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

Marlow Ltd (functional currency: dollar, $) bought an item of plant from an overseas supplier on 1 March for €300,000 and paid on 1 June. The spot rate was €1 = $1.20 on 1 March and €1 = $1.26 on 1 June. The year end is 31 December. How should Marlow treat the exchange difference under IAS 21?

The plant stays at its historical cost of $360,000 because non-monetary items are not retranslated. The $18,000 increase in the settlement cost of the euro payable is an exchange loss recognised in profit or loss, not capitalised and not placed in other comprehensive income.

  1. ARecognise the $18,000 loss in profit or loss, with plant carried at $360,000Correct
  2. BAdd the $18,000 to the cost of plant, giving $378,000
  3. CRecognise the $18,000 loss in other comprehensive income
  4. DRetranslate the plant at the closing rate at each year end, with the difference to profit or loss

Explanation

Plant is a non-monetary item measured at historical cost, so it is translated at the 1 March rate: 300,000 x 1.20 = $360,000 and is not retranslated. The payable is monetary and settled at 1.26 = $378,000, so the extra $18,000 is an exchange loss in profit or loss. Adding it to cost is wrong as IAS 21 requires settlement differences to go to profit or loss.

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