Advanced FA Assignment On Accounting For Foreign Currencies.pptx

advanced financial accounting

1. ADDIS Ababa UNIVERSITY College OF BUSINESS AND ECONOMICS DEPARTMENT OF ACCOUNTING AND FINANCE ADVANCED FINANCIAL ACCOUNTING GROUP ASSIGNMENT on the tittle Accounting and Reporting for Foreign Currency Transactions Section 2 group 1 MEMBERS:- 1. EYOB DEMESEW 2. ESKEDAR Ayalew 3. GOITOM G/EGZIABHER 4. HANAN HELIL 5. DIANA GASHAW SUBMISSION DATE: JANUARY 10,2022 SUBMITTED TO: SEWALE ABATE (PhD) ADDIS ABABA, ETHIOPIA

2. Accounting AND REPORTING for foreign currencies IAS 21

3. Objectives of IAS 21 To prescribe: How to include foreign currency transaction in financial statement How to include foreign operations into entity F/S How to translate financial statements into presentation currency

4. SCOPE OF IAS 21 This standard shall be applied: (A). In accounting for transactions and balances in foreign currencies except for those derivative transactions and balances that are within the scope of IFRS 9 Financial Instruments (B). In translating the results and financial positions of foreign operations that are included in the financial statements of the entity by consolidation or the equity method and (C). In translating an entity’s results and financial positions in to presentation currency

5. Disclosures as per ias 21 The fact that the presentation currency is different from the functional currency. If that is the case where there has been a change in functional currency The reason for using different presentation currency The amount of exchange gains and loses recorded through profit and loss and other comprehensive income statements Net exchange differences classified in a separate component of equity and reconciliation of the amount of such exchange differences at the beginning and ending of the period

6. introduction Many companies engage in international activities such as: Exporting or importing goods, Establishing a foreign branch, or Holding an equity investment in a foreign company. => FOREIGN CURRENCY TRANSACTIONS is a transaction that is denominated and requires settlement in a foreign currency. These transactions include import and export dealings with foreign suppliers and customers, borrowing and lending in foreign currencies, and various hedging (risk-neutralizing) transactions.

7. introduction Assuming an Ethiopian Company, when the agreement calls for the transaction to be settled in a foreign currency, this means one of the two things: 1. The Ethiopian company will have to acquire foreign currency in order to discharge the obligations resulting from it imports 2. The Ethiopian company will receive foreign currency as a result of its exports, and will have to sell the foreign currency in order to receive ETB

8. DEFINITION OF RELATED terms Exchange Rate: Is the ratio of one currency in terms of another country’s currency Spot (Historical) Exchange Rate: Is the exchange rate at spot of transaction/at immediate delivery of goods. Closing Rate: Is the exchange rate on the date of reporting Exchange Differences: Is the differences between two exchange rates of currencies Functional Currency: Is the currency of major transactional activities Foreign Currency: Is the currency other than functional currency.

9. DEFINITION OF RELATED terms (Con’d) Presentation Currency: Is the currency in which financial statements are prepared Foreign currency Transactions: Are transactions involving foreign currency Monetary Items: units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency. Net investment in a foreign operation: it refers monetary item that is (receivables/payables) related to foreign operation where settlement is neither planned nor likely in the foreseeable future. E.G the amount of the reporting entity’s interest in the net assets of that operation

10. DEFINITION OF TERMS RELATED (Con’d) Direct Exchange Rate Units of domestic currency that can be converted into one unit of foreign currency. Direct rate = 47(ETB 47 for 1 U.S. Dollar) Indirect Exchange Rate Units of foreign currency that can be converted into one unit of domestic currency . Indirect rate = 1.00/47 = 0.021 (1 ETB for $0.021 USD)

11. How Functional Currency is determined? Currency Influencing Prices: The currency that mainly influences sales prices for goods and services (often the currency in which prices are denominated and settled) The currency of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services The currency that mainly influences labor, material and other costs of providing goods or services (often the currency in which prices are denominated and settled)

12. How Functional Currency is determined? ( Cont’d ) Currency Influencing Fund Flow And Depositing: The currency in which funds from financing activities (raising loans and issuing equity) are generated The currency in which receipts from operating activities are usually retained

13. How Functional Currency is determined? ( Cont’d ) Where a parent has a foreign operation (as subsidiary, branch, associate or joint venture) a number of factors are considered : - Whether the activities of the foreign operation are carried out as an extension of the parent, rather than being carried out with a significant degree of autonomy. Whether transactions with the parent are a high or a low proportion of the foreign operation's activities. Whether cash flows from the activities of the foreign operation directly affect the cash flows of the parent and are readily available for remittance to it. Whether the activities of the foreign operation are financed from its own cash flows or by borrowing from the parent. Finally, Management Judgment - The translation method used has to reflect the economic reality of the relationship between the reporting entity (the parent) and the foreign operation.

14. Change in functional currency The functional currency of an entity can be changed only if there is a change to the underlying transactions, events and conditions that are relevant to the entity. For example, an entity's functional currency may change if there is a change in the currency that mainly influences the sales price of goods and services. Prospective application of translation procedures from the date of change; Translate all items into new functional currency using the exchange rate on the date of change The translated amounts for non-monetary items are treated as historical costs.

15. Foreign currency transactions Foreign Currency Transactions Is a transaction that is denominated and requires settlement in a foreign currency. These transactions include import and export dealings with foreign suppliers and customers, borrowing and lending in foreign currencies, and various hedging (risk-neutralizing) transactions. Transactions such as these are called Foreign Currency Denominated Transactions Accounting issues arise when the value of the ETB has changed relative to the value of the foreign currency at the time financial statements need to be prepared, unsettled or on the date of the subsequent settlement of the receivable or payable.

16. Foreign currency transactions ( Cont’d ) => Transaction Date Settlement Date Balance Sheet Date Increase or decrease is generally reported as a foreign currency Transaction gain or loss , sometimes referred to as an Exchange gain or loss, in determining net income for the current period. Three Stages of Concern

17. Recognition of Foreign currency Transactions Initial Recognition: Use spot exchange rate Conversion: is appropriate term. It involves either conversion gain or loss depending on the difference between the exchange rate on the date of delivery and date of settlement. Subsequent Reporting: Translation is appropriate term. Monetary items: Using closing rate Non-monetary items of historical valuation: Using Spot (Historical) rate Non-monetary items of fair valuation: Use the rate at which FV was measured

18. Recognition of Foreign currency Transactions (Cont’d) Monetary Items :- Are items that can be easily converted into cash Accounts receivable Accounts payable Loans Non-Monetary Items Include:- Are items that give no right to receive or deliver cash Fixed assets Inventories Net Investment In A Foreign Operations Refers to monetary items that is related to foreign operation where settlement is neither planned nor likely in the foreseeable future. Example:- the amount of the reporting entity’s interest in the net assets of that operation

19. How to present differences in foreign currencies In General Differences on settlement of foreign currency transactions or translation of monetary/non-monetary items are recognized in the period they arise as either profit and loss or OCI. But there are exceptions:- Monetary Items: On P/L Statement Non-Monetary Items: On OCI Net Investment in Foreign operation: On P/L in separate F/S & on OCI in consolidated F/S

20. Importing and Exporting Transactions Examples Ethiopian Firm U.S. Firm Inventory delivered December 15, 2009 10,000 dollars to be paid On January 15, 2010 Foreign Currency-Denominated Purchase (Import) Transaction On December 15, 2009, Worldwide Corporation purchased merchandise from a U.S. supplier at a cost of 10,000 dollars. The U.S. supplier made the sale on 30-day open account. Show the different journal entries to be made? Spot rates: Transaction date: ETB 12.50; Balance sheet date: ETB 12.40; Settlement date: ETB 12.20

21. Inventories 125,000 Accounts Payable (10,000 USD x ETB 12.50/USD) 125,000 A. Transaction Date B. Balance Sheet (Reporting) Date Importing and Exporting Transactions Examples(Cont’d) Accounts Payable 1,000 Foreign Currency Gains 1,000 Payable recorded on December 15 ETB125,000 Less: Payable Translated at December 31, 2009: [10,000 USD x ETB 12.40/USD] (124,000) Foreign Currency Gains ETB 1,000

22. C. Settlement Date Importing and Exporting Transactions Examples(Cont’d) II. Foreign Currency-Denominated Sale (Export) Transaction On June 17, 2009, worldwide Corporation sold merchandise to a US customer for USD15,000 with payment due July 16, 2009. Assuming the Reporting date is June 30,2009. Show the different journal entries to be made? 10,000 USD x 12.20 ETB/USD = 122,000 Gain= 124,000 - 122,000 = 2,000 Accounts Payable (ETB125,000-ETB 1,000) 124,000 Foreign Currency Gains [124,000 - 122,000] 2,000 Cash (10,000 USD*ETB 12.20/USD) 122,000

23. Ethiopian Firm US Firm Inventory delivered June 17, 2009 15,000 dollars to be Received on July 16, 2009 Spot Rates: Transaction date: ETB12.10; Balance sheet date: ETB12.07; Settlement date : ETB12.075 Importing and Exporting Transactions Examples(Cont’d) Accounts Receivable (15,000 USD x ETB12.10/USD) 181,500 Sales 181,500 A. Transaction Date

24. Foreign Currency Losses [15,000 USD * (ETB 12.10-12.07)] 450 Accounts Receivable 450 Receivable Recorded on June 17, 2009 ETB 181,500 Less: Receivable Translated at June 30, 2009 @ Spot Rate =15,000 USD X ETB 12.07/USD (181,050) Foreign Currency Transaction Loss ETB 450 B. Balance Sheet Importing and Exporting Transactions Examples( Cont ’d) Cash (15,000USD * ETB 12.075/USD) 181,125 Accounts Receivable (181,500 - 450) 181,050 Foreign Currency Gains [15,000 USD x ETB(12.075-12.07)/USD] 75 C. Settlement Date

25. III. Loan Payable Denominated in a Foreign Currency 2009 Apr. 30 Inventories 125,000 Trade Accounts Payable 125,000 2009 Apr. 30 Trade Accounts Payable 125,000 Notes Payable 125,000 A. Purchase from US supplier for $10,000 translated at selling spot rate of 1 USD = ETB12.50 on April 30,2009 and 1USD = ETB 12.60 on May 30, 2009 USD 10, 000 * ETB 12.50 = ETB125, 000 B. Borrowing of USD 10,000 from bank on 30-days, 6% Loan to be repaid in dollars on May 30 ,2009 & payment of liability to US supplier. Loan Transaction Examples

26. 2009 May 30 Notes Payable 125,000 Interest Expense ($10,000*ETB12.60*0.06 * 30/360) 630 Foreign Currency Transaction Losses (125,000-124,000) 1,000 Cash 126,630 C. Payment for to settle $10, 000, 30-days, 6% note together with interest at selling spot rate of USD1 = ETB12.60 ($10,050*12.60 = ETB 126,630) and recognition of foreign currency transaction loss. Loan Transactions Examples(Cont’d) IV. Loan Receivable Denominated in a Foreign Sale to US customer for 60-day, 9% promissory note for 10,000USD. The exchange rate on May 30,2009 was ETB12.60 ; June 30,2009 ETB 12.70 ; July 30,2009 ETB12.65 ($10, 000 * ETB 12.60= ETB 126, 000). 2009 May 30 Notes Receivable 126,000 Sales 126,000

27. 2009 June 30 Notes Receivable 1,000 Interest Receivable ($10,000 * ETB12.70 * 0.09 * 30/360) 952.5 Interest Revenue 952.5 Foreign Currency Transaction Gains 1,000 Note: Computation of Transaction Gain Receivable translated at June 30, Buying Spot Rate ($10,000 *ETB12.70) ETB127,000 Receivable recorded on May 30, 2009 ($10,000 *ETB12.60) 126,000 Transaction gain ETB1,000 B. Recognize foreign currency transaction gain applicable to June 30, 2009. - Accrue interest on note receivable from the Us customer valued at the spot rate of USD1= ETB12.70 . Loan Transactions Examples (Cont’d)

28. 2009 July 30 Cash ($10,150 * ETB 12.65) 128,397.5 Foreign Currency Losses [($10,075) * (ETB12.65 - ETB12.70)] 503.75 Notes Receivable ($10,000 * ETB12.70) 127,000 Interest Receivable ($10,000 * ETB12.70 * 0.09 * 30/360) 952.5 Interest Revenue [$10,000 *12.65* 0.09*30/360] 948.75 C. Recognize the Receipt of the loan given - Conversion $10,150 to ETB to settle 60-days, 9% notes and recognize of foreign currency transaction loss. Loan Transactions Examples (Cont’d) 1-Month Interest (May up to June)=10,000 * 0.09 * 30/360=75 2-Month Interest (May up to July)=10,000 * 0.09 * 60/360=150 Total Payment= 10,000 + 150 =10,150

29. summary Initial Recognition Using spot or historical exchange rate Settled Transactions Using Spot Rate Unsettled Transaction and Subsequent Reporting Monetary items: Using closing rate & if there is differences report on P/L Statement Non-Monetary Items of Historical Valuation: Using Spot(Historical) rate & if there is differences report on OCI Non-Monetary Items of Fair Valuation: Using the rate at which FV was measured OCI Net Investment in Foreign Operation: on P/L in separate F/S & on OCI in consolidated F/S

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