IAS 21: Foreign currency transactions
Recording deals in other currencies, retranslating balances at the year end, and where exchange gains and losses go.
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
New to this topic?
What it is: What to do when a UK company buys or sells in another currency, such as US dollars.
The key idea: record the deal at the exchange rate on the day. At the year end, retranslate monetary items (cash, receivables, payables, loans) at the closing rate. The difference is an exchange gain or loss in profit or loss.
Example. A company buys goods for $50,000 when £1 = $1.25: £40,000. At the year end it still owes the money and £1 = $1.30. The payable is now £38,462, so there’s a £1,538 gain.
Key words
- Functional currency
- The currency of the main economic environment the company operates in.Example: Pounds sterling for a UK retailer.
- Spot rate
- The exchange rate on the date of a transaction.Example: £1 = $1.25 on the day goods are bought.
- Closing rate
- The exchange rate at the year end.Example: £1 = $1.30 on 31 December.
- Monetary item
- Money held, or amounts to be received or paid in a fixed number of currency units.Example: Cash, trade receivables and payables, loans.
- Non-monetary item
- Items not settled in a fixed amount of money.Example: Machinery, inventory, prepayments.
Learn
Step 1: record the transaction
Translate at the spot rate on the transaction date (an average rate for the period can be used if rates don’t change much).
Step 2: at the year end
| Item | Rate to use |
|---|---|
| Monetary: cash, receivables, payables, loans | Closing rate. Retranslate, and put the difference in profit or loss |
| Non-monetary at historical cost: machinery, inventory | Historical rate. Don’t retranslate |
| Non-monetary at fair value | Rate on the date fair value was measured |
Step 3: on settlement
When the invoice is paid, any difference between the amount paid and the recorded amount is an exchange gain or loss in profit or loss.
Watch it explained
Press play to watch the animation, or step through it at your own pace with the arrows.
Videos from YouTube tutors
These videos are made by independent tutors on YouTube, not by Trial Balance. Some use US terms or older exam names (for example F7 for FR), but the principles are the same.
Worked example
On 1 November a UK company buys goods from a US supplier for $50,000, when £1 = $1.25. At the year end, 31 December, the invoice is unpaid and £1 = $1.30.
| Working | £ |
|---|---|
| Purchase and payable recorded: 50,000 ÷ 1.25 | 40,000 |
| Payable retranslated at closing rate: 50,000 ÷ 1.30 | 38,462 |
| Exchange gain in profit or loss | 1,538 |
| Account | Dr £ | Cr £ |
|---|---|---|
| Trade payables | 1,538 | |
| Exchange gain (P/L) | 1,538 | |
| (Retranslation of dollar payable at the closing rate) | ||
The inventory stays at £40,000: it is non-monetary, so it isn’t retranslated.
Practice questions
Type or choose your answers, then press Check answer. Questions with a New numbers button can be repeated with different figures.