Solutions to GAAP: Graded Questions Foreign currency transactions

Solution 20.1

a.

Consider the following statements in relation to IAS 21 The effects of changes in foreign
exchange rates:
1. Functional currency is defined as ‘the currency of the primary economic environment in
which the entity operates’
2. Foreign currency is defined as a currency other than the functional currency of the entity and
Presentation currency is the currency in which the financial statements are presented
3. Functional currency is defined as the currency in which the financial statements are presented
4. Presentation currency is the currency in which the financial statements are presented and
should be the entity’s functional currency.
5. Local currency is defined as ‘the currency of the primary economic environment in which
the entity operates’ whereas Foreign currency is defined as a currency other than the local
currency of the entity

a) Only 1 and 2 are correct

b) Only 3 and 4 are correct
c) Only 3, 4 and 5 are correct
d) Only 2 is correct
e) None of the options (a-d) are correct

Answer: (a)
Explanation:
• Functional currency is defined as ‘the currency of the primary economic environment
in which the entity operates’. IAS 21.8
• Foreign currency is defined as a currency other than the functional currency of the entity.
IAS 21.8

• Presentation currency is the currency in which the financial statements are presented. IAS
21.8

• Local currency is not a defined term.

b.

The transaction date:

1. is the date on which the transaction first qualifies for recognition in accordance with IFRSs.
2. is not included in the list of definitions in IAS 21 but is described in the standard.
3. is the date when risks and rewards of ownership transfer from the seller to the buyer.
4. is the date when delivery of the goods and services takes place.

a) Only 1 and 2 are correct

b) Only 2 is correct
c) Only 3 is correct
d) Only 4 is correct
e) None of the options (a-d) are correct

Answer: (a)
Explanation:

• Transaction date is defined as the date on which the transaction first qualifies for
recognition in accordance with IFRSs. IAS 21.22
• This is not part of the definitions listed in IAS 21 para8, but is described in para 22.

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Solutions to GAAP: Graded Questions Foreign currency transactions

Solution 20.1 continued …

c.

A foreign currency transaction:

a) is a transaction that is denominated in or requires settlement in a foreign currency.
b) is a transaction that requires settlement in a foreign currency.
c) is a transaction that is both denominated in and requires settlement in a foreign currency.
d) is simply a transaction that is denominated in a foreign currency.
e) None of the options (a-d) are correct

Answer: (a)
Explanation:
• A foreign currency transaction is a transaction that is denominated or requires
settlement in a foreign currency. IAS 21.20 extract

d.

Consider the following statements in relation to IAS 21 The effects of changes in foreign exchange rates:
1. The term exchange rate is defined as ‘the ratio of exchange for two currencies’.
2. The spot exchange rate is the exchange rate for immediate delivery.
3. The closing rate is the spot exchange rate at the reporting date.
4. The closing rate is the exchange rate for immediate delivery.
5. The closing rate is the exchange rate at the close of day.

a) Only 1 and 2 are correct

b) Only 2 is correct
c) Only 3 is correct
d) Only 4 is correct
e) None of the options (a-d) are correct

Answer: (e)
Explanation: statements 1, 2 and 3 are correct
• The term exchange rate is defined as ‘the ratio of exchange for two currencies’. IAS 21.8
• The spot exchange rate is the exchange rate for immediate delivery. IAS 21.8
• The closing rate is the spot exchange rate at the end of the reporting period. IAS 21.8

e.

A machine was purchased for FC1000, on credit, when the exchange rate was LC5: FC1. The
supplier of the machine was paid, before year end, where the payment in foreign currency was
based on an exchange rate of LC6: FC1.
a) The entity will record the acquisition of the machine at LC5 000 and a foreign exchange
gain of LC1 000
b) The entity will record the acquisition of the machine at LC5 000 and a foreign exchange
loss of LC1 000.
c) The entity will record the acquisition of the machine at LC6 000 and no foreign exchange
gain or loss
d) The entity will record the acquisition of the machine at LC6 000 and a foreign exchange
loss of LC1 000
e) None of the options (a-d) are correct

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Solutions to GAAP: Graded Questions Foreign currency transactions

Solution 20.1 continued …

Answer: (b)
Explanation:

Dr Machine: cost 5 000

Cr Foreign creditor (5 000)
Acquisition: (FC1 000 x LC5)

Dr Foreign creditor 5 000

Cr Bank (6 000)
Dr Foreign exchange loss 1 000
Payment (FC1 000 x LC6) and Loss is balancing item

f.

1. If goods are purchased on a ‘carriage, insurance and freight’ basis (CIF), the transaction is
recorded on date the goods are loaded for transport.
2. If goods are purchased on a ‘carriage, insurance and freight’ basis (CIF), the transaction is
recorded on date the goods are delivered.
3. If goods are purchased on a ‘free on board’ basis (FOB), the transaction is recorded on
date the goods are loaded for transport.
4. If goods are purchased on a ‘free on board’ basis (FOB), the transaction is recorded on
date the goods are delivered.

a) Only 1 and 3 are correct

b) Only 1 and 4 are correct
c) Only 2 and 3 are correct
d) Only 2 and 4 are correct
e) None of the options (a-d) are correct

Answer: (a)
Explanation:

There is no difference in the date on which the transaction is recognised when using
‘carriage, insurance and freight’ basis (CIF) or ‘Free on board’ (FOB) terms: the date on
which we would recognise the imported goods (commonly referred to as the transaction
date, being when control of the asset is transferred) will be the same whether the goods
were imported on a CIF basis or FOB basis.

When we import goods on a ‘carriage, insurance and freight’ basis (CIF), it means that
the supplier is simply arranging and paying for the carriage of and insurance over the
goods during the process of transporting the goods from one country to another. Thus, we
(as the importers) are said to acquire control over the asset when the goods are loaded
onto the ship at the port of shipment. This is because, although the supplier is responsible
for arranging the delivery and insurance, we (i.e. the purchaser) would be the beneficiary
of any insurance claim or claim against the shipping company. Thus, the seller has
absolved himself of all responsibilities relating to the goods as soon as the goods are
loaded onto the ship.

‘Free on board’ (FOB) simply means that control of the asset transfers to us (the
purchaser) when the goods are loaded onto the ship.

Continued …

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Solutions to GAAP: Graded Questions Foreign currency transactions

Solution 20.1 continued …

g.

An entity does not freely choose its functional currency; however, it may choose any currency
in which to present its financial statements.

a) True
b) False

Answer: (a)
Explanation:

The functional currency is determined on the basis on certain factors, whereas the entity is
able to choose its presentation currency/ies.

An entity is required to determine its functional currency by considering a number of

factors including (but not limited to):
• the currency influencing the sales prices of goods/services sold,
• the currency influencing the costs (materials, labour etc.) of providing such
goods/services
• the currency in which funds are raised from financing activities.

Thus, an entity cannot simply choose which currency it would like to use as its functional
currency, as this decision depends on the factors outlined in IAS 21. See IAS 21.9 - .10

The currency in which financial statements are presented is known as the presentation
currency. An entity is allowed to present its financial statements in any currency (or
currencies) of its choice. This may or may not be the same as its functional currency (if it
is not the same, the financial statements will have to be translated into the presentation
currency at each reporting date). See IAS 21.38

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Solutions to GAAP: Graded Questions Foreign currency transactions

Solution 20.2

1 Smithy Street
Durban
1234
Phone: 082 123 4567

1 November 20X6
The Financial Director
JKB Breweries
165 Main Road
Newlands
4009

Dear Sir/Madam

Re: Query regarding the application of IAS 21

Thank you for your query regarding IAS 21. We have pleasure in advising as follows:

Functional Currency

Functional currency is defined as ‘the currency of the primary economic environment in

which the entity operates’. See IAS 21.8 This primary economic environment is normally the one
in which the entity 'primarily generates and expends cash'. See IAS 21.9

Sometimes, deciding on the currency in which the entity primarily generates and expends
cash is not clear, and thus IAS 21 provides factors that should be considered in deciding what
the entity’s functional currency is. Professional judgement is needed when determining the
functional currency, which includes assessing the following factors:
• the currency that mainly influences the sales price for the goods or services being offered
(often being the currency in which the sales price is denominated and settled); IAS 21.9 (a)
and
• the currency that mainly influences the costs incurred in providing the goods or services
(often being the currency in which the related costs are denominated and settled). IAS 21.9 (b)

Other factors that may also be considered in determining the functional currency include:
• the currency in which funds from financing activities are generated; IAS 21.10 (a)
• the currency in which receipts from operating activities are usually retained. IAS 21.10 (b)

Further factors to consider are listed in IAS 21, paragraphs 11 – 14. All factors should be
considered on balance – no factor can be considered in isolation.

From the information given to me, the functional currency of JKB is the South African Rand.
This is because the costs incurred in purchasing its inputs (barley and water) are purchased in
South African Rands, and because JKB mainly sells to South African consumers, which
suggests that the Rand is probably the main currency influencing the beers’ selling prices.

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Solutions to GAAP: Graded Questions Foreign currency transactions

Solution 20.2 continued ...

Presentation Currency

Presentation currency is defined as ‘the currency in which the financial statements are
presented’. See IAS 21.8 Normally we present our financial statements in the functional currency,
but sometimes we may need to translate our financial statements into a foreign currency. IAS
21 (paragraph 38) allows an entity to present its financial statements in any currency or
currencies. Thus, the presentation currency could be the functional currency or a foreign
currency or even both (if the entity chooses to present it in more than one currency).

JKB is listed on the London stock exchange, which requires financial statements to be
presented in the local currency of the United Kingdom (i.e. Pounds). The Pound is therefore
the presentation currency of JKB.

Translation of a functional currency into a presentation currency

As the functional currency of JKB is the Rand and its presentation currency is the pound, JKB
will have to translate all items in its financial statements into Pounds. This must be done as
follows:
• Assets and liabilities are translated into the presentation currency using the spot rate at
reporting date; and
• Income and expenses are translated into the presentation currency at the spot rate at the
time of the transaction, or at the average rate if this has not fluctuated too much from the
spot rate at the time of the transaction. See IAS 21.39

Any exchange differences resulting from the translation into the presentation currency are
recognised in other comprehensive income, within a separate reserve account called the
‘foreign currency translation reserve’. See IAS 21.39 (c)

I hope I have been of assistance. Please do not hesitate to contact me if you have further
queries.

Yours sincerely
Your IFRS adviser

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Solutions to GAAP: Graded Questions Foreign currency transactions

Solution 20.3

Debit Credit
25 July 20X5
Inventory (A) USD 100 000 x 7.60 (spot rate on 760 000
Foreign creditor (L) transaction date) 760 000
Importation of advanced monitoring devices

31 December 20X5
Foreign creditor (L) USD 100 000 x 7.10 (spot rate at 50 000
Foreign exchange gain (P/L) year-end) – 760 000 balance 50 000
recorded
Translation of foreign creditor at year-end

Cost of sales (E) 760 000 x 80% 608 000

Inventory (A) 608 000
Cost of goods sold

Trade receivables/ Bank (A) 760 000 x 120% mark-up x 80% sold 729 600
Sales (P/L) at year-end 729 600
Revenue from sale of goods

2 February 20X6
Foreign creditor (L) 710 000
Bank (A) USD 100 000 x 6.90 (spot rate on 690 000
payment date)
Foreign exchange gain (P/L) 710 000 balance recorded – 690 000 20 000
Translation and payment of foreign creditor

Note:
When goods are shipped on a DAT basis (delivery at terminal), the risks and rewards of ownership
transfer on the date that the goods arrive safely in the local harbour (destination) and are unloaded:
⚫ in this case, it means that the transaction date is 25 July 20X5.

Had the transaction been FOB or CIF, the risks and rewards of ownership would have transferred on
the date that the goods were shipped – in which case the transaction date would have been
15 July 20X5.

Comment:
This is a basic example dealing with the IMPORT of inventory and the subsequent sale thereof (IAS 2).

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Solutions to GAAP: Graded Questions Foreign currency transactions

Solution 20.4

15 June 20X9 (transaction date) Debit Credit

PPE: Machines: cost (A) €30 000 x 13.75 (spot rate on transaction 412 500
Foreign creditor (L) date) 412 500
Importation of 16 fragrance testing machines: R13.75

25 September 20X9

PPE: Machines: cost (A) Given 60 000

Bank 60 000
Further costs incurred installing the machines

30 September 20X9 (payment date)

Foreign exchange loss (E) (€30 000 x 14.20) – 412 500 13 500
Foreign creditor (L) 13 500
Translation of creditor to latest spot rate on payment date: Latest
balance is now = (€30 000 x 14.20) = 426 000

Foreign creditor (L) €30 000 x 14.20 (spot rate on payment date) 426 000
Bank 426 000
Payment of foreign creditor

31 December 20X9

Depreciation (E) (412 500 + 60 000 – 50 000) / 8 years x 3/12 13 203

PPE: Machines: accumulated depreciation (-A) 13 203
Depreciation of the machines from date first available for use

Explanation:
• This is a basic example dealing with the IMPORT of property, plant and equipment and the
subsequent depreciation thereof (thus applying IAS 16 Property, plant and equipment).
• Notice how the translation of the foreign creditor from the spot rate on transaction date to the spot
rate on payment date does not affect the cost of the PPE. Instead, the PPE and the creditor are
measured at the spot rate on transaction date. Then only the creditor gets remeasured on payment
date. The difference between the creditor measured at spot rate at transaction date and spot rate on
payment date is recognised as foreign exchange gains/ losses (forex gain/ loss) in profit or loss.
• It is essential to correctly identify each of the relevant dates (transaction and payment). Because
this is an import of PPE, determining the transaction date requires us to understand when
IAS 16 Property, plant and equipment requires us to recognise the acquisition of PPE and to
understand the impact of the terms of the import transaction.
• PPE is recognised when the definition of an asset and recognition criteria are met. One of the
aspects of the asset definition is control, thus we must recognise the acquisition of PPE when we
obtain control over it. One of the indictors that control has been obtained is if we have taken on the
risks and rewards of ownership.
• When the goods are shipped FOB (free on board) [or CIF (carriage, insurance, freight)]:
− the risks and rewards of ownership transfer on the date that the goods are delivered over the
ship’s rail at the port of shipment (i.e. when the goods are loaded onto the ship).
− Thus, in this case, the transaction date is 15 June 20X9.
• Had the transaction been negotiated on a DAT basis (delivery at terminal basis),
− the risks and rewards of ownership would transfer when the goods are unloaded at the named
destination terminal (i.e. when the goods arrive safely at their destination):
− in which case, the transaction date would have been 1 September 20X9.

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Solutions to GAAP: Graded Questions Foreign currency transactions

Solution 20.5

15 July 20X5 (transaction date) US Dollars

Debit Credit
Foreign debtor (A) GBP 50 000 x 2.20 (spot rate on the CIF 110 000
Revenue - sales (I) transaction date) see note 1 110 000
Export of sheets to British company

Cost of inventory expense (E) Given 20 000

Inventory (A) 20 000
Cost of goods sold

31 October 20X5 (settlement date #1)

Foreign debtor (A) GBP 50 000 x 2.65 (spot rate on payment date) – 22 500
Foreign exchange gain (P/L) $110 000 22 500
Translation of foreign debtor on payment date:

Bank GBP 25 000 x 2.65 (spot rate on payment date) 66 250

Foreign debtor (A) 66 250
Receipt of cash from British company

31 December 20X5 (reporting date: year-end)

Foreign exchange loss (P/L) (GBP 50 000 - GBP 25 000) x 2.40: spot rate 6 250
Foreign debtor (A) at year-end – ($110 000 + $22 500 – $66 250) 6 250
Translation of foreign debtor at year-end

31 January 20X6 (settlement date #2)

Foreign debtor (A) (GBP 50 000 - GBP 25 000) x 2.90 (spot rate 12 500
Foreign exchange gain (P/L) on payment date) – $60 000 12 500
where: (GBP 50 000 – GBP 25 000) x 2.40 =
$60 000
Translation of foreign debtor on payment date

Bank GBP 25 000 x 2.90: spot rate on payment date 72 500

Foreign debtor (A) 72 500
Receipt of cash from British company

Comment:
• This is an example dealing with the EXPORT of inventory (i.e. a sale to an entity in a foreign
country) and where neither company is a South African company. The fact that the transaction
involves a sale means we must be able to apply IFRS 15 Revenue from contracts with customers).
• IFRS 15 Revenue from contracts with customers requires revenue to be recognised when control
over the goods has passed to the customer (buyer). The transfer of risks and rewards from the seller
to the buyer is one of the indicators suggesting that control has passed. This solution thus assumes
that control passed to the buyer on the date that the risks and rewards of ownership passed
⚫ When goods are shipped on a CIF basis (customs, insurance and freight),
− the risks and rewards of ownership transfer on the date that the goods are loaded onto the ship
− thus, in this case, it means that the transaction date is 15 July 20X5.
⚫ If the goods had been shipped on a DAT basis (delivery at terminal),
− the risks and rewards of ownership would have transferred on the date that the goods have been
unloaded at their destination port,
− in which case the transaction date would have been 25 July 20X5.
• Notice that the settlement of the receivable takes place by way of two instalments.

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Solutions to GAAP: Graded Questions Foreign currency transactions

Solution 20.6

General note:
Note how, in the solution that follows, the interest expense is measured at average exchange rates but
yet the interest is payable at the spot exchange rate on payment date. This means that the initial
recognition of the interest expense and the related liability will be initially measured using the average
exchange rate over the period that the interest accrued, but the liability balance must then be translated
using the spot rate at each subsequent reporting date (i.e. closing rates) and on payment date. The act of
translating amounts from average exchange rates to spot exchange rates will result in exchange
differences on each translation.

The easiest way to go about doing this question is to:

• calculate the loan amounts owing (capital and interest) in the foreign currency – you can show
these calculations directly in the journals (as has been done in this solution below), or you could
set out these calculations using an effective interest rate table (see W1);
• journalise the loan received by converting the foreign currency at the relevant spot rate
• journalise the loan repayment by converting the foreign currency at the spot rate;
• journalise the interest expense by converting the foreign currency at the average rate; and
• translate the foreign currency liability balance using the spot rate at year-ends and payment dates
and journalise the difference between this balance and the carrying amount of the liability (in the
local entity’s books) on these dates, recognising any difference as foreign exchange gain or loss.

EUROs (€)
Debit Credit
1 March 20X7 (transaction date: loan received)
Bank (A) Amt received: THB48 000 000 ÷ SR on date of 1 200 000
Foreign loan (L) receipt: 40 1 200 000
Received loan from foreign bank

31 December 20X7 (reporting date: year-end)

Finance cost (P/L) (THB48 000 000 x 8% x 10 / 12) ÷ 35; OR 91 429
Foreign loan (L) THB3 200 000 (W1) ÷ 35 91 429
Interest payable on foreign loan from 1 March 20X7 to 31 December 20X7;
translated at the average exchange rate over the 10 months that interest accrued

Foreign exchange loss (P/L) Liability translated at spot rate at YE: €1 706 667 – 415 238
Foreign loan (L) CA of the loan: €1 291 429 415 238
Translating loan liability to the spot rate at year-end:
− Liability translated at SR at YE = (THB48 000 000 + THB3 200 000) ÷ 30
= €1 706 667
− CA of the liability: (€1 200 000 + €91 429) = €1 291 429

28 February 20X8 (payment date: instalment #1)

Finance cost (P/L) (THB48 000 000 x 8% x 2/12) ÷ 30; OR 21 333
Foreign loan (L) THB640 000 (W1) ÷ 30 21 333
Interest payable on foreign loan from 1 January 20X8 to 28 February 20X8;
translated at the average exchange rate over the 2 months that interest accrued

Foreign loan (L) Liability translated at spot rate at YE: €1 382 400 – 345 600
Foreign exchange gain (P/L) CA of the loan: €1 728 000 345 600
Translating loan liability (including capital and interest payable) to the spot rate
on payment date
− Liability translated at SR on pmt date =
(THB48 000 000 + THB3 200 000 + THB640 000) ÷ 37.5 = €1 382 400
− CA of the liab: (€1 200 000 + €91 429 + €415 238+ €21 333) = €1 728 000

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Solutions to GAAP: Graded Questions Foreign currency transactions

Solution 20.6 continued ...

EUROs (€)
28 February 20X8 continued … Debit Credit
Foreign loan (L) (Capital: THB960 000 + Interest: THB3 840 000) 128 000
Bank (A) ÷ SR on Pmt date: 37.5 128 000
Repayment of part of the capital and interest for 12 months, at spot rate on
payment date:
− Capital: THB960 000 (given)
− Interest: THB 48 000 000 x 8% x 1year = THB 3 840 000 (or W1)

31 December 20X8 (reporting date: year-end)

Finance cost (P/L) (THB47 040 000 x 8% x 10/12) ÷ 36; OR 87 111
Foreign loan (L) THB3 136 000 (W1) ÷ 36 87 111
Interest payable on foreign loan from 1 March 20X8 to 31 December 20X8;
translated at the average exchange rate over the 10 months that interest accrued
− Amount still owing = THB48 000 000 – THB960 000 = THB47 040 000 (or W1)

Foreign loan (L) Liability translated at spot rate at YE: €1 286 564 – 54 947
Foreign exchange gain (P/L) CA of the loan: €1 341 511 54 947
Translating loan liability (including capital and interest payable) to the spot rate
on payment date
− Liability translated at SR at YE =
(THB48 000 000 + THB3 200 000 + THB640 000 – THB960 000 –
THB3 840 000 + THB3 136 000) ÷ 39 = €1 286 564
− CA of the liab: (€1 200 000 + €91 429 + €415 238 + €21 333 – €345 600 –
€128 000 + €87 111) = €1 341 511

WORKINGS:

W1 Effective interest rate table in foreign currency: Euros (extracts):

Date Opening balance Capital Interest Closing balance

THB THB THB THB
01 March 20X7 0 48 000 000 0 48 000 000
Calc 1
31 December 20X7 48 000 000 3 200 000 51 200 000
Calc 2
28 February 20X8 51 200 000 640 000 51 840 000
Subtotal 3 840 000
Calc 3
Repayment (960 000) (3 840 000) 47 040 000
Calc 4
31 December 20X8 47 040 000 3 136 000 50 176 000

Calculations:
1. THB48 000 000 x 8% x 10/12 = THB3 200 000
2. THB48 000 000 x 8% x 2/12 = THB640 000
3. We are told that loan repayments include capital of THB960 000 and interest for the preceding 12 months of
THB3 840 000 (i.e. the total repayment would be THB4 800 000).
4. THB47 040 000 x 8% x 10/12 = THB3 136 000

Comment:
This is an example dealing with a loan received by a local company from a foreign financier.

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Solutions to GAAP: Graded Questions Foreign currency transactions

Solution 20.7

Debit Credit
1 January 20X8 (transaction date)
Foreign loan (A) C$20 000 / 0,2 100 000
Bank (A) 100 000
Issue of a loan that is denominated in a foreign currency (translated at
spot rate on transaction date)

30 June 20X8 (year-end: reporting date)

Foreign loan (A) W1: C$424 / 0.19 OR 2 232
Interest income (P/L) (C$20 000 x 4.24% x 6/12) / 0.19 2 232
Interest receivable from 1 January to 30 June 20X8, translated at average
exchange rates

Foreign loan (A) Loan asset at SR at YE: R120 141 – 17 909

Foreign exchange gain (P/L) CA of foreign loan: R102 232 17 909
Translation of loan asset balance at year-end resulting in an exchange
difference:
− Loan asset translated at SR at YE = (C$20 000 + C$424) / C$0.17
= R120 141
− CA of the loan asset was = R100 000 + R2 232 = R102 232

31 December 20X8 (date of receipt of an instalment)

Foreign loan (A) W1: C$424/0.21 OR 2 019
Interest income (P/L) (C$20 000 x 4.24% x 6/12) / 0.21 2 019
Interest receivable from 1 July 20X8 to 31 December 20X8, translated at
average exchange rates

Foreign exchange loss (P/L) Loan asset at SR at SD: R94 764 – 27 396
Foreign loan (A) CA of foreign loan: R122 160 27 396
Translation of loan asset balance at settlement date:
− Loan asset translated at SR at Pmt date = (C$20 000 + C$424 + C$424) /
C$0.22 = R94 764
CA of the loan asset was = R100 000 + R2 232 + R17 909 + R2 019 = R122 160

Bank (A) Amt received: C$3 000 / SR on SD: C$0,22 13 636

Foreign loan (A) 13 636
Receipt of first instalment

30 June 20X9 (year-end: reporting date)

Foreign loan (A) W1: C$378/0.22 OR 1 720
Interest income (P/L) (C$ 17 848* x 4.24% x 6/12) / 0.22 1 720
Interest receivable from 1 January to 30 June 20X9, translated at average
exchange rates
*: C$20 000 – capital repaid (C$3 000 – interest C$424 x 2) = C$17 848

Foreign exchange loss (P/L) Loan asset at SR at YE: R75 942 – 6 906
Foreign loan asset (A) CA of foreign loan: R82 848 6 906
Translation of loan asset balance at year-end resulting in an exchange
difference:
− Loan asset translated at SR at YE = (C$20 000 + C$424 + C$424 -
C$3 000 + C$378) / C$0.24 = R75 942
− CA of the loan asset was = R100 000 + R2 232 + R17 909 + R2 019 -
R27 396 - R13 636 + R1 720 = R82 848

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Solutions to GAAP: Graded Questions Foreign currency transactions

Solution 20.7 continued ...

Note:
The exchange rate was given in a way that presented how much foreign currency (FC) would be
required to purchase one unit of the local currency (LC) (i.e. instead of presenting how much local
currency would be required to purchase one unit of the foreign currency). Thus, an amount of foreign
currency to be converted into local currency is divided by the amount of FC to buy one LC.

For example, the exchange rate on 1 January 20X8 is given as R1: C$0.20 (i.e. where the FC is given
as a decimal of one unit of LC) but this could have been given as R5: C$1 (i.e. where the LC is given
as a decimal of one unit of the FC).

To convert FC of C$100 000 when the rate is given as:

• R1: C$0.20.... we convert as follows: C$100 000 / C$0.20 x R1 = R500 000...
(effectively, we have to divide by the FC: C$100 000 / C$0.20)
• R5: C$1.... we convert as follows: C$100 000 / C$1 x R5
(effectively, we have to multiply by the FC: C$100 000 x R5)

Notice how the same answer is reached.

KEY:
SR = spot rate SD = settlement date (when payment is received)
AR = average rate YE = year end

W1: Effective interest rate table in foreign currency:

Canadian Dollars (extracts)
Date Interest @ 4.24% Instalment Balance
CAN $ CAN $ CAN $
01 January 20X8 20 000
Calc 1 -
30 June 20X8 424 20 424
Calc 1 (3 000)
31 December 20X8 424 17 848
Calc 2
30 June 20X9 378 18 226

Calculations:
1. C$ 20 000 x 4.24% x 6/12 = C$ 424
2. C$ 17 848 x 4.24% x 6/12 = C$ 378

Note:
The interest is compounded annually on 31 December. This date does not coincide with the reporting
date of 30 June and thus one must remember to apportion the part of the annual interest that belongs to
the reporting period in question. In other words, the effective interest rate method means that the
interest in the reporting period ended 30 June 20X8 would have included only 6 months of the 12-
month interest of C$848 (i.e. C$424 interest for the 6-month period).

© Service & Kolitz, 2022-2023 Chapter 20: Page 13

Solutions to GAAP: Graded Questions Foreign currency transactions

Solution 20.8

Answer:

The asset is impaired by LC78 000 (see W3 below).

Explanation:

When determining whether a foreign non-monetary asset is impaired we translate the year-
end carrying amount of the non-monetary asset at the spot exchange rate on initial recognition
of the asset in the financial statements and compare it to the recoverable amount at year-end,
which must be translated at the spot rate on the date of the impairment test, being the
reporting date in this example.

WORKINGS:

W1: Carrying amount at 31 December 20X5

Carrying amount at 31 December 20X5 translated at the spot rate on initial recognition:
• (Cost: FC70 000 – Accumulated depreciation: FC20 000) x Spot rate on date of initial recognition:
LC13 = LC650 000

W2: Recoverable amount at 31 December 20X5

Recoverable amount at 31 December 20X5 translated at the spot rate on reporting date, being the
higher of:
• Fair value less cost of disposal: FC48 000 x LC11 = LC528 000
• Value in use: FC52 000 x LC11 = LC572 000

Recoverable amount is therefore the value in use of LC572 000.

W3: Impairment loss at 31 December 20X5

An impairment loss is recognised on the difference between:

• the carrying amount, in the functional currency of LC: LC650 000 (W1), and
• the recoverable amount, also in the functional currency of LC: LC572 000 (W2).

Thus, the machine in Charlie’s financial statements must be impaired by:

(CA: LC650 000 – RA: LC572 000) = LC78 000

Comments:
• It is important to note that the determination of the impairment loss is calculated in the functional
currency (i.e. the local currency) and not in the foreign currency.
• Please note that, in terms of the foreign currency, the asset was actually not impaired (the carrying
amount was FC50 000 whereas the recoverable amount was FC52 000, thus being greater). It was
only impaired from Charlie’s perspective when the values of the foreign asset were translated into
local currency.

© Service & Kolitz, 2022-2023 Chapter 20: Page 14