferred taxation.

EXHANGE RATE QUOTES

Variable units of PKR for one unit of foreign currency  US$ 1 = PKR 125
Direct PKR = Foreign currency x Rate
Rs. 56,250 = $450 x 125
Variable units of foreign currency for one unit of PKR  US$ 0.008 = PKR 1
Indirect PKR = Foreign currency / Rate
Rs. 56,250 = $450 / 0.008

Latest update: March 2020

 CAF 7 – IAS 21

THE INDIVIDUAL ENTITY: ACCOUNTING TREATMENT

INITIAL RECOGNITION: TRANSLATION OF TRANSACTIONS
On initial recognition, a transaction in a foreign currency must be translated
Spot rate
at the spot rate on the date of the transaction.
If the company purchases goods on most days in the foreign currency, it
Page | 3
may use an average rate for a time period, provided that the exchange rate
does not fluctuate significantly over the period.
Average rate
For example, an entity might use an average exchange rate for a week or a
month for translating all the foreign currency-denominated transactions in
that time period.
These rules apply when an entity:
 buys or sells goods or services that will be paid for in a foreign
currency;
Examples  borrows or lends money when the interest payments and
repayments of principal are in a foreign currency;
 purchases or disposes of non-current assets in another currency; or
 receives dividends and other payments in another currency.
SUBSEQUENT RECOGNITION: RE-TRANSLATION
Exchange difference
Asset or liability Re-translate @
(gain or loss)
Monetary item
Closing rate Recognise in profit or loss
(unsettled)
Monetary item Exchange rate at the date of
Recognise in profit or loss
(settled) receipt or payment
Non-monetary items
Not applicable Not applicable
(carried at cost)
Recognised in the same location
Non-monetary items Exchange rate at the date of fair
as the revaluation gain or loss
(carried at fair value) value adjustment
(Note below)
Note: Under IAS 16 and IAS 38, revaluation gain in recorded in OCI, therefore, exchange
difference shall be recognised in OCI as well. Under IAS 40, gain on fair value increase in
recognised in profit or loss, therefore, exchange difference shall be recognised in profit or
loss as well.

SYLLABUS
Reference Content/Learning outcome

C6 IAS 21 The effects of changes in foreign exchange rates (foreign

exchange transactions)
LO3.6.1 Understand and apply accounting for foreign currency transactions
Proficiency level: 2 Testing level: 1

Past Paper Analysis

A14 S15 A15 S16 A16 S17 A17 S18 A18 S19 A19 S20
08 031
Objective Type - 01
1
Total marks 08 (including IAS 41)

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 CAF 7 – IAS 21

PRACTICE Q&A
Sr.# Description Marks Reference
CLASS ILLUSTRATIONS
1H Currency types 03 ST
Page | 4 2H Initial recognition 03 ST
3C Subsequent measurement – monetary item 05 ST
4C Multiple transaction in single account – monetary item 04 ST + KA
5C Interest at average rate and closing rate 05 ST
6C Subsequent measurement – revalued non-monetary item 06 ST
7H Subsequent measurement – monetary item 04 ST
8H Settlement of monetary items 05 ST
QUESTION BANK
9H DND Limited: Import of plant 10 QB
10H Orlando: US Company selling and buying in Euro 06 QB
11C Omega Limited: Investments and dividend (+IFRS 9) 08 QB
12C Kangaroo Limited: investment property and equity
10 QB
investments (+IAS 40 & IFRS 9)
13C MZA Limited: US Company transacting in multiple foreign
12 QB
currencies
14C Copper Limited – Import against advance & sale on credit 08 PE A19

Latest update: March 2020

 CAF 7 – IAS 21

QUESTION 01
P is a Pakistan-registered mining company whose shares are traded on the Pakistan Stock
Exchange. Its operating activities take place in the gold and diamond mines of South Africa.

(a) What is the presentation currency of P?

(b) What is its functional currency?
(c) P bought specialised mining equipment from the US, invoiced in US dollars. What Page | 5
type of currency is the US dollar, using the IAS 21 definitions? (03)

QUESTION 02
A Pakistani company (with the rupee as its functional currency) has a financial year ending
on 31 December. It buys goods from an Australian supplier (with the Australian dollar as its
functional currency) on 1 December 20X6 invoiced in A$10,000.

The Australian supplier is eventually paid in March 20X7.

Exchange rates over the period were as follows: 1 December 20X6 Rs.75/A$1

Required:
The journal entry for the above transaction on 1 December. (03)

QUESTION 03
A Pakistani company (with the rupee as its functional currency) has a financial year ending
on 31 December. It buys inventory from an Australian supplier (with the Australian dollar as
its functional currency) on 1 December 20X6 invoiced in A$10,000.

The Australian supplier is eventually paid in March 20X7.

Exchange rates over the period were as follows:
 1 December 20X6 Rs.75/A$1
 31 December 20X6 Rs.78/A$1

Required:
Journal entries for the year ended 31 December 20X1. (05)

QUESTION 04
A Pakistani company whose functional currency is the rupee paid $90,000 into a dollar
account on 30 June.

The company paid an additional $10,000 into the account on 30 September.

The company paid an additional $20,000 into the account on 31 October.

There were no other movements on this account.

Exchange rates over the period were as follows:

 30 June: Rs.100/$.
 30 September Rs.99/$.
 31 October Rs. 97/$.
 31 December (year-end): Rs.95/$.

Required:
Calculate exchange difference. (04)

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 CAF 7 – IAS 21

QUESTION 05
A Pakistani company whose functional currency is the rupee borrowed $90,000 on 30 June.
The company recognised an interest accrual of $10,000 at its year-end (31 December).
There were no other movements on this account.

Exchange rates over the period were as follows:

Page | 6  30 June: Rs.100/$.
 Average for the period Rs.99/$.
 31 December (year-end): Rs.95/$.

Required:
Calculate exchange difference on interest accrual using average rate and/or closing rate as
appropriate (05)

QUESTION 06
A Pakistani company (with the rupee as its functional currency) has a financial year ending
on 31 December. It bought a building in Bahrain on 1 December 20X6 for 100,000 Bahraini
dinar (BD) paying by Bank. The building was revalued to BD 120,000 on 31 December 20X6
as permitted by IAS 16.

Exchange rates:
 1 December 20X6 Rs.275/BD1
 31 December 20X6 Rs.290/BD1

Required:
Record the above for the year ended 31 December 20X6. (06)

QUESTION 07
A Pakistani company bought a machine from a German supplier for €200,000 on 1 March
when the exchange rate was Rs. 120/€.

By 31 December, the end of the company’s accounting year, the exchange rate was Rs.
110/€.

At 31 December, the Pakistani company had not yet paid the German supplier any of the
money that it owed for the machine.

Required
Show the amounts that must be recognised to record this transaction. (04)

QUESTION 08
A Pakistani company sells goods to a customer in Saudi Arabia for SR 72,000 on 12
September, when the exchange rate was Rs.28/SR (Saudi riyal).

It received payment on 19 November, when the exchange rate was Rs.30/SR. The financial
year-end is 31 December.

Required:
Journal entries. (05)

Latest update: March 2020

 CAF 7 – IAS 21

QUESTION 09
DND Limited is a listed company, having its operations within Pakistan. During the year
ended December 31, 2016, the company contracted to purchase plants and machineries
from a US Company. The terms and conditions thereof , are given below:

(i) Total cost of contract = US$ 100,000.

(ii) Payment to be made in accordance with the following schedule: Page | 7
Payment Dates Amount Payable
On signing the contract July 01, 2016 US$ 20,000
On shipment* September 30, 2016 US$ 50,000
After installation and test run January 31, 2017 US$ 30,000
*(risk and rewards of ownership are transferred on shipment)

The contract went through in accordance with the schedule and the company made all the
payments on time. The following exchange rates are available:
Dates Exchange Rates
July 1, 2016 US$ 1 = Rs. 60.50
September 30, 2016 US$ 1 = Rs. 61.00
December 31, 2016 US$ 1 = Rs. 61.20
January 31, 2017 US$ 1 = Rs. 61.50

Required
Prepare journals to show how the above contract should be accounted for under IAS 21.
(10)

QUESTION 10
Orlando is an entity whose functional currency is the US dollar. It prepares its financial
statements to 30 June each year. The following transactions take place on 21 May Year 4
when the spot exchange rate was $1 = €0.8.

Goods were sold to Koln, a customer in Germany, for €96,000.

A specialised piece of machinery was bought from Frankfurt, a German supplier. The invoice
for the machinery is for €1,000,000.

The company receives €96,000 from Koln on 12 June Year 4.

At 31 June Year 4 it still owns the machinery purchased from Frankfurt. No depreciation has
been charged on the asset for the current period to 30 June Year 4.

The liability for the machine is settled on 31 July Year 4.

Relevant $/€ exchange rates are:

12 June Year 4 $1 = €0.9
30 June Year 4 $1 = €0.7
31 July Year 4 $1 = €0.8

Required
Show the effect on profit or loss of these transactions for:
(a) the year to 30 June Year 4
(b) the year to 30 June Year 5 (06)

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 CAF 7 – IAS 21

QUESTION 11
Omega Limited (OL) is incorporated and listed in Pakistan. On 1 May 2012, it acquired
20,000 ordinary shares (2% shareholding) in Al-Wadi Limited (AWL), a Dubai based
company at a cost of AED 240,000 which was equivalent to Rs. 6,000,000. The face value of
the shares is AED 10 each. OL intends to hold the shares to avail benefits of regular
dividends and capital gains.
Page | 8
On 1 June 2013, AWL was acquired by Hilal Limited (HL), which issued three shares in HL
in exchange for every four shares held in AWL.

Other relevant information is as under:

AWL HL
Final dividend received on 31 March 2013:
Cash 15% -
Bonus shares 10% -
Final cash dividend received on 10 April 2014 - 20%
Fair value per share as at: 31 December 2012 AED 13.00 -
1 June 2013 AED 14.00 AED 18.00
31 December 2013 - AED 19.50

Exchange rates on various dates were as follows:

31-Dec-2012 31-Mar-2013 1-Jun-2013 31-Dec-2013 10-Apr-2014
1 AED Rs. 25.00 Rs. 26.50 Rs. 28.00 Rs. 28.70 Rs. 28.20

Required
Determine the amounts (duly classified under appropriate heads) that would be included in
OL’s statement of comprehensive income for the year ended 31 December 2013 in respect
of the above investment. (08)

QUESTION 12
Kangaroo Limited (KL), a Pakistan based company, is preparing its financial statements for
the year ended 31 December 2017. Following transactions were carried out during the year:

KL purchased an investment property in United States for USD 2.6 million. 10% advance
payment was made on 1 May 2017 and 70% payment was made on 1 July 2017 on transfer
of title and possession of the property. The remaining amount was paid on 1 August 2017.

On 1 September 2017, KL rented out this property at annual rent of USD 0.24 million for one
year and received full amount in advance on the same date.

KL uses fair value model for its investment property. On 31 December 2017, an independent
valuer determined that fair value of the property was USD 2.5 million.

Following spot exchange rates are available:

Date 1-May-2017 1-Jul-2017 1-Aug-2017 1-Sept-2017 31-Dec-2017
USD 1 Rs. 100 Rs. 105 Rs. 108 Rs. 110 Rs. 116

Following average exchange rates are also available:

Period 2017 Jul to Dec 2017 Sep to Dec 2017
USD 1 Rs. 105 Rs. 111 Rs. 113

Required:
Prepare the extracts relevant to the above transactions from KL’s statements of financial
position and comprehensive income for the year ended 31 December 2017. (10)

Latest update: March 2020

 CAF 7 – IAS 21

QUESTION 13
MZA Limited a dollar-based entity, was involved in the following transactions in foreign
currencies during the year ended December 31, 2018.

(a) MZA Limited bought equipment for 130,000 Dinars on March 04, 2018 and paid for
on August 25, 2018 in Dollars. Page | 9

(b) On February 27, 2018 MZA Limited sold goods which had cost $46,000 for $68,000
to a company whose currency was Krams. The proceeds were received on May 25,
2018.

(c) On September 02, 2018 MZA Limited sold goods which cost $17,000 for $ 24,000 to
a company whose currency was Sarils. The amount was outstanding at December
31, 2018 but the proceeds were received in Sarils on February 07, 2019 when the
exchange rate was S 2.306=$1, the directors of MZA Limited approved the final
accounts on March 28, 2019.

(d) MZA Limited borrowed 426,000 Rolands on May 25, 2018 and is repayable in two
years’ time.

Exchange rates relevant to the above transactions to $1 are given below:

Date Rolans Dinars Krams Saril
27-Feb-18 - - 7.000 -
4-Mar-18 – 0.650 – -
25-May-18 1.500 - 6.700 -
25-Aug-18 – 0.500 – -
2-Sep-18 - - - 2.224
31-Dec-18 1.800 0.540 7.500 2.250

Required:
For each of the above transactions calculate the trading profit or loss and foreign currency
gain or loss which would be included in the company’s financial statements for the ended
December 31, 2018 as required by IAS-21. (12)

QUESTION 14
Copper Limited (CL) entered into following transactions during the year ended 30 June 2019:
(i) On 1 October 2018, CL imported a machine from China for USD 250,000 against
60% advance payment which was made on 1 July 2018. The remaining payment was
made on 1 April 2019.
(ii) On 1 January 2019, CL sold goods to a Dubai based company for USD 40,000 on
credit. CL received 25% amount on 1 April 2019, however, the remaining amount is
still outstanding.

Following exchange rates are available:

Date 1 Jul 2018 1 Oct 2018 1 Jan 2019 1 Apr 2019 30 Jun 2019 Average
1 USD Rs. 121 Rs. 124 Rs. 137 Rs. 140 Rs. 163 Rs. 135

Required:
Prepare journal entries in CL’s books to record the above transactions for the year ended 30
June 2019. (08)

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 CAF 7 – IAS 21

Page | 10

Latest update: March 2020

 CAF 7 – IAS 21

ANSWER 01
(a) The presentation currency (reporting currency) is Pak rupees (PKR). This is a
requirement of the SECP in Pakistan to present financial statements using PKR
currency.
(b) The functional currency is likely to be South African Rand, even though the company
is based in Pakistan. This is because its operating activities take place in South
Africa and so the company will be economically dependent on the Rand if the Page | 11
salaries of most of its employees, and most operating expenses and sales are in
Rand.
(c) The US dollars are ‘foreign currency’ for the purpose of preparing P’s accounts.

IAS 21 requires P to prepare its financial statements in its functional currency (Rand).
However, P is permitted to use PKR as its presentation currency. If it does use PKR as its
presentation currency (which it will do, given the SECP rules), the translation of assets and
liabilities from Rand to PKR must comply with the rules in IAS 21.

ANSWER 02
The purchase/inventory and the trade payable should be recorded initially by translating the
transaction at the spot rate of Rs.75/A$1. This gives a translated value of Rs. 750,000 for
recording in the ledger accounts (Rs.75 x A$10,000).
Dr. Cr.
Rs. Rs.
01.12.X6 Purchases 750,000
Payables 750,000
Being the initial recognition of a purchase of
inventory in a foreign currency

ANSWER 03
Dr. Cr.
Rs. Rs.
01.12.X6 Purchases 750,000
Payables 750,000
Being the initial recognition of a purchase of
inventory in a foreign currency
31.12.X6 Exchange loss (PL) 30,000
Payables 30,000
Retranslation of a payable denominated a foreign
currency. A$10,000 x 78 = Rs. 780,000 – 750,000

ANSWER 04
Rs.
30 June $90,000 x 100 9,000,000
30 September $10,000 x 99 990,000
31 October $20,000 x 97 1,940,000
11,930,000
Exchange difference (balancing figure) (530,000)
Year end $120,000 x 95 11,400,000

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 CAF 7 – IAS 21

ANSWER 05
There is no rule in IAS 21 as to what rate should be used for the accrual of interest. The
accrual could be deemed to arise over the period in which case the average rate would be
used, or it could be treated as a year-end transaction in which case the closing rate would be
used. The profit for the period is not affected by the choice of rate as there would be a
compensating adjustment in the amount of the exchange difference.
Page | 12
Exchange difference (interest at closing rate)
$ Rate Rs.
Balance at start (30 June) 90,000 100 9,000,000
Interest 10,000 95 950,000
9,950,000
Exchange gain (450,000)
Balance at end (31 Dec.) 100,000 95 9,500,000

Exchange difference (interest at average rate)

$ Rate Rs.
Balance at start (30 June) 90,000 100 9,000,000
Interest 10,000 99 990,000
9,990,000
Exchange gain (490,000)
Balance at end (31 Dec.) 100,000 95 9,500,000

There is an exchange gain because the company has a dollar liability, but the dollar has
weakened against the rupee over the period.

ANSWER 06
Dr. Cr.
Rs. Rs.
01.12.X6 PPE 27,500,000
Bank (Rs. 275 x BD100,000) 27,500,000
Being the initial recognition of building bought
in a foreign currency
31.12.X6 PPE (5,800,000 + 1,500,000) 7,300,000
Gain on revaluation (OCI) 7,300,000
Being the recognition of revaluation gain and
exchange gain on retranslation of carrying
amount of a building denominated a foreign
currency.

Working BD Rate Rs.

Building on initial recognition 100,000 275 27,500,000
Revaluation (year-end) 20,000 290 5,800,000
Exchange gain 1,500,000
Building at year end 120,000 290 34,800,000

If the building was an investment property, revalued following the rules in IAS 40 the credit of
Rs.7,300,000 would be to the statement of profit or loss.

Latest update: March 2020

 CAF 7 – IAS 21

ANSWER 07
Dr. Cr.
Rs. Rs.
01 Mar PPE 200,000 x 120 24,000,000
Payable for machinery 24,000,000
Purchase of machinery Page | 13
31 Dec Payable for machinery 2,000,000
Exchange gain (PL) 200,000 x (120 – 110) 2,000,000
Retranslation at closing rate

ANSWER 08
Dr. Cr.
Rs. Rs.
12 Sep Receivable 2,016,000
Revenue (SR 72,000 x Rs.28) 2,016,000
Sales
19 Nov Cash (SR 72,000 x Rs.30) 2,160,000
Exchange gain (PL) 144,000
Receivable 2,016,000
Settlement: cash received

ANSWER 09
Date Description Dr. Cr.
Rs. Rs.
1-Jul-16 Advance to suppliers 1,210,000
Cash 1,210,000
(Amount paid on signing the contract. Exchange
rate was Rs. 60.5/US$)
30-Sep-16 Advance to suppliers 3,050,000
Cash 3,050,000
(Amount paid on delivery. Exchange rate was Rs.
61/US$)
30-Sep-16 PPE in transit/ CWIP 6,090,000
Advance to suppliers 4,260,000
Payable to suppliers 1,830,000
(Recording of asset on the delivery date as risk
and rewards are transferred to the company)
31-Dec-16 Exchange loss 6,000
Payable to suppliers 6,000
(Adjustment of exchange rate as of reporting
date. Exchange rate was Rs. 60.5/US$)
31-Jan-17 Property, plant and Equipment 6,090,000
PPE (In transit/ in progress) 6,090,000
(Transfer the new plants and machineries to
Property, Plant and Equipment)
31-Jan-17 Payable to suppliers 1,836,000
Exchange loss (Bal.) 9,000
Cash 1,845,000
(Final payment to supplier. Exchange rate was
Rs. 61.5/US$1)

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 CAF 7 – IAS 21

ANSWER 10
Part (a) Year to June Year 4
The revenue and the receivable for the sale of €96,000 should be translated at the spot rate
of 0.8 = $120,000

The capital expenditure of €1m should also be translated at the spot rate of 0.8:
Page | 14 Debit Property, plant and equipment $1,250,000
Credit Payables $1,250,000

The receipt on 12 June relating to the receivable is translated at the rate at that date of 0.9.

This generates cash of $106,667 to settle a receivable of $120,000. Hence an exchange

loss of $13,333 is recognised in profit or loss.

The non-current asset is not re-translated at the year end, but the outstanding payable (a
monetary item) must be re-stated to the year-end exchange rate of 0.7. This gives a yearend
payable balance of $1,428,571. This has increased from the initial $1,250,000; therefore, an
exchange loss of $178,571 will be recognised in profit or loss.

Part (b) Year to June Year 5

When the payable is settled after the year end at the spot rate of 0.8, it results in a payment
of $1,250,000. There is an exchange gain of $178,571 compared with the carrying value at
the end of Year 4.

ANSWER 11
Extract from financial statements
For the year ended 31 December 2013
Profit or loss Rupees
Dividend received from AWL (IFRS 9, B5.7.5.1)
(20,000 x 10 x 15% x 26.5) 795,000
FV / exchange gains on valuation of AWL shares on 1-6-2013 W1 2,124,000
Loss on de-recognition of AWL' shares W1 (308,000)
Other comprehensive income:
FV gain/(loss) on investment W1 693,000
Exchange gain on investment W1 225,225
Transfer from Other reserves to Retained earnings
Transfer of FV gain reserve of 31-12-2012,
on derecognition of AWL investment W1 500,000

W1
FV per Gain
No. of Investment
Date share /(loss) Remarks
shares
AED AED @ Rupees Rupees
1-May-2012 20,000 12.00 240,000 25.00 6,000,000
31-Dec-2012 20,000 13.00 260,000 25.00 6,500,000 500,000 FV gain
1-Jun-2013 22,000 14.00 308,000 28.00 8,624,000 2,124,000 Note 1
(20,000x1.1)
1-Jun-2013 16,500 18.00 297,000 28.00 8,316,000 (308,000) Note 2
(22,000/4 x3)
31-Dec-2013 16,500 19.50 321,750 28.00 9,009,000 693,000 FV gain
31-Dec-2013 16,500 19.50 321,750 28.70 9,234,225 225,225 Gain
3,234,225
Note 1: Gain on valuation of AWL on its acquisition by HL
Note 2: Loss on derecognition of AWL shares

Latest update: March 2020

 CAF 7 – IAS 21

ANSWER 12
Kangaroo Limited
Statement of Financial Position
As on 31 December 2017
Assets Rs. in million
Investment property W1 290.00
Page | 15
Liabilities
Unearned rent (0.24 × 8 ÷12 × 110) 17.60

Statement of comprehensive income

For the year ended 31 December 2017
Profit and Loss account Rs. in million
Exchange loss on 20% payment (2.6 × 20% × (105 – 108) (1.56)
Increase in fair value of investment property W1 18.30
Rent income (0.24 × 4÷12 × 110) 8.80

W1: Investment company Rs. in million

Advance payment (2.6 × 10% × 100) 26.00
Initial recognition (2.6 × 70% × 105) 191.10
(2.6 × 20% × 105) 54.60
Total cost 271.70
Fair value (2.5 x 116) 290.00
Gain (P & L) 18.30

ANSWER 13
Part (a)
Date Description Dr. Cr.
$ $
4-Mar-18 Equipment 200,000.00
Accounts payable 200,000.00
Purchase of equipment
25-Aug-18 Accounts payable 200,000.00
Exchange loss 60,000.00
Bank 260,000.00
Payment of accounts payable

Part (b)
Date Description Dr. Cr.
$ $
27-Feb-18 Accounts receivable 68,000.00
Sales 68,000.00
Revenue recognition
27-Feb-18 Cost of sales 46,000.00
Inventory 46,000.00
Cost recognition
25-May-18 Bank 71,044.78
Accounts receivable 68,000.00
Exchange gain 3,044.78
Receipt of accounts receivable

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 CAF 7 – IAS 21

Part (c)
Date Description Dr. Cr.
$ $
2-Sep-18 Accounts receivable 24,000.00
Sales 24,000.00
Revenue recognition
Page | 16 2-Sep-18 Cost of sales 17,000.00
Inventory 17,000.00
Cost recognition
31-Dec-18 Exchange loss 277.33
Accounts receivable 277.33
Year-end closing rate
7-Feb-19 Bank 23,146.57
Exchange gain 576.09
Accounts receivable 23,722.67
Receipt of accounts receivable

Part (d)
Date Description Dr. Cr.
$ $
25-May-18 Bank 284,000.00
Loan 284,000.00
Receipt of loan
31-Dec-18 Loan 47,333.33
Exchange gain 47,333.33
Year-end closing rate

ANSWER 14
Copper Limited
General Journal
Date Particulars Dr. (Rs.) Cr. (Rs.)
Transaction (i)
1-Jul-18 Advance payment (Machine) 18,150,000
Bank ($250,000 x 60% x 121) 18,150,000
1-Oct-18 PPE (Machine) 30,550,000
Advance payment 18,150,000
Payable ($250,000 x 40% x 124) 12,400,000
1-Apr-19 Payable 12,400,000
Exchange loss (PL) 1,600,000
Bank ($250,000 x 40% x 140) 14,000,000
Transaction (ii)
1-Jan-19 Trade receivables 5,480,000
Sales ($40,000 x 137) 5,480,000

1-Apr-19 Bank ($40,000 x 25% x 140) 1,400,000

Exchange gain (PL) 30,000
Trade receivables (Rs. 5,480,000 x 25%) 1,370,000

30-Jun-19 Trade receivables [$40,000 x 75% (163 – 137)] 780,000

Exchange gain (PL) 780,000

Latest update: March 2020

 CAF 7 – IAS 21

ICAP OBJECTIVE BASED QUESTIONS

01. On 19 December 2019 Star Limited bought goods from Morgan plc for 80,000 British Pounds.
At the date of the transactions, the exchange rates were: £1 = PKR 186
On 31 December 2019, Star Limited’s financial year end, the equivalent rates were: £1 = PKR
182
Page | 17
The average rate for the year ended 31 December 2019 was £1 = PKR 185
Star Limited paid this creditor on 3 February 2020 when the exchange rates were: £1 = PKR
188
Star Limited should recognise purchases on 19 December 2019 at:

(a) Rs. 14,880,000

(b) Rs. 14,560,000

(c) Rs. 14,800,000

(d) Rs. 15,040,000

02. On 19 December 2019 Star Limited bought goods from Morgan plc for 80,000 British Pounds.
At the date of the transactions, the exchange rates were: £1 = PKR 186
On 31 December 2019, Star Limited’s financial year end, the equivalent rates were: £1 = PKR
182
The average rate for the year ended 31 December 2019 was £1 = PKR 185
Star Limited paid this creditor on 3 February 2020 when the exchange rates were: £1 = PKR
188
The carrying amount of trade payables in respect of above on 31 December 2019 shall be:

(a) Rs. 14,880,000

(b) Rs. 14,560,000

(c) Rs. 14,800,000

(d) Rs. 15,040,000

03. On 19 December 2019 Star Limited bought goods from Morgan plc for 80,000 British Pounds.
At the date of the transactions, the exchange rates were: £1 = PKR 186
On 31 December 2019, Star Limited’s financial year end, the equivalent rates were: £1 = PKR
182
The average rate for the year ended 31 December 2019 was £1 = PKR 185
Star Limited paid this creditor on 3 February 2020 when the exchange rates were: £1 = PKR
188
The amount of exchange gain or loss for the year ended 31 December 2019 shall be:

(a) Rs. 320,000 gain

(b) Rs. 320,000 loss

(c) Rs. 480,000 gain

(d) Rs. 480,000 loss

© kashifadeel.com
 CAF 7 – IAS 21

04. On 19 December 2019 Star Limited bought goods from Morgan plc for 80,000 British Pounds.
At the date of the transactions, the exchange rates were: £1 = PKR 186
On 31 December 2019, Star Limited’s financial year end, the equivalent rates were: £1 = PKR
182
The average rate for the year ended 31 December 2019 was £1 = PKR 185
Page | 18 Star Limited paid this creditor on 3 February 2020 when the exchange rates were: £1 = PKR
188
The amount of exchange gain or loss to be recognised on 03 February 2020 shall be:

(a) Rs. 320,000 gain

(b) Rs. 320,000 loss

(c) Rs. 480,000 gain

(d) Rs. 480,000 loss

05. Which of the following statements are correct?

(i) An entity can have only one presentation currency
(ii) Functional currency is the currency of primary economic environment in which an entity
operates
(iii) Any currency other than functional currency of the entity is foreign currency.

(a) (i) and (ii)

(b) (i) and (iii)

(c) (ii) and (iii)

(d) (i), (ii) and (iii)

06. Which of the following is NOT a primary indicator for determining functional currency of an
entity?

(a) The currency that mainly influences sales prices for goods and services

(b) The currency of the country whose competitive forces and regulations mainly determine
the sales prices of its goods and services

(c) The currency in which funds from financing activities (raising loans and issuing equity)
are generated

(d) The currency that mainly influences labour, material and other costs

07. Which of the following is NOT a monetary item?

(a) Cash at bank (Fixed deposit in Pakistani Rupees)

(b) Investment equity instruments of other companies

(c) Trade receivables

(d) Loan payable

Latest update: March 2020

 CAF 7 – IAS 21

08. On 19 December 2019 Star Limited sold goods to Clinton Inc for US$ 20,000. At the date of the
transactions, the exchange rates were $1 = PKR 148
On 31 December 2019, Star Limited’s financial year end, the equivalent rates were $1 = PKR
149
Star Limited received the amount due on 3 February 2020 when the exchange rates were $1 =
PKR 146 Page | 19
Star Limited should record revenue on 19 December 2019 at:

(a) Rs. 2,960,000

(b) Rs. 2,980,000

(c) Rs. 2,920,000

(d) None of above

09. On 19 December 2019 Star Limited sold goods to Clinton Inc for US$ 20,000. At the date of the
transactions, the exchange rates were $1 = PKR 148
On 31 December 2019, Star Limited’s financial year end, the equivalent rates were $1 = PKR
149
Star Limited received the amount due on 3 February 2020 when the exchange rates were $1 =
PKR 146
The receivables on 31 December 2019 shall be presented at:

(a) Rs. 2,960,000

(b) Rs. 2,980,000

(c) Rs. 2,920,000

(d) None of above

10. On 19 December 2019 Star Limited sold goods to Clinton Inc for US$ 20,000. At the date of the
transactions, the exchange rates were $1 = PKR 148
On 31 December 2019, Star Limited’s financial year end, the equivalent rates were $1 = PKR
149
Star Limited received the amount due on 3 February 2020 when the exchange rates were $1 =
PKR 146
The amount of exchange gain or loss for the year ended 31 December 2019 in respect of
above transaction is:

(a) Rs. 20,000 gain

(b) Rs. 20,000 loss

(c) Rs. 40,000 gain

(d) Rs. 60,000 gain

© kashifadeel.com
 CAF 7 – IAS 21

11. On 19 December 2019 Star Limited sold goods to Clinton Inc for US$ 20,000. At the date of the
transactions, the exchange rates were $1 = PKR 148
On 31 December 2019, Star Limited’s financial year end, the equivalent rates were $1 = PKR
149. Star Limited received the amount due on 3 February 2020 when the exchange rates were
$1 = PKR 146

Page | 20 The amount of exchange gain or loss on receipt of cash on 03 February 2020 is:

(a) Rs. Nil

(b) Rs. 60,000 gain
(c) Rs. 40,000 loss
(d) Rs. 60,000 loss

12. Moon Limited functional currency is Pak Rupees. It bought a property in New York for $5
million on 2 July 2019. The 25% amount was paid immediately and remaining is to be paid on
31 October 2019.
Moon Limited financial year ends on 30 September each year. Relevant exchange rates are:

02 July 2019 $1 = PKR 164

30 September 2019 $1 = PKR 158
31 October 2019 $1 = PKR 156
The fair value of property is $5.1 million on 30 September 2019.
The property is being used for administrative purposes and has a useful life of 50 years. Moon
Limited uses revaluation model.
At which amount the above property shall be presented in statement of financial position on 30
September 2019?

(a) Rs. 820.0 million

(b) Rs. 815.9 million
(c) Rs. 805.8 million
(d) Rs. 790.0 million

13. Moon Limited functional currency is Pak Rupees. It bought a property in New York for $5
million on 2 July 2019. The 25% amount was paid immediately and remaining is to be paid on
31 October 2019.
Moon Limited financial year ends on 30 September each year.
Relevant exchange rates are:

02 July 2019 $1 = PKR 164

30 September 2019 $1 = PKR 168
31 October 2019 $1 = PKR 166
The fair value of property is $5.1 million on 30 September 2019.
The property is being used for administrative purposes and has a useful life of 50 years. Moon
Limited uses revaluation model.
What is the total charge/credit (net) in profit or loss in respect of the above for the year ended
30 September 2019?

(a) Rs, 4.1 million expense

(b) Rs. 19.1 million expense
(c) Rs, 15 million expense
(d) Rs. 5 million credit

Latest update: March 2020

 CAF 7 – IAS 21

14. Earth Limited has overseas freehold land which it bought for $2 million on 1 March 2019. It
uses revaluation model under IAS 16 for this property. The fair value of land is $2.5 million on
31 December 2019 (year-end). Relevant exchange rates are:

01 March 2019 $1 = PKR 144

31 December 2019 $1 = PKR 165
Page | 21
Which of the following is correct for its financial statements for the year ended 31 December
2019?

(a) PPE Rs.412.5 million, Revaluation surplus Rs. 82 million, Profit or loss Rs. 42.5 million
(b) PPE Rs. 288 million, Revaluation surplus Rs. 82 million, Profit or loss Rs. 42.5 million
(c) PPE Rs. 412.5 million, Revaluation surplus Rs. 124.5 million, Profit or loss Rs. Nil
(d) PPE Rs.288 million, Revaluation surplus Rs. 124.5 million, Profit or loss Rs. Nil

15. Which TWO of the following are secondary indicator for determining functional currency?

(a) The currency in which funds from financing activities (raising loans and issuing equity)
are generated
(b) The currency of the country in which the entity is registered
(c) The currency in which receipts from operating activities are usually retained
(d) The currency that mainly influences labour, material and other costs

16. Moon Limited functional currency is Pak Rupees. It bought a property in New York for $5
million on 2 July 2019. The 25% amount was paid immediately and remaining is to be paid on
31 October 2019. Moon Limited financial year ends on 30 September each year. Relevant
exchange rates are:

02 July 2019 $1 = PKR 164

30 September 2019 $1 = PKR 158
31 October 2019 $1 = PKR 156
The fair value of property is $5.1 million on 30 September 2019.
The property is being used for administrative purposes and has a useful life of 50 years. Moon
Limited uses cost model.
At which amount the above property shall be presented in statement of financial position on 30
September 2019?

Rs. __________ million

17. Moon Limited functional currency is Pak Rupees. It bought a property in New York for $5
million on 2 July 2019. The 25% amount was paid immediately and remaining is to be paid on
31 October 2019. Moon Limited financial year ends on 30 September each year. Relevant
exchange rates are:

02 July 2019 $1 = PKR 164

30 September 2019 $1 = PKR 158
31 October 2019 $1 = PKR 156
The fair value of property is $5.1 million on 30 September 2019.
The property is being used for administrative purposes and has a useful life of 50 years. Moon
Limited uses cost model. At which amount the payables for property shall be presented in
statement of financial position on 30 September 2019?

Rs. ___________ million

© kashifadeel.com
 CAF 7 – IAS 21

18. Moon Limited functional currency is Pak Rupees. It bought a property in New York for $5
million on 2 July 2019. The 25% amount was paid immediately and remaining is to be paid on
31 October 2019. Moon Limited financial year ends on 30 September each year.
Relevant exchange rates are:
Page | 22 02 July 2019 $1 = PKR 164
30 September 2019 $1 = PKR 158
31 October 2019 $1 = PKR 156
The fair value of property is $5.1 million on 30 September 2019.
The property is being used for administrative purposes and has a useful life of 50 years. Moon
Limited uses cost model.
What is the total charge/credit (net) in statement of profit or loss in respect of the above for the
year ended 30 September 2019?

Rs. ___________ million

19. Moon Limited functional currency is Pak Rupees. It bought a property in New York for $5
million on 2 July 2019. The 25% amount was paid immediately and remaining is to be paid on
31 October 2019. Moon Limited financial year ends on 30 September each year.
Relevant exchange rates are:

02 July 2019 $1 = PKR 164

30 September 2019 $1 = PKR 158
31 October 2019 $1 = PKR 156

The fair value of property is $5.1 million on 30 September 2019.

The property being vacant is held for capital appreciation and has a useful life of 50 years.
Moon Limited uses fair value, where permitted under relevant IFRSs.
At which amount the above property shall be presented in statement of financial position on 30
September 2019?

Rs. ___________ million

20. Moon Limited functional currency is Pak Rupees. It bought a property in New York for $5
million on 2 July 2019. The 25% amount was paid immediately and remaining is to be paid on
31 October 2019. Moon Limited financial year ends on 30 September each year.
Relevant exchange rates are:

02 July 2019 $1 = PKR 164

30 September 2019 $1 = PKR 158
31 October 2019 $1 = PKR 156
The fair value of property is $5.1 million on 30 September 2019.
The property being vacant is held for capital appreciation and has a useful life of 50 years.
Moon Limited uses fair value, where permitted under relevant IFRSs.
What is the total charge/credit (net) in statement of profit or loss in respect of the above for the
year ended 30 September 2019?

Rs. ___________ million

Latest update: March 2020

 CAF 7 – IAS 21

OBJECTIVE BASED ANSWERS

01. (a) £80,000 x 186 = Rs. 14,880,000
The exchange rate at the date of transaction is applied.
02. (b) £80,000 x 182 = Rs. 14,560,000
The closing exchange rate is applied for monetary items. Page | 23

03. (a) Initially recorded at £80,000 x 186 = Rs. 14,880,000

Retranslated at £80,000 x 182 = Rs. 14,560,000
Difference (decrease in liability is gain) = Rs. 320,000
04. (d) 0n 31 December 2019 £80,000 x 182 = Rs. 14,560,000
Payment £80,000 x 188 = Rs. 15,040,000
Difference (more payment means loss) = Rs. 480,000
05. (c) Statement (i) is incorrect, an entity may have more than one presentation
currencies, in which they present their financial statements.
06. (c) This is one of the secondary indicators.
07. (b) Investment in other companies is non-monetary item as it may not be
realised in fixed number of currency units.
08. (a) $20,000 x 148 = Rs. 2,960,000
The exchange rate at the date of transaction is applied.
09. (b) $20,000 x 149 = Rs. 2,980,000
The closing exchange rate is applied for monetary items.
10. (a) Initially recorded at $20,000 x 148 = Rs. 2,960,000
Retranslated at $20,000 x 149 = Rs. 2,980,000
Difference (increase in asset is gain) = Rs. 20,000
11. (d) 0n 31 December 2019 $20,000 x 149 = Rs. 2,980,000
Received $20,000 x 146 = Rs. 2,920,000
Difference (less received means loss) = Rs. 60,000
12. (c) $5.1 million x 158 = Rs. 805.8 million
Revalued at year end.
13. (b) Depreciation Rs. 820 million / 50 years x 3/12 = Rs. 4.1 million
The exchange gain shall be recognised in other comprehensive income as
revaluation gain is also recognised in other comprehensive income.
Exchange loss on payables
$5 million x 75% x Rs. (164-168) = Rs. 15 million
Net Rs. 19.1 million
14. (c) PPE $2.5 million x 165 = Rs. 412.5 million
Gain on revaluation (including exchange gain)
= $412.5 million – ($2 million x 144) = Rs. 124.5 million
Profit or loss Rs. Nil (because no deprecation on land and exchange gain
is to be recognised in other comprehensive income)
15. (a) and (c) (b) is not an indictor
(d) is primary indicator

© kashifadeel.com
 CAF 7 – IAS 21

16. Rs. 815.9 million $5 million x 164 = Rs. 820 million

Depreciation Rs. 820 million / 50 years x 3/12 = Rs. 4.1 million
Carrying amount Rs. 815.9 million
17. Rs. 592.5 million $5 million x 75% x Rs. 158 = Rs. 592.5 million
Using closing rate
Page | 24
18. Rs. 18.4 million Depreciation Rs. 820 million / 50 years x 3/12 = Rs. 4.1 million
Exchange gain $5 million x 75% x Rs. (164-158) = Rs. 22.5 million
Net Rs. 18.4 million
19. Rs. 805.8 million $5.1 million x 158 = Rs. 805.8 million
Investment property under fair value model (no depreciation is charged).

20. Rs. 8.3 million Initial recognition $5 million x 164 = Rs. 820 million
At year end $5.1 million x 158 = Rs. 805.8 million
Decrease in value Rs. 14.2 million
Investment property under fair value model (no depreciation is charged).
Exchange gain on payables
$5 million x 75% x Rs. (164-158) = Rs. 22.5 million
Net Rs. 8.3 million

Latest update: March 2020