ACCA Applied Skills · Financial Reporting

Foreign currency transactions: formula sheet

Full chapter guide

Key formulas

Functional currency: Currency of the primary economic environment in which the entity operates; Decided by judgement using primary indicators first (sales prices, costs), then secondary ones (financing, retained receipts).
Presentation currency: Currency in which the financial statements are presented; A free choice. It can differ from the functional currency.
Foreign currency: Any currency other than the entity's functional currency; Transactions in it are first recorded in the functional currency.
Initial recording: Foreign currency amount ÷ exchange rate (or × rate, depending on how the rate is quoted); Use the spot rate at the date of the transaction. Check how the rate is quoted before you divide or multiply.
Change in functional currency: Apply the new functional currency prospectively from the date of change; Only allowed when underlying transactions, events and conditions change.
Translation at the spot rate: Functional currency amount = Foreign currency amount × spot rate (or ÷ spot rate); Multiply or divide depends on how the rate is quoted. If the rate is 1 functional = 2 foreign (e.g. $1 = 2 dinar), divide the foreign amount by 2. If it is 1 foreign = 0.5 functional, multiply.
Initial recognition rule (IAS 21): Record at the spot rate on the date the transaction first qualifies for recognition; Applies to purchases, sales, expenses and assets bought in a foreign currency.
Average rate approximation: Average rate may be used if rates have not fluctuated significantly; Typical use is for a period of a week or month, or a year of fairly stable rates. Use the actual spot rate if the question gives one for the date.
Journal for a foreign credit purchase: Dr Purchases (or asset) / Cr Payables, both at the spot rate on the transaction date; The same translated amount is used for both sides.
Journal for a foreign credit sale: Dr Receivables / Cr Revenue, both at the spot rate on the transaction date; Revenue is not retranslated later.
Monetary items at reporting date: Carrying amount = foreign currency amount ÷ closing rate (or × closing rate, depending on how the rate is quoted); Compare with the amount already recorded. The difference is an exchange gain or loss, normally in profit or loss.
Non-monetary items at historical cost: Carrying amount = foreign currency cost at the transaction date rate; Do not retranslate. The amount stays fixed.
Non-monetary items at fair value: Carrying amount = foreign currency fair value at the rate on the date fair value was measured; The exchange difference is recognised in the same place as the fair value gain or loss (OCI or profit or loss).
Exchange difference: Exchange difference = retranslated amount − previously recorded amount; For a liability, a higher amount is a loss. For an asset, a higher amount is a gain.
Quotation direction: Rate quoted as foreign currency per 1 unit of home currency: divide. Rate quoted as home currency per 1 unit of foreign currency: multiply.; Check the wording of the rate before you calculate.
Initial recognition: Functional currency amount = foreign currency amount ÷ spot rate on transaction date; Use the rate quoted as foreign units per one unit of functional currency. If the rate is the other way round, multiply instead.
Exchange difference on settlement: Settlement amount at settlement-date rate − carrying amount at earlier rate; Recognise in profit or loss. For a payable, a lower amount paid is a gain. For a receivable, a lower amount received is a loss.
Retranslation at reporting date: Closing carrying amount = foreign currency balance ÷ closing rate; Applies to monetary items only. The difference from the previous carrying amount goes to profit or loss.
Non-monetary items at cost: Carried at the rate on the transaction date; Not retranslated. No exchange difference arises.
Total effect across two periods: Year-end difference + settlement difference = total settlement amount − original amount; Use this to check that your two entries add up to the overall movement.

Quick revision

Functional currency is the currency of the primary economic environment in which the entity operates.
Presentation currency is the currency in which the financial statements are shown; it can differ from the functional currency.
Record a foreign currency transaction at the spot rate on the transaction date.
Monetary items (cash, receivables, payables, loans) are retranslated at the closing rate at the reporting date.
Non-monetary items carried at historical cost stay at the rate on the transaction date.
Non-monetary items carried at fair value use the rate on the date the fair value was measured.
Exchange differences on monetary items normally go to profit or loss.
On settlement, the difference between the recorded amount and the cash paid or received is a gain or loss.
A foreign payable that grows in your own currency gives a loss; a foreign receivable that grows gives a gain.
Check whether the rate is quoted as foreign per one unit of your currency before you multiply or divide.
Inventory carried at cost is non-monetary, so it is not retranslated; check net realisable value if it is lower.
Show the year-end difference and the settlement difference separately when a transaction spans two periods.

Common mistakes

Assuming the functional currency is the currency of the country where the entity is registered. Fix: Base it on where sales prices and costs are mainly denominated. Registration location is not a stated indicator.
Treating presentation currency as the same thing as functional currency. Fix: Keep two labels. Functional is a judgement about operations. Presentation is a choice about reporting.
Using the payment date rate or year-end rate to record the original purchase Fix: Initial recognition always uses the rate on the transaction date. Other rates are for settlement and reporting date steps.
Multiplying when you should divide (or the reverse) Fix: Write the rate as units of foreign currency per one unit of functional currency, then divide foreign amounts by it. Sense check the size of the answer.
Retranslating inventory or PPE at the closing rate when it is held at cost Fix: Ask if the item is monetary. If not and it is at cost, keep the transaction date rate.
Treating prepayments or deposits paid for goods as monetary Fix: They give a right to goods or services, not cash, so they are non-monetary. Leave them at the original rate.
Retranslating inventory or non-current assets at the closing rate. Fix: Only monetary items are retranslated. Non-monetary items at cost keep the transaction date rate.
Multiplying when you should divide, or the reverse. Fix: State the rate direction first. Check that the answer is sensible: if the foreign currency is weaker, the functional amount is smaller.

Exam tips

Read the scenario for the currency of sales prices and costs. Questions usually plant these as clues, with a distracting loan or parent currency.
In objective test questions, watch for the word 'must'. Presentation currency does not have to equal functional currency.
Always state your reason in Section C. A bare answer with no link to the facts loses marks.
Check how the exchange rate is quoted before you convert. Then ask whether the result looks sensible.
Link this topic to initial recognition and reporting date retranslation, since functional currency decides what counts as foreign.
Always underline the transaction date in the scenario and match it to the rate table before you calculate.
Check the quote direction on every question. Examiners often give rates as foreign units per $1.
Use the average rate only when the question signals it, such as "evenly throughout the year" or "use the average rate as an approximation".