| Country : | Australia |
|---|
Assignment Task:
Task:
CHAPTER A IM
This chapter explains how to account for foreign currency transactions in accordance with AASB 121/IAS 21 The Effects of Changes in Foreign Exchange Rates. The chapter also explains how to account for hedging relationships using forward exchange contracts in accordance with AASB 9/IFRS 9 Financial Instruments.
LEARN ING OBJECT IVES
After studying this chapter, you should be able to:
23.1 explain the need to translate foreign currency transactions
23.2 explain how exchange rates function
23.3 prepare entries for the initial measurement of foreign currency items at transaction date
23.4 define and describe monetary and non-monetary items
23.5 describe how foreign exchange differences affect monetary assets or liabilities
23.6 prepare entries for the subsequent measurement of monetary items that are denominated in foreign currency
23.7 prepare entries for the subsequent measurement of non-monetary items that are denominated in foreign currency
23.8 explain what is meant by ‘foreign exchange risk’ and the circumstances in which it can arise
23.9 describe a ‘forward exchange contract’
23.10 explain hedge accounting
23.11 describe the disclosures required in the financial report relating to foreign currency transactions.
CONCEPT FOR REV IEW
Before studying this chapter, you should understand and, if necessary, revise:
• accounting for financial instruments.
.
23.1 The need for translation of foreign currency transactions
LEARNING OBJECTIVE 23.1 Explain the need to translate foreign currency transactions.
An Australian company may engage in operating, investing or financing activities that involve entering into transactions denominated in a currency other than Australian dollars (A$). Reporting the effects of such transactions in the original foreign currencies would not be useful to financial report users who are normally interested in the company’s overall financial position, financial performance and cash flows.
Therefore, it is necessary to translate these effects into a single currency. If the financial statements of the company are presented in A$, then the financial effects of all transactions have to be recorded and reported in A$, including transactions denominated in foreign currencies such as United States dollars (US$), New Zealand dollars (NZ$), pounds (£), euros (€), Chinese yuan (?) or Japanese yen (¥). Accounting for foreign currency transactions is regulated by AASB 121/IAS 21 The Effects of Changes in Foreign Exchange Rates. AASB 121/IAS 21 covers the:
• initial measurement of the financial statement elements that arise from foreign currency transactions
• subsequent measurement of assets and liabilities that arise from foreign currency transactions, including subsequent measurement at the end of a reporting period
• treatment of any exchange differences that arise from the subsequent measurement of assets and liabilities denominated in foreign currency
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