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ACCA Strategic Professional · Strategic Business Reporting (International) · Foreign transactions and entities

Kestrel Co has the dollar ($) as its functional currency. On 1 November 20X5 it bought inventory from a Swiss supplier for CHF 200,000 on credit, when the rate was $1 = CHF 0.80. At the year end of 31 December 20X5 the invoice was unpaid and the rate was $1 = CHF 0.84 (CHF per $). Under IAS 21, what exchange difference arises at the year end?

A gain of about $12,000 arises in profit or loss. The CHF payable is a monetary item retranslated at the closing rate, falling from $250,000 to about $238,095. The inventory stays at the historical transaction-date cost and is not retranslated.

  1. AGain of $12,000 recognised in profit or lossCorrect
  2. BLoss of $12,000 recognised in profit or loss
  3. CGain of $12,000 recognised in other comprehensive income
  4. DNo difference, as the inventory is a non-monetary item

Explanation

Initial cost = 200,000/0.80 = $250,000. At year end the payable is 200,000/0.84 = $238,095, rounded to $238,095. The payable has fallen by about $11,905 (approx. $12,000), so a gain arises in profit or loss. The payable is monetary and is retranslated at closing rate, even though the inventory itself is not retranslated.

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