Foreign Exchange Single company

NotesQuizPaper exam

Foreign Exchange Single company

Transactions in a single company

This is where a company simples deals with companies abroad (who have a different currency).

The key thing to remember is that…
ALL EXCHANGE DIFFERENCES TO INCOME STATEMENT

So - a company will buy on credit (or sell) and then pay or receive later. The problem is that the exchange rate will have moved and caused an exchange difference.

Step 1: Translate at spot rate
Step 2: If there is a creditor/debtor @ y/e - retranslate it (exch gain/loss to I/S)
Step 3: Pay off creditor - exchange gain/loss to I/S

Illustration 1

On 1 July an entity purchased goods from a foreign country for Y$10,000. 
On 1 September the goods were paid in full.

The exchange rates were: 
1 July $1 = Y$10 
1 September $1 = Y$9

Calculate the exchange difference to be included in profit or loss according to IAS 21 The Effects of Changes in Foreign Exchange Rates.

  • Solution

    Account for Payables on 1 July: Y$10,000/10 = 1,000
    Payment performed on 1 September: Y$10,000 / 9 = 1,111

    The Exchange difference: 1,000 - 1,111 = 111 loss

Illustration 2

Maltese Co. buys £100 goods on 1st June (£1:€1.2)
Year End (31/12) payable still outstanding (£1:€1.1)
5th January £100 paid (£1:€1.05)

Solution

Initial Transaction

Dr Purchases 120
Cr Payables 120

Year End

Dr Payables 10
Cr I/S Ex gain 10

On payment

Dr Payables 110
Cr I/S Ex gain   5
Cr Cash 105

Also items revalued to Fair Value will be retranslated at the date of revaluation and the exchange gain/loss to Income statement.

All foreign monetary balances are also translated at the year end and the differences taken to the income statement.

This would include receivables, payables, loans etc.

NotesQuizPaper exam