ACC711: ADVANCED ACCOUNTING PRACTICE & REPORTING II

Tutorial 6: Foreign Currency Translation

1. Explain what is meant by spot exchange rate, closing exchange rate and forward exchange
rate?
 A spot exchange rate is the exchange rate for immediate delivery at a particular point in
time. (AASB 121, para 8), for example, on 1 January 2017 at 4.59 pm, A$ = US$0.85.
 A closing exchange rate is the spot exchange rate at the end of the reporting period
(AASB 121, para 8), for example, on 30 June 2017 at close of business A$1 = US$0.90.
 A forward exchange rate is the exchange rate specified for currency exchange at a
specified future date, for example, a 3 month forward exchange contract entered into on 1
July 2017 specifies a currency exchange on 30 September 2017 at a forward rate A$1 =
US$0.87.

2. What is the purpose of translating financial statements from one currency to another?
Para 3 of AASB 121 notes 2 areas of application:
 Translation of results and financial position of foreign operations for the purpose of
including those results in the consolidated financial statements of a group, or to allow an
investor to equity account for these results.
 Translation of an entity’s results and financial position into another currency for
presentation purposes.

3. What is meant by ‘functional currency?

Paragraph 8 of AASB 121/IAS 21 defines functional currency as “the currency of the
primary economic environment in which the entity operates”. In determining the functional
currency of a foreign operation of a reporting entity it is then necessary to analyze the
underlying economics of the situation.

4. What is meant by ‘presentation currency?

Paragraph 8 of AASB 121.IAS 21 states that presentation currency is the currency in which
the financial statements are presented.

5. The accounts listed below are for a wholly owned foreign subsidiary. In the space provided
indicate the exchange rate that would be used to translate the accounts into Australian
dollars. Use the following letters to indicate the appropriate exchange rate:

H – Historical exchange rate

C – Current exchange rate at the end of the current period
A – Average exchange rate for the current period

A$ is functional Foreign currency is

currency functional currency
Cash C C
Prepaid expenses H C

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 Equipment H C
Goodwill H C
Accounts payable C C
Inventory – cost H C
Inventory – NRV C C
Capital H H
Sales A A
Depreciation expense H C

6. Dragon Product Ltd is an Australian company with a functional currency of A$. The
company has entered into a number of transactions denominated in US$ during the year
ended 30 June 2017. If the closing exchange rate is A$1.00 = US$0.77, then determine the
translated amount that will be included in the financial statements for each of the following
balances:
(a) Land at cost US$400,000 acquired on 1 February 2017 when the exchange rate is A$1.00
= US$0.67.
Date of transaction Reporting date
1.2.17 30.6.17

Record acquisition at spot rate Land at cost is a non-monetary item

that is NOT restated
Land U.S$400,000 ÷ 0.67 = A$597,015

Journal Entry
1.2.17 Land Dr $597,015
Cash Cr $597,015

(b) Land revalued to US$600,000 on 30 June 2017 that had cost US$400,000 on 1 February
2017 when the exchange rate was A$1.00 = US$0.67.
Date of transaction Reporting date
1.2.17 30.6.17

Record acquisition at spot rate Land restated to fair value at spot rate

Land U.S$400,000 ÷ 0.67 Land U.S$600,000 ÷ 0.77

= A$597,015 = A$779,221

Gain on revaluation of A$182,206

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 Journal Entry
1.2.17 Land Dr $597,015
Cash Cr $597,015

30.6.17 Land Dr $182,206

Gain on revaluation Cr $182,206

(c) Credit sale of US$80,000 on 12 March 2017 when the exchange rate is A$1.00 =
US$0.69. Received cash from debtor of US$40,000 on 30 June 2017.
Date of transaction Reporting date and Settlement date
12.3.17 30.6.17

Record the sales at spot rate Restated the monetary item to closing rate

Trade receivable U.S$80,000 ÷ 0.69 Trade receivable U.S$80,000 ÷ 0.77

= A$115,942 = A$103,896

Exchange loss of A$12,046

Record cash receipts at spot rate

US$40,000 ÷ 0.77 = A$51,948
Journal Entry
12.3.17 Trade Receivables Dr $115,942
Sales Cr $115,942

30.6.17 Foreign exchange loss Dr $12,046

Trade Receivables Cr $12,046

Cash Dr $51,948
Trade Receivables Cr $51,948

(d) Credit purchase of inventory of US$250,000 on 15 June 2017 when the exchange rate is
A$1.00 = US$0.62. The creditor remains unpaid at 30 June 2017.
Date of transaction Reporting date
15.6.17 30.6.17

Record inventory purchase at spot rate Restated the monetary item to closing rate

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 Trade payable U.S$250,000 ÷ 0.62 Trade payable U.S$250,000 ÷ 0.77
= A$403,226 = A$324,675

Exchange gain of A$78,551

Journal Entry
15.6.17 Inventory Dr $403,226
Trade Creditors Cr $403,226

30.6.17 Trade Creditors Dr $78,551

Foreign exchange gain Cr $78,551

(e) A loan payable of US$800,000 arranged on 1 January 2017 when the exchange rate is
A$1.00 = US$0.60. On 30 June 2017, the outstanding interest on the loan is US$20,000.
Date of transaction Reporting date
1.1.17 30.6.17

Record the loan transaction at spot rate Restated the monetary item to closing rate

Loan payable U.S$800,000 ÷ 0.60 Loan payable U.S$800,000 ÷ 0.77

= A$1,333,333 = A$1,038,961

Exchange gain of A$294,372

Recognize interest for the period

Interest Payable US$20,000 ÷ 0.77 = A$25,974

Journal Entry
1.1.17 Cash Dr $1,333,333
Loan Payable Cr $1,333,333

30.6.17 Loan Payable Dr $294,372

Foreign Currency gain Cr $294,372

Borrowing cost expense* Dr $25,974

Interest payable Cr $25,974

*Borrowing costs include interest expense and foreign exchange differences in the nature
of adjustments to interest costs.

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 (f) A six month forward contract to buy US$3,000,000 entered into on 1 April 2017 at the
forward rate of A$1.00 = US$0.72. On 30 June 2017, the forward rate for a 3-month
forward contract to buy US$3,000,000 is A$1.00 = US$0.70. Assume a 3-month discount
rate of 2% applies at 30 June 2017.
Date of transaction Reporting date
1.4.17 30.6.17

Initial recognition of forward contract Subsequent measurement of forward contract

Contract right to receive US$ Contract right to receive US$

U.S$3,000,000 ÷ 0.72 = A$4,166,667 U.S$3,000,000 ÷ 0.70 = A$4,285,714

Contract obligation fixed in SA Contract obligation fixed in SA

U.S$3,000,000 ÷ 0.72 = A$4,166,667 U.S$3,000,000 ÷ 0.72 = A$4,166,667

Fair Value = A$0 Net contract position = Receivable A$119,047

Fair value = A$119,047 ÷ 1.02 = A$116,713

Gain in fair value of contract A$116,713

Journal Entry
30.6.17 Forward Contract Dr $116,713
Gain on forward contract* Cr $116,713

*The gain on the fair value of the forward contract is recognized in the profit or loss.

7. Bebex Ltd is an Australian company that purchases inventory from Hammers plc, which is
an English company. The following information is relevant to a recent acquisition of
inventory for £300,000 pursuant to a contract with terms including FOB shipping.
Date Event Exchange rate
11-5-2017 Inventory shipped A$1 = £0.41
22-6-2017 Inventory delivered A$1 = £0.42
30-6-2017 End of reporting period A$1 = £0.43
31-7-2017 Cash payment of £300,000 to Hammers plc A$1 = £0.39

Required
In accordance with AASB 121, prepare all of the entries of Bebex Ltd that relate to the
foreign currency purchase of inventory. How would your answer change if the inventory
acquired had a net realisable value of £270,000 at 30 June 2017?

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 Journal Entries
11.5.17 Inventory Dr $731,707
Trade Creditors Cr $731,707
(Inventory purchase £300,000 ÷ 0.41)

30.6.17 Trade Creditors Dr $34,033

Foreign exchange gain Cr $34,033
(Re-measurement of trade payable
£300,000 ÷ 0.43 less £300,000 ÷ 0.41)

31.7.17 Foreign exchange loss Dr $71,556

Trade Creditors Cr $71,556
(Re-measurement of trade payable
£300,000 ÷ 0.39 less £300,000 ÷ 0.43)

Trade Creditors Dr $769,230

Cash Cr $769,230
(Cash payment £300,000 ÷ 0.39)

Additional explanations
 The date of the transaction for inventory purchased FOB shipping is the date of shipping,
that is, 11 May 2017.
 Bebex Ltd’s statement of financial position as at 30 June 2017 will include a trade
payable balance of $697,674, that is, £300,000 translated at the closing rate of 0.43.
Bebex Ltd’s statement of profit or loss for the year ending 30 June 2017 will include a
foreign exchange gain of $34,033 whilst its statement of profit or loss for the year ending
30 June 2018 will include a foreign exchange loss of $71,556
 The realised exchange difference is a foreign exchange loss of $37,523, that is, $769,230
less $731,707 OR $71,566 less $34,033.

What if the net realisable value of the inventory is £270,000 at 30 June 2017?

The translated net realisable value of the inventory at 30 June 2017 would be $627,907 (i.e.
£270,000  0.43). Inventory must be measured at the lower of cost and net realisable value at
reporting date. Hence, an inventory expense of $103,800 (i.e. $731,707 less $627,907) would
have to be recognised for the year to 30 June 2017.

8. Ozzila Ltd is an Australian company that receives management consulting services from
Spin Incorporated. On 15 June 2017, Ozzila received an invoice from Spin amounting to
US$5 million for services provided over the period 1 January 2017 to 31 May 2017. On 15
July 2017, Ozzila paid the invoice. The functional currency of Ozzila Ltd is A$ and its
financial year ends on 30 June. Applicable exchange rates are as follows:

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 01/01/2017 A$1 = US$0.70
31/05/2017 A$1 = US$0.64
Average 01/01/2017 to 31/05/2017 A$1 = US$0.65
15/06/2017 A$1 = US$0.62
30/06/2017 A$1 = US$0.60
15/07/2017 A$1 = US$0.58

Required
In accordance with AASB 121, prepare the entries of Ozzila Ltd to record the management
fee transaction and related cash balance.
Journal Entries
15.6.17 Management service expense ($5,000,000 ÷ 0.65) Dr $7,692,308
Foreign exchange loss Dr $372,208
Accounts payable ($5,000,000 ÷ 0.62) Cr $8,064,516

30.6.17 Foreign exchange loss ($8,333,333 – $8,064,516) Dr $268,817

Accounts Payable Cr $268,817

15.7.17 Accounts payable ($5,000,000 ÷ 0.60) Dr $8,333,333

Foreign exchange loss ($8,620,690 – $8,333,333) Dr $287,356
Cash at Bank Cr $8,620,690

OR
15.7.17 Foreign exchange loss ($8,333,333 – $8,064,516) Dr $287,356
Accounts Payable Cr $287,356

Accounts Payable Dr $8,620,690

Cash at Bank Cr $8,620,690

9. Sydney Ltd is a manufacturer of sheepskin products in Australia. It is a wholly owned

subsidiary of a Hong Kong company, Wan Chai Ltd. The following assets are held by
Sydney Ltd at 30 June 2017:
Exchange rate on
Useful life Acquisition acquisition date
Plant Cost A$ (years) date (A$1 = HK$)
Tanner $40,000 5 10/8/13 5.4
Benches $20,000 8 8/3/15 5.8
Presses $70,000 7 6/10/16 6.2
Plant is depreciated on a straight-line basis, with zero residual values. All assets acquired in
the first half of a month are allocated a full month’s depreciation.
Inventory:
 At 1 July 2016, the inventory on hand of $25,000 was acquired during the last month of
the 2015–16 period.
 Inventory acquired during the 2016–17 period was acquired evenly throughout the
period. Total purchases of $420,000 were acquired during that period.

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  The inventory of $30,000 on hand at 30 June 2017 was acquired during June 2017.
Relevant exchange rates (quoted as A$1 = HK$) are as follows:
Average for June 2016 7.2
1 July 2016 7.0
Average for 2016–17 7.5
Average for June 2017 7.7
30 June 2017 7.8
Required
A. Assuming the functional currency for Sydney Ltd is the A$, calculate:
(a) The balances for the plant items and inventory in HK$ at 30 June 2017
Plant: A$ Rate HK$ HK$
Tanner $40,000 7.8 $312,000
Accumulated Depreciation
($40,000 × 1/5 × 47/12) $31,333 7.8 $244,400 $67,600

Benches $20,000 7.8 $156,000

Accumulated Depreciation
($20,000 × 1/8 × 28/12) $5,833 7.8 $45,500 $110,500

Presses $70,000 7.8 $546,000

Accumulated Depreciation
($70,000 × 1/7 × 3/4) $7,500 7.8 $58,500 $487,500
$665,600

Inventory $30,000 7.8 $234,000

(b) The depreciation and cost of sales amounts in the statement of profit or loss and other
comprehensive income for 2016–17.
Depreciation:
Tanner: 1/5 × $40,000 $8,000 7.5 $60,000
Benches: 1/8 × $20,000 $2,500 7.5 $18,750
Presses: $7,500 7.5 $56,250 $135,000

Cost of sales:
Opening Stock $25,000 7.2 $180,000
Purchases $420,000 7.5 $3,150,000
$445,000 $3,330,000
Closing Stock $30,000 7.7 $231,000
$415,000 $3,099,000

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 B. Assuming the functional currency is the HK$, calculate:
(a) The balances for the plant items and inventory in HK$ at 30 June 2017
Plant: A$ Rate HK$ HK$
Tanner $40,000 5.4 $216,000
Accumulated Depreciation
($40,000 × 1/5 × 47/12) $31,333 5.4 $169,200 $46,800

Benches $20,000 5.8 $116,000

Accumulated Depreciation
($20,000 × 1/8 × 28/12) $5,833 5.8 $33,832 $82,168

Presses $70,000 6.2 $434,000

Accumulated Depreciation
($70,000 × 1/7 × 3/4) $7,500 6.2 $46,500 $387,500
$516,468

Inventory $30,000 7.7 $231,000

(b) The depreciation and cost of sales amounts in the statement of profit or loss and other
comprehensive income for 2016–17.
Depreciation:
Tanner: 1/5 × $40,000 $8,000 5.4 $43,200
Benches: 1/8 × $20,000 $2,500 5.8 $14,500
Presses: $7,500 6.2 $46,500 $104,200

Cost of sales:
Opening Stock $25,000 7.2 $180,000
Purchases $420,000 7.5 $3,150,000
$445,000 $3,330,000
Closing Stock $30,000 7.7 $231,000
$415,000 $3,099,000

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