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

Kestrel plc (functional currency: dollar, $) buys inventory from a Swiss supplier on 10 November for CHF 200,000, payable on 10 January. Rates: 10 November CHF 1 = $1.10; 31 December (year end) CHF 1 = $1.15; 10 January CHF 1 = $1.12. Under IAS 21, what is the initial recognition amount of the payable and the exchange difference recognised in profit or loss for the year ended 31 December?

The payable is first recorded at the spot rate on the transaction date, $220,000. At the year end it is retranslated at the closing rate to $230,000, so a $10,000 exchange loss goes to profit or loss. Later rate movements do not affect the year-end figures.

  1. APayable $220,000; exchange loss $10,000Correct
  2. BPayable $220,000; exchange gain $10,000
  3. CPayable $230,000; exchange loss $10,000
  4. DPayable $224,000; exchange loss $4,000

Explanation

Initial recognition is at the spot rate on the transaction date: 200,000 x 1.10 = $220,000. At the year end the monetary payable is retranslated at the closing rate: 200,000 x 1.15 = $230,000, giving a loss of $10,000 in profit or loss. The 10 January rate is a post-year-end event and is not used.

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