FOREIGN CURRENCY TRANSACTION

Functional currency
The currency of the primary economic environment in which the entity operates.

It can be determined by:

a. Currency that mainly influences the sales prices of goods and services
b. Currency whose competitive forces and regulations determine the sales prices of goods
and services
c. Currency in which financing is obtained
d. Currency in which receipts are usually retained

Foreign currency transactions

A transaction that is denominated or requires settlement in a foreign currency.

Example
• Buys or sells goods and services, whose price is denominated in a foreign currency;
• Borrows or lends funds when the amount payable or receivable are denominated in a
foreign currency; or
• Otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a
foreign currency.

Initial measurement (Transaction date)

At the spot rate at the date of the transaction

Subsequent measurement (Balance sheet date)

a. Foreign currency monetary items have to be adjusted (or remeasured) for exchange rate
changes using the current rate/closing rate on balance sheet date, since these accounts
are carried at contractual amounts and settled or received at a specific currency and
should be adjusted for changes.
b. Non-monetary items that are measured in terms of historical cost in a foreign currency
are translated using the exchange rate on the date of the transaction (historical/actual
rate)
c. Non-monetary items that are measured at FV in a foreign currency are translated using
the exchange rate on the date when the FV was determined, usually current/closing rate.

Accounting treatment for foreign exchange gains or losses

When a gain or loss on a non-monetary item is recognized in OCI, any exchange component of
that gain or loss shall be recognized in OCI.

When a gain or loss on a non-monetary item is recognized in P/L, any exchange component of
that gain or loss shall be recognized in P/L.
 FOREIGN CURRENCY TRANSACTION

Exchange differences arising on a monetary item that forms part of a reporting entity’s net
investment in a foreign operation shall be recognized in P/L in the separate FS of the reporting
entity or the individual FS of the foreign operation. EXCEPT, in the FS that include the foreign
operation and the reporting entity (e.g., consolidated FS when the foreign operation is a
subsidiary), such exchange differences shall be recognized initially in OCI and reclassified from
equity to P/L on disposal of the net investment.

Importing Transaction

Transaction Date (TD)

Purchases XXX
Accounts payable XXX
(Foreign currency x selling spot rate on TD)

Balance sheet Date (BSD)

Loss Gain
Foreign exchange loss XXX Accounts payable XXX
Accounts payable XXX Foreign exchange gain XXX
(Foreign currency x (changes in selling spot (Foreign currency x (changes in selling spot
rate from TD and BSD)) rate from TD and BSD))

Settlement Date (SD)

Accounts payable XXX

Cash XXX
(Foreign currency x selling spot rate on SD)

Loss Gain
Foreign exchange loss XXX Accounts payable XXX
Accounts payable XXX Foreign exchange gain XXX
(Foreign currency x (changes in selling spot (Foreign currency x (changes in selling spot
rate from SD and BSD)) rate from SD and BSD))
 FOREIGN CURRENCY TRANSACTION

Exporting Transaction

Transaction Date (TD)

Accounts receivable XXX

Sales XXX
(Foreign currency x buying spot rate on TD)

Balance sheet Date (BSD)

Loss Gain
Foreign exchange loss XXX Accounts receivable XXX
Accounts receivable XXX Foreign exchange gain XXX
(Foreign currency x (changes in buying spot (Foreign currency x (changes in buying spot
rate from TD and BSD)) rate from TD and BSD))

Settlement Date (SD)

Cash XXX
Accounts receivable XXX
(Foreign currency x buying spot rate on SD)

Loss Gain
Foreign exchange loss XXX Accounts receivable XXX
Accounts receivable XXX Foreign exchange gain XXX
(Foreign currency x (changes in buying spot (Foreign currency x (changes in buying spot
rate from SD and BSD)) rate from SD and BSD))
FOREIGN CURRENCY TRANSACTION
FOREIGN CURRENCY TRANSACTION