Solutions to GAAP : Graded Questions
Foreign currency transactions
Solution 20.1
a)
A foreign currency transaction is a transaction that is denominated in and/or requires
settlement in a foreign currency. IAS 21.20 extract
b)
The transaction date 'is the date on which the transaction first qualifies for recognition
in accordance with IFRSs'. See IAS 21.22
c)
True: F.O.B and C.I.F are both Inco terms. Furthermore, FOB and CIF result in the
same date of risks and rewards transfer because:
d)

When goods are delivered F.O.B, risks and rewards of ownership transfer when
the goods pass over the ship’s rail at the port of shipment.

When goods are delivered C.I.F, although the seller arranges and pays for the
carriage and insurance costs, the purchaser is generally the beneficiary in the event
of an insurance claim, and thus the seller has effectively completed its primary
duties and thus transferred the risks and rewards of ownership once the goods pass
over the ship’s rail at the port of shipment and is insured.
Monetary items are defined as ‘units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency’. See IAS 21.8
Examples of monetary items: loans, debtors and creditors.
Examples of non-monetary items: inventory, pre-paid expenses and property, plant and
equipment.
e)
True.
Exchange differences on monetary items are recognised in profit/loss in the period that
they occur. See IAS 21.28
FYI: There is one exception, which involves:
 a foreign operation with monetary items and where
 the foreign operation and the reporting entity are included in the same financial
statements (e.g. consolidated financial statements that include a foreign subsidiary).
In this case, the exchange differences on the foreign operation's monetary items will be
recognised in other comprehensive income (in a foreign currency translation reserve)
and will be reclassified to profit or loss on disposal of the net investment in the foreign
operation. See IAS 21.32
f)
False.
The subsequent measurement of a non-monetary item that had been imported is not
affected by exchange rates.
The entire foreign currency denominated transaction, including the non-monetary item
(e.g. plant), is converted into the local currency at the spot rate on transaction date and
thereafter, all subsequent related adjustments (e.g. depreciation) are based on this local
currency figure. See IAS 20.21
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Chapter 20: Page 1
Solutions to GAAP : Graded Questions
Foreign currency transactions
Solution 20.1 continued ...
g)
True.
Foreign currency denominated non-monetary items (e.g. a non-monetary item held by
a foreign operation) that are subsequently measured in terms of historical cost (e.g. the
cost model, where the cost is subsequently depreciated) will have their cost or carrying
amount translated into local currency at the exchange rate ruling on transaction date
and thus a fluctuating exchange rate will not affect its subsequent measurement.
However, if the foreign currency denominated asset needs to be remeasured, for
example to fair value, recoverable amount or net realisable value, its new carrying
amount will be translated at the exchange rate that was ruling when this value was
determined (e.g. at reporting date). See IAS 21.25
h)
Functional currency is defined as 'the currency of the primary economic environment
in which the entity operates'. See IAS 21.8
P.S. The primary economic environment in which an entity operates is usually taken to
be the environment 'in which it primarily generates and expends cash'. See IAS 21.9
i)
True.
The functional currency may only be changed if there has been a change in the
'underlying transactions, events and conditions' that are used in determining the
functional currency. See IAS 21.36
For example, a change in the currency that influences the selling price of goods and
services may very well lead to a change in the functional currency. See IAS 21.36
j)
False.
An entity may present its financial statements in any currency of its choice. The
currency it chooses is then referred to as its presentation currency. If the functional
currency and presentation currency are not the same, the entity will need to translate all
items from the functional currency into the presentation currency at year end. See IAS 21.38
k)
When the functional currency and presentation currency are different:

Assets and liabilities shall be translated into the presentation currency at the spot
rate at year end;

Income and expenses shall be translated into the presentation currency at the spot
rate at the time of the transaction or at the average rate, if this has not fluctuated
too much from the spot rate at the time of the transaction. See IAS 21.39-.40
Any exchange differences are recognised in other comprehensive income in the foreign
currency translation reserve.
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Chapter 20: Page 2
Solutions to GAAP : Graded Questions
Foreign currency transactions
Solution 20.2
1 Smithy Street
Durban
1234
Phone: 082 123 4567
The Financial Director
JKB Breweries
165 Main Road
Newlands
4009
Dear Sir/Madam
Re: Query regarding the application of IAS 21
Thank you for your query regarding IAS 21.
Functional Currency
Functional currency is defined as ‘the currency of the primary economic environment in
which the entity operates’. See IAS 21.8
This primary economic environment is normally the one in which the entity 'primarily
generates and expends cash'. See IAS 21.9
Sometimes deciding where the entity primarily generates and expends cash is not clear and
thus IAS 21 provides factors that should be considered. Professional judgement should be
used at all times though. The factors that should be considered are as follows:

the currency that mainly influences the sales price for the goods or services being offered
(often being the currency in which the sales price is denominated and settled) is generally
the functional currency; IAS 21.9 (a)

the currency that mainly influences the costs incurred in providing the goods or services
(often being the currency in which the related costs are denominated and settled) is
generally the functional currency. IAS 21.9 (b)
Other factors that may also be used to establish the functional currency are:
 the currency in which funds from financing activates are generated; IAS 21.10 (a)
 the currency in which receipts from operating activities are usually retained. IAS 21.10 (b)
Further factors to consider are listed in IAS 21, paragraphs 11 – 14. All factors should be
considered on balance – no factor can be considered in isolation.
From the information given to me, the functional currency of JKB is the South African Rand
as the costs incurred in purchasing its inputs (barley and water) are purchased in South Africa
and due to the fact that they mainly sell to the South African consumer the Rand is the
currency that mainly influences the selling prices of the beers.
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Chapter 20: Page 3
Solutions to GAAP : Graded Questions
Foreign currency transactions
Solution 20.2 continued ...
Presentation Currency
Presentation currency is defined as ‘the currency in which the financial statements are
presented’. See IAS 21.8
Normally we present our financial statements in the functional currency but sometimes we
may need to translate our financial statements into a foreign currency. Thus the presentation
currency could be the functional currency or a foreign currency. Thus, we generally refer to
the financial statements as being translated into a ‘presentation currency’ if the financial
statements are presented in a foreign currency.
Our ‘presentation currency’ would be a foreign currency if, for example, we are required to
present out financial statements in a currency that is not our functional currency because, for
example, we are listed on a foreign stock exchange that requires us to present our financial
statements in the local currency of the foreign stock exchange.
Translation of a functional currency into a presentation currency
As the functional currency of JKB is the Rand and its presentation currency when preparing
financial statements for the London Stock Exchange is the pound, JKB would have to
translate all items in its financial statements to the pound. This will be done as follows:

Assets and liabilities are translated into the presentation currency using the spot rate at
year-end;

Incomes and expenses are translated into the presentation currency at the spot rate at the
time of the transaction or at the average rate, if this has not fluctuated too much from the
spot rate at the time of the transaction. See IAS 21.39
Any exchange differences are recognised in other comprehensive income (in a foreign
currency translation reserve). See IAS 21.39 (c)
I hope I have been of assistance. Please do not hesitate to contact me if you have further
queries.
Sincerely
Your IFRS adviser
© Kolitz & Service, 2016
Chapter 20: Page 4
Solutions to GAAP : Graded Questions
Foreign currency transactions
Solution 20.3
15 June 20X9 (transaction date)
Debit
Credit
€30 000 x 13.75 (spot rate on transaction
PPE: Machines: cost (A)
date)
Foreign creditor (L)
Importation of 16 fragrance testing machines: R13.75
412 500
412 500
25 September 20X9
Given
PPE: Machines: cost (A)
Bank
Further costs incurred installing the machines
60 000
60 000
30 September 20X9 (payment date)
(€30 000 x 14.20) – 412 500
Foreign exchange loss (E)
Foreign creditor (L)
Translation of creditor to latest spot rate on payment date: Latest
balance is now = (€30 000 x 14.20) = 426 000
Foreign creditor (L)
Bank
Payment of foreign creditor
€30 000 x 14.20 (spot rate on payment date)
13 500
13 500
426 000
426 000
31 December 20X9
(412 500 + 60 000 – 50 000) / 8 years x 3/12
Depreciation (E)
PPE: Machines: accumulated depreciation (-A)
Depreciation of the machines from date first available for use
13 203
13 203
Explanation:
 This is a basic example dealing with the IMPORT of property, plant and equipment and the
subsequent depreciation thereof (thus applying IAS 16 Property, plant and equipment).

Notice how the translation of the foreign creditor from the spot rate on transaction date to the spot
rate on payment date does not affect the cost of the PPE. Instead, the PPE and the creditor are
measured at the spot rate on transaction date. Then only the creditor gets remeasured on payment
date. The difference between the creditor measured at spot rate at transaction date and spot rate on
payment date is recognised as foreign exchange gains/ losses (forex gain/ loss) in profit or loss.

It is essential to correctly identify each of the relevant dates (transaction and payment). Because
this is an import of PPE, determining the transaction date requires us to understand when
IAS 16 Property, plant and equipment requires us to recognise the acquisition of PPE and to
understand the impact of the terms of the import transaction.

PPE is recognised when the definition of an asset and recognition criteria are met. One of the
aspects of the asset definition is control, thus we must recognise the acquisition of PPE when we
obtain control over it. One of the indictors that control has been obtained is if we have taken on the
risks and rewards of ownership.

When the goods are shipped FOB (free on board) [or CIF (carriage, insurance, freight)]:

the risks and rewards of ownership transfer on the date that the goods are delivered over the
ship’s rail at the port of shipment (i.e. when the goods are loaded onto the ship).

Thus, in this case, the transaction date is 15 June 20X9.

Had the transaction been negotiated on a DAT basis (delivery at terminal basis),

the risks and rewards of ownership would transfer when the goods are unloaded at the named
destination terminal (i.e. when the goods arrive safely at their destination):

in which case, the transaction date would have been 1 September 20X9.
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Chapter 20: Page 5
Solutions to GAAP : Graded Questions
Foreign currency transactions
Solution 20.4
Debit
Credit
25 August 20X0 (transaction date)
USD 150 000 x 7.50 (spot rate on transaction date)
Inventory (A)
Foreign creditor (L)
Importation of radio-controlled lawnmowers:
1 125 000
1 125 000
31 December 20X0 (reporting date: year-end)
USD 150 000 x 7.10 (spot rate at year-end) –
Foreign creditor (L)
Foreign exchange gain (I) Balance on creditor acc: 1 125 000
Translation of foreign creditor at year-end:
Cost of sale (E)
Inventory (A)
Cost of goods sold
(Cost of inventory: 1 125 000 x 60% sold)
(Cost of sales: 675 000 x 120% mark-up on cost)
Debtors/ Bank
Revenue: sales (I)
Revenue from sale of goods
60 000
60 000
675 000
675 000
810 000
810 000
2 February 20X1 (settlement date)
[USD 150 000 x 6.90 (spot rate on payment date)] –
Foreign creditor (L)
Foreign exchange gain (I) [Balance on creditor acc: (1 125 000 – 60 000)]
Translation of creditor to latest spot rate on payment date: Latest
balance is now = (USD150 000 x 6.90) = 1 035 000
USD 150 000 x 6.90 (spot rate on payment date)
Foreign creditor (L)
Bank
Payment of foreign creditor
30 000
30 000
1 035 000
1 035 000
Explanation:

This is a basic example dealing with the IMPORT of inventory and the subsequent sale thereof
(thus applying IAS 2 Inventory and IFRS 15 Revenue from contracts with customers).

Notice how the translation of the foreign creditor from the spot rate on transaction date to the spot
rate on reporting date and then spot rate on payment date does not affect the cost of the inventory
purchased. Instead, the inventory and the creditor are measured at the spot rate on transaction date.
Then only the creditor gets remeasured (in this case at reporting date and payment date). The
differences between the creditor measured at the spot rate at transaction date and the spot rate on
the other dates are recognised as foreign exchange gains/ losses (forex gain/ loss) in profit or loss.

It is essential to correctly identify each of the relevant dates (transaction, payment and reporting).
Because this is an import of inventory, determining the transaction date requires us to understand
when IAS 2 Inventory requires us to recognise the acquisition of inventory and to understand the
impact of the terms of the import transaction.

Inventory is recognised when the definition of an asset and recognition criteria are met. One of the
aspects of the asset definition is control, thus we must recognise the inventory acquisition when we
obtain control over it. One of the indictors that control has been obtained is that we have taken on
the risks and rewards of ownership.

When goods are shipped on a DAT basis (delivery at terminal basis),

the risks and rewards of ownership transfer on the date that the goods are unloaded at the
named destination terminal (i.e. when the goods arrive safely at their destination):

in this case, it means that the transaction date is 25 August 20X0. Note 1

Had the transaction been negotiated on as FOB (free on board) or CIF (carriage, insurance, freight):

the risks and rewards of ownership would have transferred on the date that the goods were
delivered over the ship’s rail at the port of shipment (i.e. when the goods were shipped).

in which case, the transaction date would have been 15 August 20X0.
© Kolitz & Service, 2016
Chapter 20: Page 6
Solutions to GAAP : Graded Questions
Foreign currency transactions
Solution 20.5
15 July 20X5 (transaction date)
GBP 50 000 x 2.20 (spot rate on the CIF
Foreign debtor (A)
transaction date) see note 1
Sales (I)
Export of sheets to British company
Cost of inventory expense (E)
Inventory (A)
Cost of goods sold
Given
US Dollars
Debit
Credit
110 000
110 000
20 000
20 000
31 October 20X5 (settlement date #1)
GBP 50 000 x 2.65 (spot rate on payment
Foreign debtor (A)
date) – $110 000
Foreign exchange gain (I)
Translation of foreign debtor on payment date:
22 500
GBP 25 000 x 2.65 (spot rate on payment
Bank
date)
Foreign debtor (A)
Receipt of cash from British company
66 250
22 500
66 250
31 December 20X5 (reporting date: year-end)
Foreign exchange loss (E)
Foreign debtor (A)
(GBP 50 000 - GBP 25 000) x 2.40: spot
rate at year-end – ($110 000 + $22 500 –
$66 250)
6 250
6 250
Translation of foreign debtor at year-end
31 January 20X6 (settlement date #2)
Foreign debtor (A)
Foreign exchange gain (I)
(GBP 50 000 - GBP 25 000) x 2.90 (spot
rate on payment date) – $60 000
where: (GBP 50 000 – GBP 25 000) x 2.40
= $60 000
12 500
12 500
Translation of foreign debtor on payment date
Bank
GBP 25 000 x 2.90: spot rate on payment
date
72 500
Foreign debtor (A)
Receipt of cash from British company
72 500
Comment:

This is an example dealing with the EXPORT of inventory (i.e. a sale to an entity in a foreign
country) and where neither company is a South African company. The fact that the transaction
involves a sale means we must be able to apply IFRS 15 Revenue from contracts with customers).

IFRS 15 Revenue from contracts with customers requires revenue to be recognised when control
over the goods has passed to the customer (buyer). The transfer of risks and rewards from the seller
to the buyer is one of the indicators suggesting that control has passed. This solution thus assumes
that control passed to the buyer on the date that the risks and rewards of ownership passed

When goods are shipped on a CIF basis (customs, insurance and freight),

the risks and rewards of ownership transfer on the date that the goods are loaded onto the ship

thus, in this case, it means that the transaction date is 15 July 20X5.

If the goods had been shipped on a DAT basis (delivery at terminal),

the risks and rewards of ownership would have transferred on the date that the goods have been
unloaded at their destination port,

in which case the transaction date would have been 25 July 20X5.

Notice that the settlement of the receivable takes place by way of two instalments.
© Kolitz & Service, 2016
Chapter 20: Page 7
Solutions to GAAP : Graded Questions
Foreign currency transactions
Solution 20.6
Debit
1 June 20X7 (transaction date: loan received)
Q48 000 000÷ 8 (spot rate on date cash received)
Bank (A)
Foreign loan (L)
Credit
6 000 000
6 000 000
Received loan from bank.
31 March 20X8 (reporting date: year-end)
(Q48 000 000 x 8% x 10 / 12) ÷ 7; OR
Finance cost (E)
Q3 200 000 (W1) ÷ 7
Foreign loan (L)
457 143
457 143
Interest payable on foreign loan from 1 June 20X7 to 31 March 20X8; translated at
the average exchange rate over period that interest accrued
Liability translated at spot rate at YE: €8 533 333 –
CA of the loan: €6 457 143
Translating loan liability to the spot rate at year-end:

Liability translated at SR at YE = (Q48 000 000 + Q3 200 000) ÷ 6 = €8 533 333

CA of the liability: (€6 000 000 + €457 143) = €6 457 143
Foreign exchange loss (E)
Foreign loan (L)
31 May 20X8 (payment date: instalment #1)
(Q48 000 000 x 8% x 2/12) ÷ 7.2; OR
Finance cost (E)
Q640 000 (W1) ÷ 7.2
Foreign loan (L)
2 076 190
2 076 190
88 889
88 889
Interest payable on foreign loan from 1 April 20X8 to 31 May 20X8; translated at the
average exchange rate over period that interest accrued
Liab at SR at YE: €6 912 000 –
CA of foreign loan: €8 622 222
Translating loan liability (including capital and interest payable) to the spot rate on
payment date

Liability translated at SR at YE =
(Q48 000 000 + Q3 200 000 + Q640 000) ÷ 7.5 = €6 912 000

CA of the liab: (€6 000 000 + €457 143 + €2 076 190 + €88 889) = €8 622 222
Foreign loan (L)
Foreign exchange gain (I)
Foreign loan (L)
Bank (A)
(Capital: Q960 000 + Interest: Q3 840 000) ÷ 7.5
1 710 222
1 710 222
640 000
640 000
Repayment of part of the capital and interest for 12m, at spot rate on payment date:
[Capital: Q960 000 + Interest: (Q3 200 000 + Q640 000)] ÷ 7.5 = €640 000
31 March 20X9 (reporting date: year-end)
(Q47 040 000 x 8% x 10/12) ÷ 7.2; OR
Finance cost (E)
Q3 136 000 (W1) ÷ 7.2
Foreign loan (L)
435 556
435 556
Interest payable on foreign loan from 1 June 20X8 to 31 March 20X9; translated at
the average exchange rate over period that interest accrued
Liab at SR at YE: €6 432 821 –
CA of foreign loan: €6 707 556
Translating loan liability (including capital and interest payable) to the spot rate on
payment date

Liability translated at SR at YE =
(Q48 000 000 + Q3 200 000 + Q640 000 – Q960 000 – Q3 840 000 +
Q3 136 000) ÷ 7.8 = €6 432 821
CA of the liab: (€6 000 000 + €457 143 + €2 076 190 + €88 889 – €1 710 222 –
€640 000 + €435 556) = €6 707 556
Foreign loan (L)
Foreign exchange gain (I)
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274 735
274 735
Chapter 20: Page 8
Solutions to GAAP : Graded Questions
Foreign currency transactions
Solution 20.6 continued ...
Note:
Note how the interest expense is measured at average exchange rates but yet the interest is payable at
the spot exchange rate on payment date. This means that the initial recognition of the interest payable
account is initially measured at the average exchange rate but that this balance must then be translated
to the spot rates at each subsequent reporting date and on payment date, thus resulting in exchange
differences on each such translation.
The easiest way to go about doing this question is to:

calculate the loan amounts owing (capital and interest) in the foreign currency – you can show
these calculations directly in the journals (as has been done in this solution above), or you could
set out these calculations using a loan amortisation table (see below);

journalise the loan received by converting the foreign currency at the relevant spot rate

journalise the loan repayment by converting the foreign currency at the spot rate;

journalise the interest expense by converting the foreign currency at the average rate; and

translate the foreign currency liability balance using the spot rate at year-ends and payment dates
and journalise the difference between these amounts and the carrying amount of the liability on
these dates, recognising these differences as foreign exchange gains or losses.
W1 Loan amortisation table (extracts):
Date
1 June 20X5
30 March 20X6
31 May 20X6
Subtotal
Repayment
31 March 20X7
Opening balance
Q
0
48 000 000
51 200 000
Capital
Q
48 000 000
(960 000)
47 040 000
Interest
Q
0
3 200 000
640 000
3 840 000
(3 840 000)
3 136 000
Calc 1
Calc 2
Calc 3
Closing balance
Q
48 000 000
51 200 000
51 840 000
47 040 000
50 176 000
Calculations:
1.
Q48 000 000 x 8% x 10/12 = Q3 200 000
2.
Q48 000 000 x 8% x 2/12 = Q640 000
3.
We are told that loan repayments include capital of Q960 000 (capital) and interest for the preceding
12 months (Q3 840 000)
4.
Q47 040 000 x 8% x 10/12 = Q3 136 000
Comment:
This is an example dealing with a loan received by a local company from a foreign financier.
© Kolitz & Service, 2016
Chapter 20: Page 9
Solutions to GAAP : Graded Questions
Foreign currency transactions
Solution 20.7
Debit
1 September 20X5 (transaction date: loan granted)
P30 000 / P0.7
Foreign loan asset (A)
Bank (A)
Issue of loan
28 February 20X6 (reporting date: year-end)
W1: (P1 272 x 6/12) / P0.69 (AR for 6m)
Foreign loan asset (A)
Or: (P 30 000 x 4.24% x 6/12) / P0.69 (AR)
Interest income (I)
Interest for the six months ended 28 February 20X6
Foreign loan asset (A)
Forex gain (I)
Balance in P per EIRT (W1), converted into Rands at SR
on RD:
[(P30 000 + P1 272 x 6/12) / P0.67 (SR on RD)]
Less: Balance in R currently in foreign loan a/c:
[R42 857 + R922]
Credit
42 857
42 857
922
922
1 946
1 946
Foreign exchange gain on translation of loan balance at year-end
31 August 20X6 (settlement date: instalment #1)
W1: (P1 272 x 6/12) / P0.71 (AR)
Foreign loan asset (A)
Or: (P30 000 x 4.24% x 6/12) / P0.71 (AR)
Interest income (I)
Interest for the six months ended 31 August 20X6
P 4 500 / P0,72 (SR on SD)
Bank (A)
Foreign loan asset (A)
Receipt of first instalment
896
6 250
6 250
28 February 20X7 (reporting date: year-end)
W1: (P1 135 x 6/12) / P0.72 (AR)
Foreign loan asset (A)
Or: (P26 772 x 4.24% x 6/12) / P0.72
Interest income (I)
Interest for the six months ended 28 February 20X7
Forex loss (E)
Foreign loan asset (A)
896
Balance in P per EIRT (W1), converted into Rands at SR
on RD:
[(P30 000 + P1 272 – P4 500 + P1 135 x 6/12)/ P0.74)]
Less: Balance in R currently in foreign loan a/c:
[R42 857 + R922 + R1 946 + R896 – R6 250 + R788]
788
788
4 214
4 214
Foreign exchange loss on translation of loan balance at year-end
Note:
The exchange rate was given in a way that presented how much foreign currency (P) would be required
to purchase one unit of the local currency (R1) (i.e. instead of presenting how much local currency (R)
would be required to purchase one unit of the foreign currency (P1)). In this case, the foreign currency
amounts are converted into local currency by dividing the foreign currency amount (in Pula) by the
amount of P required to buy one R.
For example, the exchange rate on 1 September 20X5 is given as R1: P0.70 (i.e. the P is presented as a
cost of one Rand) but this could have been given as R1,43: P1 (i.e. the R is presented as the cost of one
Pula). To convert P100 000 when the rate is given as:
 R1: P0.70.... we convert as follows: P100 000 / P0.70 x R1 = R142 857...
(i.e. we divide by P0.70)
 R1.43: P1.... we convert as follows: P100 000 / P1 x R1.43 = R142 857
(i.e. we multiply by R1.43)
Notice how the same answer is reached.
KEY:
SR = spot rate
AR = average rate
© Kolitz & Service, 2016
SD = settlement date (when cash received or paid)
RD = reporting date
Chapter 20: Page 10
Solutions to GAAP : Graded Questions
Foreign currency transactions
Solution 20.7 continued ...
The amortisation table (Botswanan Pula) need only have been calculated for the first 2 years (the
complete table for the entire 8 years is simply shown for your interest):
W1: ALTERNATIVE Amortisation Table
Year of the loan agreement
1 September 20X5
Year 1 (to 31 August 20X6)
Year 2 (to 31 August 20X7)
Year 3 (to 31 August 20X8)
Year 4 (to 31 August 20X9)
Year 5 (to 31 August 20Y0)
Year 6 (to 31 August 20Y1)
Year 7 (to 31 August 20Y2)
Year 8 (to 31 August 20Y3)
Interest @ 4.24%
P
1 272
1 135
993
844
689
527
359
183
6 002
Instalment
P
(4 500)
(4 500)
(4 500)
(4 500)
(4 500)
(4 500)
(4 500)
(4 500)
(36 000)
Balance
P
30 000
26 772
23 407
19 900
16 244
12 433
8 460
4 319
2
Note: The interest is compounded annually on 31 August. This date does not coincide with the
reporting date of 28 February and thus one must remember to apportion that part of the annual interest
that belongs to the reporting period in question. In other words, the effective interest rate method
means that the interest in the reporting period ended 28 February 20X6 would have included only
6 months of the 12 months interest of P1 272.
© Kolitz & Service, 2016
Chapter 20: Page 11
Solutions to GAAP : Graded Questions
Foreign currency transactions
Solution 20.8
Answer:
The asset is impaired by LC78 000 (see W1 – W3).
Explanation:
When calculating whether a foreign non-monetary asset is impaired we translate the year-end
carrying amount of the non-monetary asset at the spot exchange rate on initial recognition of
the asset in the financial statements and compare it to the recoverable amount at year-end,
which must be translated at the spot rate on date of the impairment test, being the reporting
date in this example.
Workings:
W1: Carrying amount at 31 December 20X5
Carrying amount at 31 December 20X5 translated at the spot rate on initial recognition:
 (Cost: FC70 000 – Accumulated depreciation: FC20 000) x Spot rate on date of initial recognition:
LC13 = LC650 000
W2: Recoverable amount at 31 December 20X5
Recoverable amount at 31 December 20X5 translated at the spot rate on reporting date, being the
higher of:
 Fair value less cost of disposal: FC48 000 x LC11 = LC528 000
 Value in use: FC52 000 x LC11 = LC572 000
Recoverable amount is therefore the value in use of LC572 000.
W3: Impairment loss at 31 December 20X5
An impairment loss is recognised on the difference between:
 the carrying amount, in the functional currency of LC: LC650 000 (W1), and
 the recoverable amount, also in the functional currency of LC: LC572 000 (W2).
Thus, the machine in Charlie’s financial statements must be impaired by:
(CA: LC650 000 – RA: LC572 000) = LC78 000
Comments:

It is important to note that the determination of the impairment loss is calculated in the functional
currency (i.e. the local currency) and not in the foreign currency.

Please note that, in terms of the foreign currency, the asset was actually not impaired (the carrying
amount was FC50 000 whereas the recoverable amount was FC52 000, thus being greater). It was
only impaired from Charlie’s perspective when the values of the foreign asset were translated into
local currency.
© Kolitz & Service, 2016
Chapter 20: Page 12