Foreign currency

CR – May 2020 – L3 – Q3a – Foreign Currency Transactions

Foreign currency transactions related to purchases, sales, and investment property with exchange rate variations and reporting implications.

Question

Medina Power Ltd has carried out certain transactions denominated in foreign currency during its financial year ended 31 October 2019 and has also conducted foreign operations through a foreign entity. Medina Power Ltd.’s functional and presentation currency is the cedi.

On 31 July 2019, Medina Power Ltd purchased goods from a foreign supplier for 16 million dinars. At 31 October 2019, the supplier had not yet been paid and the goods were still held in inventory by Medina Power Ltd.

On 31 July, Medina Power Ltd sold goods to a foreign customer for 8 million dinars, and it received payment for the goods in dinars on 31 October 2019.

Medina Power Ltd had also purchased an investment property on 1 November 2018 for 56 million dinars. At 31 October 2019, the investment property had a fair value of 48 million dinars. The company uses the fair value model in accounting for investment properties.

Medina Power Ltd wants advice on how to treat these transactions in the financial statements for the year ended 31 October 2019.

Required:
Discuss the accounting treatment of the above transactions in accordance with the advice required by the directors. (You should show detailed workings as well as a discussion of the accounting treatment used.)

Answer

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Tags: Foreign Exchange, Investment properties, Monetary and non-monetary transactions, Revenue Recognition
Level: Level 3

Topic: Foreign currency
Series: MAY 2020

CR – Nov 2021 – L3 – Q3a – Foreign currency

Explain the disclosure requirements when financial information is presented using convenience translation in a different currency under IAS 21.

Question

An entity sometimes displays its financial statements or other financial information in a currency that is different from either its functional currency or its presentation currency simply by translating all amounts at end-of-period exchange rates. This is sometimes called a convenience translation. A result of making a convenience translation is that the resulting financial information does not comply with all IFRS, particularly IAS 21: The Effects of Changes in Foreign Exchange Rates.

Required:

Explain the disclosure requirements when convenience translation is used to display financial information.

Answer

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Tags: Convenience Translation, Disclosure Requirements, Foreign Exchange Rates, Functional Currency, IAS 21, Presentation Currency
Level: Level 3

Topic: Foreign currency
Series: NOV 2021

CR – Mar 2024 – L3 – Q3a – Foreign currency

This question involves determining the functional currency of Mongu Plc and discussing the factors influencing this decision.

Question

Mongu Plc (Mongu) is a diversified entity listed on the Ghana Stock Exchange. Its financial year ends on 30 September. Mongu Plc operates through its local and foreign subsidiaries. Most of Mongu’s revenues come from its foreign operations, but Mongu incurs a significant portion of its costs locally in Ghana. The local currency is the Ghana Cedi (GH¢), but Mongu’s subsidiaries operate in regions that use other currencies.

Required:
In accordance with IAS 21: The Effects of Changes in Foreign Exchange Rates, identify the functional currency of Mongu Plc, considering the relevant factors, and explain how exchange differences should be accounted for.

Answer

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Tags: Exchange Rates, Foreign Operations, Functional Currency, IAS 21
Level: Level 3

Topic: Foreign currency
Series: MAR 2024

CR – Aug 2022 – L3 – Q3a – Foreign currency

This question requires an explanation on how the functional currency of a subsidiary (Sunyani Ltd) should be determined according to IAS 21.

Question

Hamma Ltd is the parent company of a multinational listed group of companies. Hamma Ltd uses the dollar ($) as its functional currency. Hamma Ltd recently acquired 80% of the equity shares of Sunyani Ltd, a company located in the Bono Region of Ghana, on 1 January 2022. The group’s current financial year-end is 31 December 2022.

The head office of Sunyani Ltd is located in Sunyani, which uses the Ghana Cedi (GH¢) as its main currency. However, its staff are spread across various locations. Consequently, half of the staff are paid in GH¢, and the other half are paid in $. Sunyani Ltd has a high degree of autonomy and is not reliant on finance from Hamma Ltd, nor do sales to Hamma Ltd make up a significant proportion of their income. All of its sales and purchases are invoiced in GH¢, and therefore, Sunyani Ltd raises most of its finance in GH¢. Cash receipts are retained in GH¢. Sunyani Ltd does not operate a $ bank account. Sunyani Ltd is required by law to pay tax on its profits in GH¢.

Required:

In accordance with IAS 21: The Effects of Changes in Foreign Exchange Rates, explain to the directors of Hamma Ltd how the functional currency of Sunyani Ltd should be determined. (5 marks)

Answer

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Tags: Currency Conversion, Foreign Exchange, Functional Currency
Level: Level 3

Topic: Foreign currency
Series: AUG 2022

CR – Nov 2019 – L3 – Q2a – Foreign currency

Analyze foreign currency transactions, their impact on financial statements, and the application of hedging instruments.

Question

a) Nyinahini Ltd (Nyinahini) is a company reporting under IFRS. Nyinahini normally operates only within the country where its buildings are physically located. Recently, it entered into a contract to supply its products to a new client based in South Africa. All the work was completed in the period October to November 2018. The (fixed) contract price of 100 million Rand has been agreed upon as denominated in South African Rand. The full amount was invoiced on 1 December 2018 when the exchange rate was GH¢1 = 10.1889 Rand. The new client paid 50 million Rand in advance on 1 November 2018 when the exchange rate was GH¢1 = 9.9783 Rand. The balance will be paid in two equal instalments on 31 March 2019 and 30 June 2019. The exchange rate at 31 December 2018 was GH¢1 = 10.5037 Rand.

Nyinahini decided to eliminate exchange rate differences on the final two payments and entered into two forward rate agreements on 1 December 2018 to sell the appropriate amount of Rand on 31 March 2019 and 30 June 2019, and set up the relevant documentation to treat them as fair value hedges of the recognized receivables. At 31 December 2018, the two contracts for settlement on 31 March 2019 and 30 June 2019 were valued at GH¢148,000 collectively, as an asset from Nyinahini’s point of view.

Required:
Set out and discuss the accounting treatment of the above items, including relevant calculations, as the information provided permits, in the financial statements of Nyinahini for the year ended 31 December 2018.

(6 marks)

Answer

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Tags: Foreign Exchange Transactions, Forward Rate Agreements, Hedging, IAS 21, Receivables
Level: Level 3

Topic: Foreign currency
Series: NOV 2019

CR – May 2020 – L3 – Q3a – Foreign Currency Transactions