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

Tarn Co (functional currency: dollar, $) has a monetary receivable of £100,000 from a UK customer, recorded at £1 = $1.30. At the year end of 31 December, the closing rate is £1 = $1.35. The receivable is settled on 15 February at £1 = $1.28. How is the exchange difference for the year ended 31 December treated?

The receivable is a monetary item, so it is retranslated at the closing rate of 1.35, giving $135,000 against the original $130,000. The $5,000 gain is recognised in profit or loss for the year. The later fall in the rate affects only the following period.

  1. AA $5,000 gain in profit or loss for the year ended 31 DecemberCorrect
  2. BA $2,000 loss in profit or loss in the year ended 31 December
  3. CA $5,000 gain in other comprehensive income
  4. DNo entry until settlement, then a $2,000 loss

Explanation

Monetary items are retranslated at the closing rate at each reporting date, with differences in profit or loss. At 31 December the receivable is 100,000 x 1.35 = $135,000 against $130,000, giving a $5,000 gain. The February settlement produces a separate $7,000 loss in the next period; it is not an adjusting event for the retranslation.

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