Certificate in International Financial Reporting Foreign Currency and Hyperinflationary Economies 1

Question 1

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

Accepted Answer

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

Answer

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.

Question 2

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

Accepted Answer

At the closing (spot) rate at the reporting date

Answer

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

Question 3

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

Accepted Answer

Inventory measured at historical cost

Answer

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

Question 4

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?

Accepted Answer

In profit or loss for the period

Answer

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

Question 5

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

Accepted Answer

The historical rate at the date of the transaction

Answer

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.

Certificate in International Financial Reporting Practice Test

Certificate in International Financial Reporting Practice Test

Certificate in International Financial Reporting Foreign Currency and Hyperinflationary Economies 1