Foreign currency transactions

Cash in bank

12/15/X1, XYZ exchanged 18,060 local currency (LC) for 20,000 foreign currency (FC). 1/15/X2, it paid FC 20,000 for equipment from an oversees supplier. The exchange rates were 0.9032, 0.8851 and 0.9073 on 12/15/X1, 12/31/X1 and 1/15/X2.

In practice, XYZ would likely maintain separate bank accounts for all the currencies it commonly uses so it would not need to acquire this currency.

For illustration purposes, this example assumes XYZ did not have any of this currency hand.

Also, instead of acquiring it on a foreign exchange market, the example assumes it acquired it from its bank by transferring funds between bank accounts.

The local currency is also XYZ's currency of record (CR), reporting currency (RC) and functional currency (FuncC).

IFRS 21.8 states: Spot exchange rate is the exchange rate for immediate delivery.

ASC 830-20-20 states: Exchange Rate: The ratio between a unit of one currency and the amount of another currency for which that unit can be exchanged at a particular time.

As the rate offered by XYZ's bank was "for immediate delivery" / "the ratio between a unit of one currency and the amount of another currency", XYZ used this rate to measure the transaction even though this rate included the bank's premium.

Had XYZ had direct access to a foreign currency exchange market, it would have used the rate derived from its transaction on that market.

Dr/Cr

12/15/X1 | 15.12.X1

In currency of record

In foreign currency

Cash in bank (FC)

18,064

 

 

20,000

 

Cash in bank

 

18,064

 

 


The local currency is XYZ's currency of record and functional currency.

Since XYZ's currency of record is the local currency, only transactions measured in the LC are double entered.

12/31/X1 | 31.12.X1

 

 

Foreign currency remeasurement loss

362

 

 

 

 

Cash in bank (FC)

 

362

 

 


1/15/X2 | 15.1.X2

 

 

Cash in bank (FC)

444

 

 

 

Equipment

18,146

 

 

 

 

Foreign currency remeasurement gain

 

444

 

 

 

Cash in bank (FC)

 

18,146

 

(20,000)


National GAAP, tax implications

Same facts except, in XYZ's accounting jurisdiction, companies are required to use a declared rate (“national bank middle”) for national GAAP / tax reporting purposes. The declared rate was 0.90, 0.89 and 0.91 and tax rate 20%. For illustration purposes, the tax effect is recognized perpetually. In practice, it is generally recognized periodically as a single, period-end adjustment.

Since a declared rate is not a spot rate or a rate at which one currency can actually be exchanged for another it cannot be applied for IFRS / US GAAP purposes even though this rate is often prescribed for national GAAP / taxation purposes.

IFRS 21.8 states: Spot exchange rate is the exchange rate for immediate delivery.

ASC 830-20-20 states: Exchange Rate: The ratio between a unit of one currency and the amount of another currency for which that unit can be exchanged at a particular time.

12/15/X1 | 15.12.X1: IFRS/US GAAP book

In currency of record

In foreign currency

Cash in bank: FC

18,064

 

 

20,000

Income tax payable

13

 

 

 

 

Cash in bank

 

18,064

 

 

 

Income tax expense

 

13

 

 

12/15/X1 | 15.12.X1: national GAAP book

 

 

221 002 (cash in bank): FC

18,000

 

 

20,000

563 (foreign exchange expenses)

64

 

 

 

 

221 001 (cash in bank): LC

 

18,064

 

 


12/31/X1 | 31.12.X1: IFRS/US GAAP book

 

 

Foreign currency remeasurement loss

362

 

 

 

Income tax payable

40

 

 

 

 

Cash in bank: FC

 

362

 

 

 

Income tax expense

 

40

 

 

12/31/X1 | 31.12.X1: national GAAP book

 

 

563 (foreign exchange expenses)

200

 

 

 

 

221 002 (cash in bank): FC

 

200

 

 


1/15/X2 | 15.1.X2: IFRS/US GAAP book

 

 

Cash in bank: FC

444

 

 

 

Equipment

18,146

 

 

 

Income tax expense

80

 

 

 

 

Foreign currency remeasurement gain

 

444

 

 

 

Cash in bank: FC

 

18,146

 

(20,000)

 

Income tax payable

 

80

 

 

12/31/X1 | 31.12.X1: national GAAP book

 

 

221 002 (cash in bank): FC

400

 

 

 

022 (tangible movable things and their groups)

18,200

 

 

 

 

664 (foreign exchange income)

 

400

 

 

 

221 002 (cash in bank): FC

 

18,200

 

(20,000)


If national GAAP requirements cause different asset acquisition costs (as in this example), the tax base of the asset should also be adjusted to reflect the difference.

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