Foreign Currency and Hyperinflationary Economies Flashcards

Under IAS 21, how is 'functional currency' defined?

Answer: The currency of the primary economic environment in which an entity operates

IAS 21 defines functional currency as the currency of the primary economic environment in which the entity operates, reflecting the environment that primarily influences its cash flows.

Under IAS 21, how should monetary items denominated in a foreign currency be translated at the reporting date?

Answer: At the closing (spot) rate at the reporting date

IAS 21 requires monetary items to be retranslated at the closing rate at the end of the reporting period.

Which of the following is a non-monetary item under IAS 21?

Answer: Inventory measured at historical cost

Inventory measured at cost is non-monetary because it does not represent a right to receive a fixed or determinable number of currency units.

An entity with a USD functional currency holds a EUR-denominated trade receivable. Between the transaction date and year-end, the EUR strengthens against the USD. Where is the resulting exchange difference recognized?

Answer: In profit or loss for the period

Under IAS 21, exchange differences on monetary items (such as trade receivables) are recognized in profit or loss in the period they arise.

Under IAS 21, what exchange rate is used to translate a non-monetary item carried at historical cost?

Answer: The historical rate at the date of the transaction

Non-monetary items measured at historical cost are translated using the exchange rate at the date of the original transaction and are not subsequently retranslated.

When translating the financial statements of a foreign subsidiary for consolidation, IAS 21 requires income and expense items to be translated at:

Answer: Exchange rates at the dates of the transactions, with the average rate permitted as a practical approximation

IAS 21 requires income and expenses to be translated at exchange rates at the dates of transactions, but an average rate may be used when rates do not fluctuate significantly.

Under IAS 21, exchange differences arising on translation of a foreign subsidiary's net assets should be:

Answer: Recognized in other comprehensive income and accumulated in a separate translation reserve in equity

Translation differences on foreign operations are recognized in OCI and accumulated in equity in a foreign currency translation reserve.