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Advanced Theory Assignment 1

This document contains an assignment submitted by Fungayi Johane Majurira for their Advanced Accounting Theory course. The assignment addresses the differences between functional and presentational currency as well as exchange gains and losses. It also discusses conditions for consolidation under IFRS 10 and the definition of minority interest. The assignment includes references in APA style.

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Fungai Majurira
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65 views

Advanced Theory Assignment 1

This document contains an assignment submitted by Fungayi Johane Majurira for their Advanced Accounting Theory course. The assignment addresses the differences between functional and presentational currency as well as exchange gains and losses. It also discusses conditions for consolidation under IFRS 10 and the definition of minority interest. The assignment includes references in APA style.

Uploaded by

Fungai Majurira
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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NAME: FUNGAYI JOHANE MAJURIRA

STUDENT ID: 21981559

COURSE: ADVANCED ACCOUNTING THEORY

COURSE CODE: BBAC 421

PROGRAM: BACHELOR OF BUSINESS IN ACCOUNTING

LECTURER

DATE: 15 AUGUST 2022

ASSIGNMENT NUMBER: ONE

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1. (a) Define and explain in detail the difference between the following:
(i) Functional and presentational currency
(ii) Exchange gains and exchange losses

(i) Functional currency according to IAS 21 (The effects of changes in foreign


exchange rates) is the currency of the primary economic environment in which
the entity operates. It is the main currency that a company conducts its business.
As companies transact in many currencies but report their financial statements in
one currency, the foreign currencies have to be translated into the functional
currency
Functional currency is the currency which is mostly used for a nation’s economic
activities, Therefore all corporate according IAS 21 are compelled to report their
year end results in the functional currency.

Presentational currency is the currency in which the financial statements of an


entity are presented. This is an accounting policy choice under IAS 21. The entity is
free to choose the currency in which to present to its shareholders. The difference
between the two is that whereas functional currency is the default currency that is
being used by the economy where the company is operating from, presentational
currency is the default currency that the company presents its financial reports in.
For example Pepsi functional currency is the Kwacha(K) and its presentational
currency will be the United states dollar (Usd). The presentation currency is the
currency in which the Financial statements are laid or presented to the
shareholders according to IAS 21. Functional currency picks its definition from the
fact that it is a national currency and all companies are compelled to present their
financial statements to the locals affected by the business operations in the
financial gazette of the local community. The locals include shareholders bankers
suppliers government, they would want to see the results in the functional
currency for them to make a viable judgment. Vis a vi the presentation currency
which is a result of a company that has subsidiary in the local and Head office in
another country a requirement by the shareholders of the parent company to

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translate the financial statements in the presentation currency. For example
standard chartered bank in Zambia trades in Kwacha but the main shareholders is
based in British pounds so a conversion is requirement to determine the
performance of his investment. Presentation currency is controlled internally
within the organization functional currency is a requirement by the government of
the local

(ii) Exchange gains is the difference that emanates from the resulting gain or loss from
translating a given proportion of currency into another currency at different
exchange rates according to IAS 21. The application of an exchange rate(being the
difference in the value of the foreign currency when converted to the local
currency of the seller) that result in a home currency increase after a conversion.
If however the home currency declines after the conversion it results in an
exchange loss. Suppose a company invoices a customer abroad in a different
currency from the local currency. On the day the invoice is generated you would
have calculated and applied your converted prices but when the customer
eventually pays the exchange rate will invariably be different from when you
generated the invoice in your accounting system. There will consequently be a
slight difference in the amount paid. That difference will be a gain if there has been
an increase in the foreign currency and an exchange loss if the foreign currency
decreases in value. The valuation channel which looks a forex gains or losses at the
world market according to Lane and Miles- and Ferretty (2007) there is rapid
movement in the growth of cross border financial holdings which contributes a lot
to gains and losses on foreign assets and liabilities. If n dollar depreciates the net
international investment of the currency will be reduced the vice versa is true.

(b)

Apex Ltd
USd Exchange rate Kwacha
Debtors(Electro) 833.33 12 10,000
813.01 12.3 10,000

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Electro
Creditors(Apex Ltd) Kwacha Exchange rate Usd
10,000 12 833.33
10,000 12.3 813.01

Apex Books of Accounts

On sale 10,000/12 = 833.33


Dr Debtors 833.33
Cr Sales 833.33

On payment
Dollar value of cash received = 10,000 / 12.3 = 813.01
Loss on transaction = 833.33 – 813.01 = 20.32

Dr Bank 813.01
Cr Debtors 833.33
Dr P&L 20.32

Electro Books of Accounts

On purchase 10,000/12 = 833.33


Dr Purchases 833.33
Cr Payables 833.33

On payment
Dollar value of cash paid = 10,000 / 12.3 = 813.01
Gain on transaction = 833.33 – 813.01 = 20.32

Dr Creditors 833.33
Cr Bank 813.01
Cr P&L 20.32

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2. (a) According to IFRS 10 (Consolidated Financial statements) which sets conditions
for a company to be termed a subsidiary of another company. It is the sole basis of
consolidation whereby a parent would have derived the total control of the
subsidiary. Total control being the power of the investee and have a exposure to the
investment or enjoy the returns Y ltd is a subsidiary of another company Z ltd if Z
ltd owns more than 50 percent of the total shares in voting rights in Y ltd. Z ltd has
control over Y ltd if Z ltd has power to govern the financial and operating policies of
Y ltd so as to obtain benefits from its activities.

(b) According to Fischer, Taylor and Leer (1990) Stresses and Theory, stresses that
minority interest is an equity interest which is included in stock holders equity .
This discloses the shareholding of the minority group. According to Moonitz this
stockholders have interest or residual interest in the consolidated interest of the
organization. Minority interests is a partial ownership stake in a company where the
majority of shares are controlled by a larger parent company. These minority
investors don’t exercise control over a company by way of votes, leaving them with
little influence in the overall decision-making process.

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REFERENCES

1. Eaton, T. V., Easterday, K. E., Rhodes M. R. (2013). The presentation of other


comprehensive income. The CPA Journal, March 2013,32-35.
2. ke, J., Vdoviak, M., Pilař, T., &Čermáková, A. (2020). Revenue management of changes
in foreign exchange rates: A case study of production companies with foreign
participation in the Czech. Economic Annals-XXI., 181 (1),115–123.
3. IAS 21. The Effects of Changes in Foreign Exchange Rates. International Financial
Reporting StandardsFoundation.
Korableva, A. (2018), “Empirical investigation into the.
4. Nedelcu, S. (2020). The problem of the currency conversion methods in the external
accounting of companies. Advances in Accounting, Auditing and Risk Management, 5
(3),34–38.
5. Pavlova, Anna and Roberto Rigobon (2006), “Asset Prices and Exchange Rates,”
Review of Financial Studies, forthcoming.
6. ] Portes, Richard and Helene Rey, (2005), “The Determinants of Cross-Border Equity
Flows,” Journal of International Economics 65, 269-296.40
7. Abad, C., J. Laffarga, A., Garcia-Borbolla, M. Larran, J. Pinero, and N. Garrod. 2000. An
evaluation of the value relevance of consolidated versus unconsolidated accounting
information: Evidence from quoted Spanish firms. Journal of International Financial
Management and Accounting 11(3): 156–177.
8. Beck, A., B. Behn, A. Lionzo, and F. Rossignoli. 2017. Firm equity investment decisions
and U.S. GAAP and IFRS consolidation control guidelines: An empirical analysis.
Journal of Accounting Auditing and Finance 16(1): 37-57

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