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CMA Final · Corporate Financial Reporting · The Effects of Changes in Foreign Exchange Rates (Ind AS 21)

Under Ind AS 21, which of the following statements about the exchange rate at which a foreign currency transaction is initially recorded is correct?

A foreign currency transaction is initially recorded in the functional currency using the spot exchange rate on the transaction date. Averages are only a practical approximation when rates are stable, and neither prior closing rates nor expected settlement rates are used.

  1. AIt is recorded at the spot exchange rate between the functional currency and the foreign currency on the date of the transactionCorrect
  2. BIt is recorded at the closing rate on the previous balance sheet date
  3. CIt is recorded at the average rate of the financial year in all cases
  4. DIt is recorded at the rate expected to prevail on the settlement date

Explanation

Ind AS 21 requires a foreign currency transaction to be recorded on initial recognition in the functional currency by applying the spot rate on the date of the transaction. An average rate may be used only as an approximation where rates do not fluctuate significantly, so it is not applied in all cases. Closing rate of the previous year and expected settlement rates are not the basis.

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