Week 12 Ans - tutorial answer PDF

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3. Illustrate the direct method and indirect methods of quoting exchange rates. Assume an Australian company has a deposit with a financial institution at year end amounting to $U.S.100 000 and the closing exchange rate is $A1 = $U.S.0.90. Calculate the $A amount of the deposit to be included in the statement of financial position (LO 2)

How currencies are expressed

Example of quoted rates Translation process Example of translation

Direct method

Indirect method

One unit of foreign currency expressed in Australian currency

One unit of Australian currency expressed in foreign currency

$U.S.1 = $A1.11’

A$1 = $U.S.$0.90

multiplication

division

$U.S.100 000 x 1.11’ = $A111 111

$U.S.100 000 0.90 =A$111 111

A deposit at call denominated in foreign currency with a financial institution is a 'monetary item' being an asset to be received in a fixed or determinable number of units of currency refer definition at paragraph 8 of AASB 121. In this example, the amount of currency to be received is US$100 000. Any monetary item outstanding at year-end, which is at reporting date, must be translated using the closing exchange rate. Therefore, the balance of cash and cash equivalents on the face of the statement of financial position will include $A111 111 in respect of the $U.S.100 000 deposit with a financial institution. As an aside, it is worth noting that an investment in foreign shares is not a monetary item because it is not an asset to be received in fixed or determinable amounts of money. For example, shares with a cost of $U.S.100 000 would be translated into $A when acquired but would NOT be remeasured at the closing rate at the end of the reporting period.

5. Explain what is meant by the term ‘exchange difference’. Distinguish between an unrealised exchange loss and a realised exchange loss. Provide an overview of the accounting requirements of AASB 121 in relation to foreign currency transactions and exchange differences. (LO 3, LO 4 and LO 5) Definition of exchange difference Paragraph 8 of AASB 121 defines an exchange difference to mean: “the difference resulting from translating a given number of units of one currency into another currency at different exchange rates” Therefore, an exchange difference arises when a balance denominated in foreign currency is re-measured and there has been a movement in exchange rates between two dates. AASB 121 recognises exchange differences on the foreign currency monetary items. Exchange differences on foreign currency monetary items are determined by comparing the foreign currency amount translated at the applicable exchange rate at the reporting date (or, where the monetary item is settled during the reporting period, at the date of settlement) with that same foreign currency amount translated at the date on which the original transaction took place (or, if later, the last reporting date).

Exchange differences: realised versus unrealised A realised exchange difference arises on the cash realisation of a recognised asset or cash settlement of a recognised liability. In the case of a monetary item (e.g. a trade payable), the realised exchange difference equals the difference between the translated amount at the date of initial recognition and translated amount at the date of cash settlement. Date of transaction

Settlement date Realised Exchange Difference

Record the transaction at the

.

Re-measure monetary asset or

spot rate (initial recognition of

liability at the spot rate for cash

monetary asset or liability).

settlement

In contrast, an unrealised exchange difference arises whenever a recognised asset or recognised liability continues to be recognised in the financial statements but is re-measured using an exchange rate that is different to the historic exchange rate. Monetary items that are re-measured at the end of the financial reporting period give result in unrealised exchange differences. Date of transaction

Reporting Date Unrealised Exchange Difference

Record the transaction at the

.

Re-measure monetary asset or

spot rate (initial recognition of

liability at the closing rate for

monetary asset or liability).

inclusion in the statement of financial position

Another exchange difference arises if a monetary item is remeasured at settlement date after having been included in the statement of financial position at the end of a previous reporting period. In effect, this is an adjustment of the exchange difference. The adjustment ensures that the total exchange difference recognised for the monetary item in the current and prior periods equals the realised exchange difference. Reporting Date

Settlement Date Adjustment Exchange Difference

Re-measure monetary asset or

Re-measure monetary asset or

liability at the closing rate for

liability at the spot rate for cash

inclusion in the statement of

settlement

financial position

Accounting treatment of exchange differences The accounting treatment of exchange differences for monetary items is set out at paragraph 28 of AASB 121 as follows: Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements, shall be recognised in profit or loss in the period in which they arise

The accounting treatment of exchange differences for non-monetary items is set out at paragraph 30 of AASB 121 as follows: When a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange component of that gain or loss shall be recognised in other comprehensive income. Conversely, when a gain of loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss shall be recognised in profit or loss.

The following table summarises the required approach. Item

Recognition of exchange differences

Monetary items  

Trade payable Trade receivable

In profit or loss as exchange rates change In profit or loss as exchange rates change

Non-monetary items  

Land at cost Land at fair value > cost

  

gain to reserve Land at fair value < cost In profit or loss as part of revaluation loss Inventory at NRV In profit or loss as part of inventory expense Impaired asset at recoverable In profit or loss as part of impairment loss amount

None In other comprehensive income as part of revaluation

Question 8.2

Translation of various foreign currency transactions and balances

Know Your Product Ltd is an Australian company with a functional currency of A$. The company has entered into a number of transactions denominated in US$ during the year ended 30 June 2017. If the closing exchange rate is A$1.00 = US$0.77, then determine the translated amount that will be included in the financial statements for each of the following balances: (a) Land at cost US$400 0000 acquired on 1 February 2017 when the exchange rate is A$1.00 = US$0.67. Date of transaction 1.2.17

Reporting date 30.6.17

Record acquisition at spot rate

Land at cost is a non-monetary item that is NOT restated.

Land $U.S.400 000  0.67 = $A597 015

Journal entry 1.2.17

Land

Dr Cash

597 015 Cr

597 015

(b) Land revalued to US$600 000 on 30 June 2017 that had cost US$400 000 on 1 February 2017 when the exchange rate was A$1.00 = US$0.67. Date of transaction 1.2.17

Reporting date 30.6.17

Record acquisition at spot rate

Land restated to fair value at spot rate

Land $U.S.400 000  0.67 = $A597 015

Land $U.S.600 000  0.77 = $A779 221

Gain on revaluation of $A182 206

Journal entries

1.2.17

30.6.17

Land Cash

Dr Cr

Gain

Dr revaluation Cr

Land (OCI)

on

597 015 597 015 182 206 182 206

(c) Credit sale of US$80 000 on 12 March 2017 when the exchange rate is A$1.00 = US$0.69. Received cash from debtor of US$40 000 on 30 June 2017. Date of transaction 12.3.17

Reporting date and Settlement date 30.6.17

Record the sales at spot rate

Restate the monetary item to closing rate

Trade receivable $U.S.80 000  0.69 = $A115 942

Trade receivable $U.S.80 000  0.77 = $A103 896

Exchange loss of $A12 046

Record cash receipt at spot rate $U.S.40 000  0.77 = $A51 948

Journal entries 12.3.17

30.6.17

Trade receivables Sales

Dr

115 942 115 942

Cr

Foreign exchange loss Trade receivables

Dr Cr

12 046

Cash

Dr Cr

51 948

Trade receivables

12 046

51 948

(d) Credit purchase of inventory of US$250 000 on 15 June 2017 when the exchange rate is A$1.00 = US$0.62. The creditor remains unpaid at 30 June 2017.

Date of transaction 15.6.17

Reporting date 30.6.17

Record inventory purchase at spot rate

Restate the monetary item to closing rate

Trade payable $U.S.250 000  0.62 = $A403 226

Trade payable $U.S.250 000  0.77 =$A324 675

Exchange gain of $A78 551

Journal entries 15.6.17

30.6.17

Inventory Trade creditors

Dr

403 226 Cr

Trade creditors Foreign exchange gain

403 226

Dr Cr

78 551 78 551

(e) A loan payable of US$800 000 arranged on 1 January 2017 when the exchange rate is A$1.00 = US$0.60. On 30 June 2017, the outstanding interest on the loan is US$20 000. Date of transaction 1.1.17

Reporting date 30.6.17

Record the loan transaction at spot rate Loan payable $U.S.800 000  0.60 = $A1 333 333

Restate the monetary item to closing rate Loan payable $U.S.800 000  0.77 =$A1 038 961

Exchange gain of $A294 372

Recognise interest for the period Interest payable $U.S.20 000  0.77 =$A25 974

Journal entries

1.1.17

Cash

Dr Loan payable

30.6.17

1 333 333 Cr

1 333 333

Loan payable Foreign exchange gain

Dr Cr

294 372

Borrowing costs expense* Interest payable

Dr Cr

25 974

294 372

25 974

*Borrowing costs include interest expense and foreign exchange differences in the nature of adjustments to interest costs.

Question 8.6

Translation of purchase of plant, sale of inventory and interest free loan

Just Like Ltd is an Australian company. The functional currency of Just Like is A$. It has reporting periods ending on 31 December and 30 June. During the year ended 30 June 2017, Just Like entered into various foreign currency transactions in Euros ( €) as follows: (a) On 15 November 2016 Just Like Ltd ordered plant costing €800 000 from an Italian company under a FOB destination contract. On 30 November 2016, the plant was delivered. On 25 January 2017, the invoice for the plant purchase was paid. (b) On 30 November 2016 Just Like Ltd sold inventory to a German customer for the agreed price of €500 000. The inventory had a cost of $350 000. On 31 January 2017, the sales invoice was paid by the customer. (c) On 1 July 2016, Just Like Ltd made an interest free loan to a related French company, Attitude Cavaliere, for €1 000 000. The term of the loan is set at 5 years at which time Attitude Cavaliere will be required to arrange its debt finances independently. Applicable exchange rates are as follows: 1 July 2016 15 November 2016 30 November 2016 31 December 2016 25 January 2017 31 January 2017 30 June 2017

€1 = A$1.22 €1 = A$1.15 €1 = A$1.25 €1 = A$1.20 €1 = A$1.18 €1 = A$1.16 €1 = A$1.30

Required In accordance with AASB 121, prepare the entries of Just Like Ltd for the half year to 31 December 2016 and the full year to 30 June 2016. (a) Purchase of plant from Italian supplier for €800 000 15 November 2016

31 December 2016

25 January 2017

Date of purchase

Reporting date

Settlement date

Plant and Payable initially measured at spot rate

Re-measure Payable at closing rate

€800 000 x 1.15 = $920 000

€800 000 x 1.2 = $960 000

Re-measure Payable Record cash settlement at spot rate €800 000 x 1.18 = $944 000

Exchange loss $40 000

Exchange gain $16 000

Journal entries 15.11.16

Plant

Dr Cr

920 000

Foreign exchange loss Payable to supplier (Re-measurement of Payable €800 000 x 1.2 - €800 000 x 1.15)

Dr Cr

40 000

Payable to supplier Foreign exchange gain (Re-measurement of Payable €800 000 x 1.18 - €800 000 x 1.2)

Dr Cr

16 000

Payable to supplier Cash (Cash payment €800 000 x 1.18)

Dr Cr

944 000

Payable to supplier (Plant purchase €800 000 x 1.15)

31.12.16

25.1.17

920 000

40 000

16 000

944 000

(b) Sale of inventory to German customer for €500 000 30 November 2016

31 December 2016

31 January 2017

Date of sale

Reporting date

Settlement date

Sale and Receivable recognised at spot rate

Re-measure Receivable at closing rate

€500 000 x 1.25 = $625 000

€500 000 x 1.20 = $600 000

Re-measure Receivable Record cash settlement at spot rate €500,000 x 1.16 = $580 000

Exchange loss $25 000

Exchange loss A$20 000

Journal entries 30.11.16

31.12.16

31.1.17

Accounts receivable Sales (Sale €500 000 x 1.25)

Dr Cr

625 000

Cost of sales Inventory

Dr Cr

350 000

Foreign exchange loss Accounts receivable (Re-measurement of Receivable €500 000 x 1.2 - €500 000 x 1.25)

Dr Cr

25 000

Foreign exchange loss Accounts receivable (Re-measurement of Receivable €500 000 x 1.16 - €500 000 x 1.2)

Dr Cr

20 000

Cash

Dr Cr

580 000

Accounts receivable (Cash receipt €500 000 x 1.16)

625 000

350 000

25 000

20 000

580 000

(c) Interest-free loan to related French company of $1 000 000 1 July 2016

31 December 2016

30 June 2017

Date of loan transaction

Reporting date

Reporting date

Receivable initially measured at spot rate

Receivable re-measured at closing rate

Receivable re-measured at closing rate

€1 000 000 x 1.22 =$1 220 000

€1 000 000 x 1.20 = $1 200 000

€1 000 000 x 1.30 =$1 300 000

Exchange loss $20 000

Exchange gain $100 000

Journal entries 1.7.16

31.12.16

30.6.17

Loan receivable Cash (Receivable €1 000 000 x 1.22)

Dr Cr

1 220 000

Foreign exchange loss Loan receivable (Re-measurement of Receivable €1 000 000 x 1.2 - €1 000 000 x 1.22)

Dr Cr

20 000

Loan receivable Foreign exchange gain (Re-measurement of Receivable €1 000 000 x 1.3 - €1 000 000 x 1.2)

Dr Cr

100 000

1 220 000

20 000

100 000...