Syllabus D. Financial Statements of Groups entities D4. Foreign Transactions And Entities

D4a. Foreign Exchange Single company 1 / 3

Syllabus D4a)

Outline and apply the translation of foreign currency amounts and transactions into the functional currency and the presentational currency.

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…

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)


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.