ACC3704 - Topic 8A Notes 8 - 2023

ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS
1 AND FOREIGN OPERATIONS
Department of Accounting Instructor:

School of Business Adjunct AP Sardool Singh
National University of Singapore Email: bizsardo@nus.edu.sg
ACC3704 ADVANCED CORPORATE ACCOUNTING & REPORTING

Semester 2, 2022/2023
Topic 8
Accounting for foreign currency transactions and foreign operations
Readings
a) Textbook, Chapter 8
b) SFRS (1) 1-21 The Effects of Changes in Foreign Exchange Rates.
Tutorial
All questions are from the textbook, unless otherwise stated.
1. Problem 9.4
2. Problem 8.1: requirement 1 only
3. Problem 8.2: requirements 1 and 2 only
4. Problem 8.10: requirement 1 only.

Amend 1(f) to Fair value reserve relating to FVTOCI
FEB ADDITIONAL TUTORIAL QUESTION FOR FOREIGN EXCHANGE
1. A NEWCO started with a capital of S$150,000 deposited into the S$ bank account
(when the exchange rate was S$1.50 to 1US$). The company has both S$ and US$
bank accounts.
2. Purchased 10,000 units of stocks for US$20,000 (S$1.51) on credit.
3. Sold 10,000 units of the goods for US$23,000 (S$1.49) on credit.
4. Purchased 5,000 units of stocks for S$10,000 for cash. The company uses the
average cost method for measuring stocks.
5. Received US$20,000 (S$1.52) from the debtor.
6. Purchased fixed assets for US$1,000 (S$1.53) for cash. Depreciation 5 years.
7. Closing rate S$1.52. The NRV of the stocks at month end was US$6,250.
Prepare the balance sheet and income statement. The functional currency of NEWCO is S$.
Prepare a reconciliation of the exchange difference in the income statement.
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1
TOPIC PAGE
HOW IS THE FUNCTIONAL CURRENCY DETERMINED?
1. How do exchange differences arise? 3
2. What is the functional currency of the entity? 5
3. How are foreign currency transactions recorded on initial recognition? 6
4. How are foreign currency balances reported at the end of subsequent reporting
periods? 6
5. Must accounting records be maintained in the functional currency? 8
6. How is a change in functional currency effected? 8
USE OF A PRESENTATION CURRENCY OTHER THAN THE FUNCTIONAL

CURRENCY
1. Can an entity present the accounts in a currency other than the functional 10
currency?
2. How is translation to the presentation currency effected? How are the results 10
of a foreign operation translated?
FOREIGN OPERATIONS
1. What is the functional currency of the foreign operation? 12
EXAMPLES
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2
SUMMARY
HOW DO EXCHANGE DIFFERENCES ARISE?
An exchange difference is the difference resulting from translating a given number of

units of one currency into another currency at different exchange rates. Exchange
differences arise from three different situations:
1. in accounting for transactions and balances in foreign currencies in the financial

statements of INDIVIDUAL ENTITIES (using the temporal method). A foreign
currency is a currency other than the functional currency of the entity. See Page 5-
6.
Measurement Rules
1. A foreign currency transaction is recorded / converted, at the date of the

transaction, to the functional currency, by applying to the foreign currency amount,
the spot exchange rate.
At each statement of financial position date:
2. foreign currency monetary items are translated using the closing rate. Resultant
exchange differences are included in the income statement.
3. non-monetary items are NOT translated at closing rate. Therefore, the items are
measured in terms of historical cost translated using the exchange rate at the
date of the transaction.
4. non-monetary items that are measured at fair value in a foreign currency shall
be translated using the exchange rates at the date when the fair value was
determined. Resultant gains or losses, including any exchange component are
recognised directly in other comprehensive income, or in profit or loss, as
required by the relevant SFRS.
2. in translating the results and financial position of foreign operations that are included
in the financial statements of the entity by CONSOLIDATION or the equity method
(using the closing rate method); and See Page 9-10.
3. in translating an entity’s results and financial position into a PRESENTATION

CURRENCY (using the closing rate method). Presentation currency is the currency in
which the financial statements are presented. See Page 9-10. [SFRS(I) 21.3]
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3
Measurement Rules for (b) and (c)
1. assets and liabilities for each statement of financial position presented (i.e.
including comparatives) shall be translated at the closing rate at the date of that
statement of financial position;
2. income and expenses for each statement profit or loss and other comprehensive
income (i.e. including comparatives) shall be translated at exchange rates at the
dates of the transactions;
3. the share capital and pre-acquisition reserves shall be translated at exchange

rates at historical rates when the parent invested in the foreign operation and
4. all resulting exchange differences shall be recognised in other comprehensive

income and then to an exchange fluctuation reserve [EFR].
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WHAT IS THE FUNCTIONAL CURRENCY OF THE ENTITY?
Functional currency is the currency of the primary economic environment in

which the entity operates. In preparing financial statements, each entity -whether a
stand-alone entity, an entity with foreign operations (such as a parent) or a foreign
operation (such as a foreign subsidiary, associate, joint venture or branch) -
determines its own functional currency in accordance with the requirements of SFRS(I)
1-21.
-> need to
be sequential
O 3 STEP APPROACH TO DETERMINE THE FUNCTIONAL CURRENCY
step - i. The primary economic environment in which an entity operates is normally the one in
which it primarily generates and expends cash. An entity considers the following
PRIMARY factors in determining its functional currency:
(a) the currency: ↳ books need be kept in
to
functional currency
(i) that mainly influences sales prices for goods and services (this will
often be the currency in which sales prices for its goods and services
are denominated and settled); and
SS notes that if oil prices are set in US$ but locally the invoices are
denominated in local currency, i.e. other than US$, and settled in US$, under
this rule the US$ is the functional currency.
(ii) of the country whose competitive forces and regulations mainly
determine the sales prices of its goods and services.
SS notes that what this means is that if local governmental regulations inhibit
the conversion of local dollars to foreign currencies which influence sales
prices under (i) above, the local currency will be the functional currency.
(b) the currency that mainly influences labour, material and other costs of
providing goods or services (this will often be the currency in which such costs
are denominated and settled). [21.9]
2
Step
ii. The following SECONDARY factors may also provide evidence of an entity’s functional
/ currency: capital. and loans
->
capital, (a) the currency in which funds from financing activities (i.e. issuing debt and
equity instruments) are generated.
receipts
(b) the currency in which receipts from operating activities are usually retained.
[21.10] from revenue
↳mainly
iii. When the above indicators are mixed and the functional currency is not obvious,
management uses its JUDGEMENT to determine the functional currency that most
I faithfully represents the economic effects of the underlying transactions, events and
judgement conditions. As part of this approach, management gives priority to the primary
indicators in paragraph 9 before considering the indicators in paragraphs 10, which
are designed to provide additional supporting evidence to determine an entity’s
functional currency. [21.12]
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5
EXCHANGE DIFFERENCES AT ENTITY LEVEL
1. HOW ARE FOREIGN CURRENCY TRANSACTIONS RECORDED ON INITIAL

/ RECOGNITION IN THE BOOKS OF INDIVIDUAL ENTITIES? (using the temporal
method)
Initial recog
the
always spoti.
average
or
->
A foreign currency transaction shall be recorded, on initial recognition in the
functional currency, by applying to the foreign currency amount the spot exchange
rate
rate between the functional currency and the foreign currency at the date of the
transaction. The spot exchange rate is the exchange rate for immediate delivery.
[21.21]
be determined then...
Ideally, use spot rates, but if cannot
ii. For practical reasons, an average rate for a week or a month might be used for
all transactions in each foreign currency occurring during that period. However, if
exchange rates fluctuate significantly, the use of the average rate for a period is
inappropriate.[21.22]
2. HOW ARE FOREIGN CURRENCY BALANCES REPORTED AT THE END OF

S SUBSEQUENT REPORTING PERIODS?
receivables, payables, cash, borrowings.
look outfor
in BIS:
monetary
->
At each statement of financial position date:
(a) foreign currency monetary items are translated using the closing rate i.e. the spot
items, exchange rate at the statement of financial position date;
adjustto
Monetary items are units of currency held and assets and liabilities to be received or
rate &
closing paid in a fixed or determinable number of units of currency.
compart Examples:
A
- Cash and bank balances;
diff goes to
- Receivables;
pd( as - Payables including lease liabilities;
- Loans and borrowings;
exchange- Investment in bonds;
gain/lots -
-
pensions and other employee benefits to be paid in cash;
provisions that are to be settled in cash; and
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 are
RECOGNISED IN PROFIT OR LOSS in the period in which they arise. [21.28]
(b) foreign currency non-monetary items that are measured in terms of historical cost
/ are translated using the exchange rate at the date of the transaction. Therefore, non-
non-monetary
don't touch! Examples:
↳
monetary items are not translated at closing rate at subsequent balance sheet dates.
do not update non-monetary items!!
- amounts prepaid for goods and services (e.g. prepaid rent);
- non-refundable deposits
- intangible assets;
- inventories;
- investments in equity instruments;
- right-of-use assets;
- investment property;
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6
do not split the FVC
I
A- property, plant and equipment;

↳includes fx gap/loss
and gapufloss non-on
(c) non-monetary items that are measured at fair value in a foreign currency are monetary
translated using the exchange rates at the date when the fair value was items
I determined. [21.23]
diff btw
aufs called
When a gain or loss on a non-monetary item is recognised directly in other
comprehensive income, any exchange component of that gain or loss shall be
↳
Fr recognised directly in other comprehensive income. Conversely, when a gain or
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. [21.30]
For example,
SFRS(I) 1-16 requires some gains and losses arising on a revaluation of property,
plant and equipment to be recognised directly in other comprehensive income.
When such an asset is measured in a foreign currency, the revalued amount to be
translated using the rate at the date the value is determined, resulting in an exchange
difference that is also recognised in other comprehensive income. [21.31]
Similarly, the carrying amount of inventories is the lower of cost and net realisable
value in accordance with SFRS(I) 1-2 Inventories.
In accordance with SFRS(I) 1-40 Investment Property, gains and losses arising on
an adjustment to fair value of an investment property are recognised in profit and
loss
In accordance with SFRS(I) 1- 9 Financial Instruments, gains and losses arising on

an adjustment to fair value of a debt or equity instrument are recognised in profit and
loss or other comprehensive income, as appropriate. Exchange differences on the
amortised cost of debt instruments is adjusted to income statement.
In accordance with SFRS(I) 1-36 Impairment of Assets, the carrying amount of an

asset for which there is an indication of impairment is the lower of its carrying amount
before considering possible impairment losses and its recoverable amount. When
such an asset is non-monetary and is measured in a foreign currency, the carrying
amount is determined by comparing:
(a) the cost or carrying amount, as appropriate, translated at the exchange rate at
the date when that amount was determined (i.e. the rate at the date of the
transaction for an item measured in terms of historical cost); and
(b) the net realisable value or recoverable amount, as appropriate, translated at
the exchange rate at the date when that value was determined (e.g. the closing
rate at the end of the reporting period).
The effect of this comparison may be that an impairment loss is recognised in the
functional currency but would not be recognised in the foreign currency, or vice versa.
[21.25]
SS notes that exchange differences may be recognized in the change in the value of a non-
monetary asset and need not be separately recognized. For example, a foreign currency asset
costing US$100,000 was recorded in the books as $185,000. (i.e. 1 US$= $1.85). Two years
later, this asset is impaired with a recoverable value of US$85,000 when the exchange rate
was 1 US$=$1.75. Therefore, the recoverable amount now is $148,750. The company will
Sardool:3704NUS:423
7
record an impairment loss of $36,250. The loss was actually US$15,000 which translated at
1.75 would have given a theoretical loss of $26,250.
What if the exchange rate was US$1=$2.2? The recoverable amount would be $187,000. No
impairment loss is recognized in functional currency although there is US$15,000 loss in foreign
currency terms.
TRY THESE QUESTIONS
Company A’s functional currency is S$. A only has one S$ bank account.
Exchange rates
1.1.22 - 1 US$ = S$1.50
31.1.22 - 1 US$ = S$1.45
28.2.22 - 1 US$ = S$1.47
receive $
->
1. A sold goods to a customer on credit for US$100 on 1.1. Customer paid on 28.2.
What is the exchange gain or loss for the months of January and February?
. . .
Dr PAL 5
DrAlesengines
-- a-----
Answer:
Jan – exchange loss = $5
Feb – exchange gain = $2
145
4 AIR 145. =
AIR Cr
2. exchange gain 2
A bought goods from a supplier on credit for US$100 on 1.1. A paid on 28.2.
Cr
What is the exchange gain or loss for the months of January and February?
Dr Inventory 150 Dr AIP
145
Answer: AIP 150
Cr
Dr exchange loss. 2
Jan – exchange gain = $5 update to closing:ar Bank 147

Feb – exchange loss = $2 AlP 145 =
Dr AIP 5
5
or PAL
3. A bought a fixed asset from a supplier on credit for US$100 on 1.1. A paid the supplier on 28.2.
What is the fixed asset and creditor balance on 31.1 and 28.2 and exchange gain or loss for
the months of January and February? Dr FA 150
2812: Dr AIP 145
Cr AIP 150 DrEL
2
Answer: assetas need to revalue:$150. Cr Bank 147

31.1 – asset = $150; exchange gain = $5: creditor = $145
28.2 – asset = $150; exchange loss = $2 31/1:Dr AlP 5 5
or exchange gain
creditor bal:145.
4. A placed an order for a fixed asset from a supplier for US$100 on 1.1. A paid a non-refundable
deposit of US$50 on 1.1. The asset was delivered on 31.1. A paid the balance on 28.2.
What is the fixed asset balance, creditor and deposit balance on 1.1; 31.1 and 28.2 and exchange
gain or loss for the months of January and February?
> Current assef

"other receivables"
Answer:
1.1 – FA = 0; Deposit = $75; exchange = 0
31.1 – FA = $147.50; Deposit = 0; exchange = 0; creditor = $72.5
28.2 – FA = $147.50; Deposit = 0; exchange loss = $1 on creditors 72.5
282: DrAIP
DNFA 72.5 ($50 remaining x 1.45)
111:Dr 75
deposit UII: BrEL 1
75. Cr AIP 72.5 73.5

Cr bank Cr Bank
3,3]
Dr deposts close departs. 450x1.47
FA 0 =
Cr FA
↳ not delivered FA:147.50 FA 147-50
=
8 Sardool:3704NUS:423 Gron-monetary
5. A has closing stock costing US$100 on 31.3. The stock was all purchased on 1.1. The net
realisable value of the stock was US$110 on 31.3. The exchange rate was 1 US$ = S$1.20 on
- - -
31.3.
O
-
What is the stock balance; exchange gain or loss; other adjustments, if any on 31.3?
lower of
111:20st 100x1.50=150
3 stock balis
=
Answer:
NRU & cost.
12:132
Cost = US100 x 1.50 = S$150 31/3:WRV 110X
=
NRV = US$110 x 1.2 = S132

stock write down:150-132=18
If stock > NRU -> no write down needed.
Stock balance = $132 (lower of cost and NRV)
Exchange diff = 0
Write down of stocks = $18.
6. A purchased an investment property (IP) for US$100 on 1.1. The fair value of the IP was US$110
on 28.2.
What is the IP balance; exchange gain or loss; other adjustments, if any on 28.2.?
How would your answer change if A used the cost model and the IP is depreciated over 10 years
with a full year’s depreciation in the year of purchase?
IP balance 161.70
=
111:cost 100x1-50 150

= =
1170
Argain:161.70-150
=
Answer: 110x1.4)=161.70
ey: FV
=
FV model
IP balance = $161.7; Fair value gain in the PL = $11.70. Exchange diff = 0
If & cost, IP balance 150
=
Cost model ↳ non-monetary item 135.

- 150-15:
IP balance = $150; Accumulated depreciation = $15; carrying amount = $135.

-150/10:15
7. A purchased a property (PPE) for own use for US$100 on 1.1.22. The PPE was revalued to
US$110 on 28.2.22 and US$105 on 28.2.23 when the exchange rate was 1.40. The PPE is
depreciated over 10 years with a full year’s depreciation in the year of purchase?
Compute the following - PPE balance; Accumulated depreciation; Revaluation reserve; other
adjustments, if any for the years ended 28.2.22 and 28.2.23?
Answer: Revaluation model;

2022
PPE balance = $161.70 [US$110 x 1.47]; Accumulated depreciation = $0; Depreciation = $15
[$150 / 10]; Revaluation reserve = $26.70. [161.70 – (150-15)]
2023
PPE balance = $147 [US$105 x 1.4]; Accumulated depreciation = $0; Depreciation = $18
[$161.70 / 9]; Revaluation reserve = $30. [147 – (161.70 -18) + 26.7]
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9
3. MUST ACCOUNTING RECORDS BE MAINTAINED IN THE FUNCTIONAL

CURRENCY?
When an entity keeps its books and records in a currency other than its
functional currency, at the time the entity prepares its financial statements all
amounts are translated into the functional currency in accordance with
paragraphs above. This produces the same amounts in the functional currency as
would have occurred had the items been recorded initially in the functional currency.
For example, monetary items are translated into the functional currency using the
closing rate, and non-monetary items that are measured on a historical cost basis are
translated using the exchange rate at the date of the transaction that resulted in their
recognition. [21.34]
SS notes that accounting records may sometimes not been maintained in the functional
currency. At the time the financial statements are prepared, the financial statements are
converted into functional currency using the procedures set out in the paragraphs above. The
translation method from foreign currency to functional currency is referred to as re-
measurement or temporal method (in your textbook).
4. HOW IS A CHANGE IN FUNCTIONAL CURRENCY EFFECTED?

A
Once the functional currency is determined, it can be changed only if there is a
change to those underlying transactions, events and conditions. For example, a
change in the currency that mainly influences the sales prices of goods and services
may lead to a change in an entity’s functional currency. [21.36]
When there is a change in an entity’s functional currency, the entity shall apply the
translation procedures applicable to the new functional currency prospectively from
the date of the change. In other words, an entity translates all items into the new
↓
functional currency using the exchange rate at the date of the change. The resulting
translated amounts for non-monetary items are treated as their historical cost.
Exchange differences arising from the translation of a foreign operation previously
recognised in other comprehensive income are not reclassified from equity to profit or
loss until the disposal of the operation. [21.35/37]
emerger up
sing l ikete f
ner at ent
are
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USE OF A PRESENTATION CURRENCY OTHER THAN THE FUNCTIONAL

CURRENCY
1. CAN AN ENTITY PRESENT THE ACCOUNTS IN A CURRENCY OTHER THAN THE

FUNCTIONAL CURRENCY?
An entity may present its financial statements in any currency. If the presentation
currency differs from the entity’s functional currency, it translates its results and
financial position into the presentation currency. For example, when a group contains
individual entities with different functional currencies, the results and financial position
of each entity are expressed in a common currency so that consolidated financial
statements may be presented. [21.38].
2. HOW IS TRANSLATION TO THE PRESENTATION CURRENCY EFFECTED? HOW

ARE THE RESULTS OF A FOREIGN OPERATION TRANSLATED? (using the
closing rate method)
i. The results and financial position of an entity whose functional currency is not the
currency of a hyperinflationary economy shall be translated into a different presentation
currency using the following procedures:
(a) assets and liabilities for each statement of financial position presented (i.e.
A1 E
= = including comparatives) shall be translated at the closing rate at the date of
no m that statement of financial position;
closing historical
rates
(b) income and expenses for each statement profit or loss and other
rate comprehensive income (i.e. including comparatives) shall be translated at
en exchange rates at the dates of the transactions; average rates also can,
-
differences (c) the share capital and pre-acquisition reserves shall be translated at
goes to the exchange rates at historical rates when the parent invested in the foreign
EFR operation and
(d) all resulting exchange differences shall be recognised in other
comprehensive income and then to an exchange fluctuation reserve
[EFR]. [21.39]
ii. For practical reasons, a rate that approximates the exchange rates at the dates of
the transactions, for example an average rate for the period, is often used to
translate income and expense items. However, if exchange rates fluctuate
significantly, the use of the average rate for a period is inappropriate. [21.40]
iii. The exchange differences referred to in paragraph 39(d) result from:

(a) translating income and expenses at the exchange rates at the dates of the
transactions and assets and liabilities at the closing rate.
(b) translating the opening net assets at a closing rate that differs from the previous
closing rate.
These exchange differences are not recognised in profit or loss because the changes
in exchange rates have little or no direct effect on the present and future cash flows
from operations. The cumulative amount of the exchange differences is presented in
a separate component of equity until disposal of the foreign operation. When the
exchange differences relate to a foreign operation that is consolidated but not wholly-
owned, accumulated exchange differences arising from translation and attributable to
non-controlling interests are allocated to, and recognised as part of, non-controlling
interest in the consolidated statement of financial position. [21.41]
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FOREIGN OPERATIONS
1. WHAT IS THE FUNCTIONAL CURRENCY OF A FOREIGN OPERATION?
A foreign operation is an entity that is a subsidiary, associate, joint venture or branch

of a reporting entity, the activities of which are based or conducted in a country or
currency other than those of the reporting entity.
The following additional factors are considered in determining the functional

currency of a foreign operation, and whether its functional currency is the same as
that of the reporting entity:
(a) whether the activities of the foreign operation are carried out as an extension of the
reporting entity, rather than being carried out with a significant degree of autonomy.
An example of the former is when the foreign operation only sells goods imported from
the reporting entity and remits the proceeds to it. (SS notes then the functional
currency will be that of the reporting entity). An example of the latter is when the
operation accumulates cash and other monetary items, incurs expenses, generates
income and arranges borrowings, all substantially in its local currency. (SS notes then
the functional currency will be that of the local entity).
(b) whether transactions with the reporting entity are a high or a low proportion of the
foreign operation’s activities.
SS notes then the functional currency will be that of the reporting entity if there are extensive
inter-company transactions with the reporting entity. If not, the local currency is the functional
currency.
(c) whether cash flows from the activities of the foreign operation directly affect the cash
flows of the reporting entity and are readily available for remittance to it.
SS notes then the functional currency will be that of the reporting entity if cash flows of the
foreign operations have a direct impact on the reporting entity’s cash flows and are readily
available to the reporting entity. If not, the local currency is the functional currency.
(d) whether cash flows from the activities of the foreign operation are sufficient to service
existing and normally expected debt obligations without funds being made available by
the reporting entity. [21.11]
SS notes then the functional currency will be that of the reporting entity if the reporting entity
provides financing to the foreign operations to service existing debt obligations. If not, the local
currency is the functional currency.
2. HOW IS GOODWILL ARISING ON THE ACQUISITION OF A FOREIGN

OPERATION RECORDED?
Any goodwill arising on the acquisition of a foreign operation and any fair value
convert goodwill adjustments to the carrying amounts of assets and liabilities arising on the acquisition
inte
using of that foreign operation shall be treated as assets and liabilities of the foreign
↓ operation. Thus, they shall be expressed in the functional currency of the foreign
operation and shall be translated at the closing rate in accordance with paragraphs 39
goodwill -
every and 42. [21.47]
year
SS notes that goodwill on a foreign operation has to be recognised as part of the assets and
↓
liabilities and therefore has to be translated with exchange differences going to equity. For
diff goes into example, H bought 100% of S for $2,000 when the net assets of S were US$1,000. The
exchange rate was US$1 = $1.8. Therefore, the goodwill was $2,000 – (US$1,000 x 1.8) =
EFR $200 or US$111.
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12
At the end of the year the exchange rate was US$1 = $1.6. The opening net assets are
US$1,111 (US$1,000 + US$111). The exchange fluctuation will be US$1,111 x (1.8 – 1.6) =
$222. Goodwill is now shown as $178.
The consolidated statement of financial position in $ will reflect:
@ Acquisition @ Year end

Goodwill 200 178
Net assets 1,800 1,600
Cash payment -2,000 -2,000
Exchange fluctuation 0 -222
NOW TRY EXAMPLE 1
Sardool:3704NUS:423
13
shenfin (48D)
EXAMPLE 1 ↓
parkway (SGD)
Parkway, a Singapore company with a US$ functional currency, whose accounting
period ended on 30 September 2022, has a wholly-owned subsidiary, Shenton, that
was acquired for S$ 500,000 on 30 September 2021. Shenton’s functional currency is
S$. The fair value of the net assets at the date of acquisition was S$ 400,000. The goodwill
O 2100k
exchange rate at 30 September 2021 and 2022 was US$1=S$ 2.0 and US$1=S$ 1.5
--
respectively. The weighted average rate for the year ended 30 September 2022 was
US$1=S$ 1.65.
& date of acquisition
-
The summarised profit and loss account of Shenton for the year ended 30 September
2022 and the summarised statement of financial positions at 30 September 2021 and
2022, are as follows.
Translate Shenton’s profit and loss account and statement of financial position in US$
to enable the financial statements to be included in Parkway’s consolidated financials.
Shenton: Profit and loss account for the year ended 30 September 2022
Average
rate
S$'000 US$'000
Exchange rate US$1 = 1.65.
Operating profit 135 91.82
Interest paid (15) 19.09)

Profit before taxation 120 72.73
Taxation (30) (18-2)

Profit after taxation 90 54.5
Dividends paid in the year (14) (8.57
Retained profit 76 46.1
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14
Statement of financial positions of Shenton

Ins:$150-14S=$2
A2:closing rate -
2022 2021 2022 2021
capital:historical S$'000 S$'000 US$'000 US$'000

RE:compilation of averages.
Closing exchange rate US$1 =
Fixed assets:
Cost (2022 additions: $30) 255 225 170 112.50
Depreciation (2022 charge: 65.3 22.50

98 45
$53)
Net book value 157 180 rot.67 90
Current assets:
116 66
Stocks 174 126
140 7225
Debtors 210 145
360 155
Cash at bank 240 210
624 481 416 240.5
Current liabilities:
Trade creditors 125 113 83.3 56.5
Taxation 30 18 20 9
155 131 103.365.5
Net current assets 469 350 312.67 175
Loan stock 150 130 100 65
317-3 200
Net assets 476 400
Share capital 200 200 100 100

use 100 46.1
+
100
Retained profits 276 200
historical e =146-10
cost
14S =
S$2
Exchange Fluctuation
Reserve Cplug)
profitof As
4 converted
⑰2 0
↓
↓ 46.1 per page
to
476 400 317.3 200

can be negative
⑪ PAL
-
⑧ opening notasset
15 Sardool:3704NUS:423
/70PL 21,50 50.674009(YR2
=
200
this yr
9165: & TYR

50
7002 1
-
lastyr
66-7
+
* 66.7 4.6 7.3

=
+
For no
2023 L024
- -
share cap
300 100
=
RE
0
EFR -
0
200
-
closing rate:
1.55
rate: 1,60
average RE:244 (300 216)
-
4 ISUSD
↳ Use average 1.60.
proof of 2023 EFR
3 cumulates
OPIL
/ 24 91.60 15
=
this yo
24 21.55=5 (+0.5-10.3)
sending) /
lastyr +0.48 = to.5
cinitial) diff is -9.8
⑧
out
&cys150:
-
4768TY2R155:307096
A
ending initial
-
The summarised statement of financial positions of Parkway at 30 September

2022 and 2021 are as follows:
Company A - Statement of financial positions 2022 2021
US$'000 US$'000
Investments in subsidiary ($500,000 @ 2.0) 250 250
Cash 208 200
Net assets 458 450
Share capital 450 450
P&L account (dividend received: $14,000 @

8 -
1.75*)
458 450
*actual rate on date dividend received
Exchange Fluctuation reserve:
US$'000 US$'000
at opening rate -
at closing rate -
Exchange gain on opening net investment
Exchange gain arising from translating profit and loss account at

average rate (US$46.1) rather than closing rate (US$50.7)
Exchange difference on consolidating Shenton
Goodwill at opening rate -
at closing rate -
Exchange gain on goodwill
Total exchange difference
Sardool:3704NUS:423
16
The summarised consolidated profit and loss account for the year ended 30
September 2022 and the summarised consolidated statement of financial position
at that date are as follows:
Consolidated profit and loss account for the year ended 30 September 2022
Average
rate
US$'000
Operating profit of Shenton
Exchange diff - intercompany dividend*
Net operating profit
Interest paid
Profit before taxation
Taxation
Retained profit
*The exchange difference arising on the inter-company dividend, being the difference
between the dividend calculated at the date of receipt and at the closing rate or at the
average rate, is included in the profit and loss account.
Sardool:3704NUS:423
17
Consolidated statement of financial position at 30 September 2022
US$'000
Fixed assets
Goodwill ($100,000 @ )
Current assets:
Stocks
Debtors
Cash (Shenton: US$160; Parkway US$208)
Trade creditors
Taxation
Net current assets
Loan stock
Net assets
Share capital
Reserves:
Retained profit
Exchange Fluctuation Reserve
Sardool:3704NUS:423
18
ANSWERS
1. Shenton: Profit and loss account for the year ended 30 September 2022
Average
rate
S$'000 US$'000
Exchange rate US$1 = $1.65
Operating profit 135 81.8
Interest paid (15) (9.0)
Profit before taxation 120 72.8
Taxation (30) (18.2)
Profit after taxation 90 54.6
Dividends paid in the year (14) (8.5)
Retained profit 76 46.1
Sardool:3704NUS:423
19
Statement of financial positions of Shenton
2022 2021 2022 2021
S$'000 S$'000 US$'000 US$'000
Closing
rate
Closing exchange rate US$1 = $1.50 $2.00
Fixed assets:
Cost (2022 additions: S$30) 255 225 170.0 112.5
Depreciation (2022 charge:

98 45 65.3 22.5
S$53)
Net book value 157 180 104.7 90.0
Current assets:
Stocks 174 126 116.0 63.0
Debtors 210 145 140.0 72.5
Cash at bank 240 210 160.0 105.0
624 481 416.0 240.5
Trade creditors 125 113 83.3 56.5
Taxation 30 18 20.0 9.0
155 131 103.3 65.5
Net current assets 469 350 312.7 175.0
Loan stock 150 130 100.0 65.0
Net assets 476 400 317.4 200.0
Share capital 200 200 100.0 100.0
Retained profits 276 200 146.1 100.0
Exchange Fluctuation
71.3
Reserve
476 400 317.4 200.0
Sardool:3704NUS:423
20
Exchange Fluctuation reserve
US$'000
at opening rate - $400,000 @ $2 = US$1 200.0
at closing rate - $400,000 @ $1.5 = US$1 266.7
Exchange gain on opening net investment 66.7
Exchange gain arising from translating profit and loss account at average
4.6
rate (US$46.1) rather than closing rate (US$50.7)
Exchange difference on consolidating Shenton 71.3
Goodwill at opening rate - $100,000 @ $2 = US$1 50.0
at closing rate - $100,000 @ $1.5 = US$1 66.7
Exchange gain on goodwill 16.7
Total exchange difference 88.0
Consolidated profit and loss account for the year ended 30 September 2022
Average rate
US$'000
Operating profit of Shenton 81.8
Exchange difference: intercompany dividend1

(0.5)
[8-8.5]
Net operating profit 81.3
Interest paid (9.0)
Profit before taxation 72.3
Taxation (18.2)
Retained profit 54.1
1
The exchange difference arising on the inter-company dividend, being the difference between the
dividend received ($8,000) calculated at the date of receipt and dividend paid ($8,500) at the average
rate, is included in the profit and loss account.
Sardool:3704NUS:423
21
Consolidated statement of financial position at 30 September 2022
US$'000
Fixed assets 104.7
Goodwill ($100,000 @ 1.5) 66.7
Current assets:
Stocks 116.0
Debtors 140.0
Cash (Shenton: US$160; ParkwayUS$208) 368.0
624.0
Trade creditors 83.3
Taxation 20.0
103.3
Net current assets 520.7
Loan stock 100.0
Net assets 592.1
Share capital 450.0
Reserves:
Retained profit 54.1
Exchange Fluctuation Reserve 88.0
592.1
Sardool:3704NUS:423
22
EXAMPLE 2
Illustration for translation of financial statements
(adapted from Applying International Financial Reporting Standards (2e) by
Alfredson et al, Wiley 2009, from p1067)
Sentosa Ltd operates in Singapore and is a subsidiary of a listed New Zealand (NZ)
company, Taupo Ltd. Taupo formed Sentosa on 1 Jul 2019 with an investment of
NZ$310,000. Sentosa’s financial records and statements are prepared in S$. The
financial statements for year ended 30 June 2020 are as follows.
Sentosa Ltd
Statement of Financial Position @ 30/6/20
S$
Inventory 210,000
Trade receivables & cash 190,000
Total current assets 400,000
Land (acquired 1/7/19) 100,000

Land (acquired 1/10/19) 120,000
PPE (acquired 1/11/19) 110,000
Accumulated depreciation (for PPE) (10,000)
Deferred tax asset 10,000
Total non-current assets 330,000
TOTAL ASSETS 730,000
Current tax liability 70,000

Borrowings (current portion) 50,000
Trade payables 100,000
Total current liabilities 220,000
Non-current borrowings 150,000
TOTAL LIABILITIES 370,000
Share capital 310,000

Retained earnings 50,000
TOTAL EQUITY 360,000
TOTAL LIABILITIES & EQUITY 730,000
Sardool:3704NUS:423
23
Sentosa Ltd
SCI for y/e 30/6/20
S$ S$
Sales revenue 1,200,000
Cost of sales:
Purchases 1,020,000
Ending inventory (210,000) (810,000)
Gross profit 390,000
Expenses:
Selling 120,000
Depreciation of PPE 10,000
Interest 20,000
Other 90,000 (240,000)
Profit before income tax 150,000
Income tax expense (60,000)
Profit for the period 90,000
Additional information:
a) Exchange rates over the period 1/7/19 to 30/6/20 were:
NZ$ per S$
1/7/19 1.00
1/10/19 0.95
1/11/19 0.90
1/1/20 0.85
1/4/20 0.74
30/6/20 0.75
Average rate for year 0.85
Average rate for final quarter 0.77
b) Proceeds of non-current borrowings were received on 1/7/19 and are payable in 4

-
-
-
annual installments commencing 1/7/20. Interest expenses relates to this loan.
-
c) The inventory on hand at 30/6/20 represents approximately the final 3 months’

-
purchases.
e
d) Revenues and expenses are spread evenly throughout the year.
e) Deferred tax asset relates to depreciation of the plant and equipment. DTA (and
DTL) is a monetary item.
f) Dividends of $40,000 were paid on 1/4/20.

-
Sardool:3704NUS:423
24
-> sentosa cannot have its own functional

Scenario A: assume Sentosa is seen as an extension of Taupo and so its functional
currency
currency is NZ$. Thus, as per SFRS(I) 1- 21, the financial statements of Sentosa are A
to be translated to NZ$ using the re-measurement/temporal method. This is also to haveto
facilitate consolidation. follow
parent
>average rate (2)
-> ↑ monetary item S$ Rate NZ$
Sales revenue 1,200,000 0.85 1,020,000
Cost of sales:
Purchases -> tmonetary item 1,020,000 0.85 867,000
Ending inventory (210,000) W
0.77 (161,700)
810,000 ↓ 705,300
Gross profit 390,000

closing stocks
194 314,700
boughtin
Expenses: 3 months
PRE acquired
Selling 120,000 0.85 -> 102,000 11/19
Depreciation of PPE 10,000 E
0.90 9,000 A
recorded &
Interest
Other +fraonetary 20,000
90,000
0.85
0.85
17,000
76,500
PPE
historical cost
A for entity method, (240,000) (204,500) crow rate)
exchange diff goes to PAL

1st step
Profit before translation loss 150,000 110,200
-
Foreign exchange translation loss 0 (1,400) PLUG. ->
Profit before income tax 150,000 108,800 A

Income tax expense-> monetary
s3 tepis
to
(60,000) 0.85 (51,000)
Profit for the period 90,000 57,800
dividend
Retained earnings at 1/7/19 0 0
paid on particular
->
I
monetary 90,000 date 1 57,800
Dividends paid (40,000) 0.74 (29,600) :
4thStep
Retained earnings at 30/6/20
->
50,000 28,200 -
Step
number
Share capital ->balancing 310,000 1.00 310,000 -3rd
-> monetary
Retained earnings at 30/6/20 50,000 28,200pen t
Non-current borrowings 150,000 0.75 112,500

Current tax liability 70,000 0.75 52,500 closing rate
Borrowings (current portion) 50,000 0.75 37,500
Trade payables 100,000 0.75 75,000
A yellow 730,000 615,700 of
=monetary hittorical rate last quarteryr
->
Inventory 210,000 0.77 161,700monetary item
Trade receivables & cash 190,000 0.75 -> 142,500
Land (acquired 1/7/19) 100,000 1.00 spot 100,000
Land (acquired 1/10/19)
PPE (acquired 1/11/19) I 120,000
110,000
0.95 spot 114,000
0.90 spot 99,000
Accumulated depreciation (for PPE) (10,000) 0.90 spot (9,000)
Deferred tax asset 10,000 0.75 7,500
and Step
linked tax
to income 730,000 ↓ 615,700 -
closing rate ↳ 12 step to
25 Sardool:3704NUS:423 gettotal assets

sothatyou'll get
total 2XE.
OTo prove that the foreign exchange translation loss is indeed $1,400, note that it must
arise from changes in net monetary items for this Illustration (because there is no
revaluation of non-monetary item that affects I/S). The reconciliation:
> investment /beg
cash
.
①Identify all monetary items S$ Rate NZ$ 1

Net monetary assets at 1/7/19 310,000 1.00 310,000 Step
-
Increases in monetary assets:

look for items Sales &r Asales 1,200,000 0.85 1,020,000
here
have e
that Decreases in monetary assets:
nete
-
-
Land (purchased 1/7/19)
Land (purchased 1/10/19)
PPE
100,000
120,000
110,000
1.00
0.95
0.90
100,000
114,000
99,000
TPuTeg Purchases
Selling expense
1,020,000
120,000
0.85
0.85
867,000
102,000
both monetary Interest 20,000 0.85 17,000
↳ cancels out Other expenses 90,000 0.85 76,500
Dr Bank Dividend paid 40,000 0.74 29,600
4 coal.
or
Income tax expense 60,000 0.85 51,000
(1,680,000) (1,456,100)
If functional currency NZ$ was

used for recording, net monetary -add all monetary items highlighted
assets at 30/6/20 should be (170,000) above (126,100)
Net monetary assets at 30/6/20 has

to be translated at closing rate (170,000) 0.75 (127,500) Step
2
Foreign exchange translation loss 0 (1,400)

recognised in I/S
↓
Notes to reconciliation: due to exchange diff in
monetary feas
1) Net monetary position (asset) at 1/7/19 is the cash injected at formation of Sentosa
=NZ$310,000 = S$310,000. [For this illustration only because Sentosa was just 7
formed on 1/7/19.] non-monetary items
give riseto
won't
2) Net monetary position at 30/6/20 is computed as follows: loss.
this exchange
Trade receivables+ cash S$190K
Deferred tax asset 10K
Borrowings (current) (50K)
Current tax liability (70K)
Trade payables (100K)
Non-current borrowings (150K)
Net monetary assets S$(170K)
3) Because the reconciliation is based on net monetary items, leave out transactions
that have no effect on monetary items (e.g.: borrowings, repayment by debtors,
repayment to suppliers, DTA, DTL, etc.) because they cancel each other out.
Sardool:3704NUS:423
26
Scenario B: assume Sentosa is seen as operationally independent of Taupo and so

its functional currency is S$. Thus, for consolidation purposes, its financial statements
need to be translated to NZ$ using the closing rate method.
0.85.
PAL average rate
=
use
S$ Rate NZ$
Sales revenue 1,200,000 0.85 1,020,000
Cost of sales:
Purchases 1,020,000 0.85 867,000
an
personEnding inventory (210,000) 0.85 (178,500)
810,000 688,500
Gross profit 390,000 331,500

Expenses:
Selling 120,000 0.85 102,000
Depreciation of PPE 10,000 0.85 8,500
Interest 20,000 0.85 17,000
Other 90,000 0.85 76,500
(240,000) (204,000)
Profit before income tax 150,000 127,500

Income tax expense (60,000) 0.85 (51,000)
dividends
o
Profit for the period 90,000 76,500
Retained earnings at 1/7/19 0 0 paid on
90,000 76,500
114/20
Dividends paid (40,000) 0.74 (29,600) ↓
Retained earnings at 30/6/20 50,000 46,900 exactrate is
rapporation available
Share capital
Retained earnings at 30/6/20
310,000
50,000
⑦
1.00 310,000
46,900
use i
...
Non-current borrowings 150,000 0.75 112,500 ↓

Current tax liability 70,000 0.75 52,500 not avail
Borrowings (current portion) 50,000 0.75 37,500 then use
Trade payables 100,000 0.75 75,000 average
A Exchange Fluctuation Reserve(EFR) 0 (86,900)
↳
730,000 547,500
Inventory
Trade receivables & cash
210,000
190,000
100,000
120,000
0.75
0.75
0.75
0.75
157,500
142,500
75,000
90,000
I
PPE (acquired 1/11/19) 110,000 0.75 82,500
Accumulated depreciation (for PPE) (10,000) 0.75 (7,500)
Deferred tax asset 10,000 0.75 7,500
730,000 547,500
↓
closing rate
Sardool:3704NUS:423
27
proofof EER
OPI
-
RE:50,000 90.75= 37,500
e
⑧A
NA &
beg ($1):310,000
NA
lending (0.75) 2
=
77,500
77,500 -
9,400
= -
86,900
To prove that the foreign exchange translation reserve is indeed $(86,900) at 30/6/20,
note that it must arise from changes in net asset items. The proof:
S$ Rate NZ$
Net assets at 1/7/19 310,000 1.00 310,000
Increases in net assets:
Profit for period (after tax) 90,000 0.85 76,500
Decreases in net assets:
Dividend paid (40,000) 0.74 (29,600)
Net assets at 30/6/20 as accounted 360,000 356,900
Net assets at 30/6/20 has to be

restated at closing rate per SFRS(I) 360,000 0.75 (270,000)
1-21
Foreign exchange translation loss for 0 (86,900)
the year (OCI item)
Beg bal of EFR (1/7/19) 0 0
End bal of EFR (30/6/20) 0 (86,900)
Notes to reconciliation:
1) As Sentosa was just formed, there is no beginning FCTR at 1/7/19.
2) The translation loss of $86,900 came from two sources:

(a) Beginning net assets was brought forward at NZ$1 rate but is now translated
at NZ$0.75; loss arising = 310K x (1 – 0.75) = NZ$77.5K. The S$ has weakened
against the NZ$ and so there is a loss on the initial investment in Sentosa. [For
a NZ company, S$ assets will result in losses.]
(b) ∆ in net assets during the year were accounted at NZ$0.85 and NZ$0.74 rates
but are now translated at NZ$0.75 in the ending net assets. The S$ has
weakened against the NZ$ and so there is a loss from Sentosa’s activities
during the year amounting to 90K x (0.85 – 0.75) + 40K x (0.74 – 0.75) = NZ$9K
loss + NZ$0.4K loss = NZ$9.4K loss.
Note that the dividend payment results in a “loss” because if we pay at year-
end higher rate ($0.75), there is a greater outflow compared to actual payment
at lower rate ($0.74).
(c) Combined loss = NZ$86.9K
Alternative reconciliation:
S$ LY CR/AR TY CR EFR
Opening net assets 310,000 1.00 0.75 (77,500)
PL 50,000 NZ$46,900 NZ$37,500 (9,400)
(86,900)
Sardool:3704NUS:423
28

ACC3704 - Topic 8A Notes 8 - 2023

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ACC3704 - Topic 8A Notes 8 - 2023

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ACCOUNTING FOR FOREIGN CURRENCY TRANSACTIONS

1 AND FOREIGN OPERATIONS

Department of Accounting Instructor:

ACC3704 ADVANCED CORPORATE ACCOUNTING & REPORTING

b) SFRS (1) 1-21 The Effects of Changes in Foreign Exchange Rates.

2. Problem 8.1: requirement 1 only

3. Problem 8.2: requirements 1 and 2 only

4. Problem 8.10: requirement 1 only.

FEB ADDITIONAL TUTORIAL QUESTION FOR FOREIGN EXCHANGE

HOW IS THE FUNCTIONAL CURRENCY DETERMINED?

1. How do exchange differences arise? 3

2. What is the functional currency of the entity? 5

3. How are foreign currency transactions recorded on initial recognition? 6

5. Must accounting records be maintained in the functional currency? 8

6. How is a change in functional currency effected? 8

USE OF A PRESENTATION CURRENCY OTHER THAN THE FUNCTIONAL

1. What is the functional currency of the foreign operation? 12

HOW DO EXCHANGE DIFFERENCES ARISE?

An exchange difference is the difference resulting from translating a given number of

1. in accounting for transactions and balances in foreign currencies in the financial

1. A foreign currency transaction is recorded / converted, at the date of the

At each statement of financial position date:

3. in translating an entity’s results and financial position into a PRESENTATION

Measurement Rules for (b) and (c)

3. the share capital and pre-acquisition reserves shall be translated at exchange

4. all resulting exchange differences shall be recognised in other comprehensive

WHAT IS THE FUNCTIONAL CURRENCY OF THE ENTITY?

Functional currency is the currency of the primary economic environment in

O 3 STEP APPROACH TO DETERMINE THE FUNCTIONAL CURRENCY

EXCHANGE DIFFERENCES AT ENTITY LEVEL

1. HOW ARE FOREIGN CURRENCY TRANSACTIONS RECORDED ON INITIAL

2. HOW ARE FOREIGN CURRENCY BALANCES REPORTED AT THE END OF

EXCHANGE DIFFERENCES arising on the settlement of monetary items or on

A- property, plant and equipment;

In accordance with SFRS(I) 1- 9 Financial Instruments, gains and losses arising on

In accordance with SFRS(I) 1-36 Impairment of Assets, the carrying amount of an

TRY THESE QUESTIONS

Jan – exchange gain = $5 update to closing:ar Bank 147

Answer: assetas need to revalue:$150. Cr Bank 147

> Current assef

75. Cr AIP 72.5 73.5

NRV = US$110 x 1.2 = S132

111:cost 100x1-50 150

Cost model ↳ non-monetary item 135.

IP balance = $150; Accumulated depreciation = $15; carrying amount = $135.

Answer: Revaluation model;

3. MUST ACCOUNTING RECORDS BE MAINTAINED IN THE FUNCTIONAL

4. HOW IS A CHANGE IN FUNCTIONAL CURRENCY EFFECTED?

USE OF A PRESENTATION CURRENCY OTHER THAN THE FUNCTIONAL

1. CAN AN ENTITY PRESENT THE ACCOUNTS IN A CURRENCY OTHER THAN THE

2. HOW IS TRANSLATION TO THE PRESENTATION CURRENCY EFFECTED? HOW

iii. The exchange differences referred to in paragraph 39(d) result from:

1. WHAT IS THE FUNCTIONAL CURRENCY OF A FOREIGN OPERATION?

A foreign operation is an entity that is a subsidiary, associate, joint venture or branch

The following additional factors are considered in determining the functional

2. HOW IS GOODWILL ARISING ON THE ACQUISITION OF A FOREIGN

The consolidated statement of financial position in $ will reflect:

@ Acquisition @ Year end