Categories of Foreign Currency (FC) transaction and operation;
FC Transaction : Local entity enters transaction with foreign entity using foreign currency
Example: purchase or sale of products and payment in foreign currency.
Lending or borrowing in foreign currency.
FC operation: Local entity has branches, subsidiaries, associate or JV in foreign countries. The accounts are in foreign currency.
Exchange exposure: the risk of exchange losses or gain from foreign currency transaction and operation arising from fluctuation of exchange rate of FR against MR.
Exchange gain/loss arise when the FC appreciate/depreciate against MR CountryCurrencyOriginal rateCurrent rateCurrent rate
ThailandBaht10 Baht9 baht11 baht
FC AppreciateFC Depreciate
Hold asset dominated in FCGainLoss
Hold liability dominated in FCLossGain
Functional currency vs Presentation currency.
Functional Currency: currency of the primary economic environment Presentation currency: currency in which fin. Statements are presented. FRS121 requires individual entity shall determine its functional currency and measure its result and financial position in that currency. Once determine the Functional currency should not be changed. Each entity shall translate foreign currency transactions and items into its functional currency and reports the effect
Country business resideCurrency denominated Functional currencyForeign currency transactionTranslation MalaysiaRinggitRinggitUSDTranslate to RM
MalaysiaUSDUSDRinggitTranslate to USD
MalaysiaThai BahtThai BahtRinggitTranslate to Baht
ThaiMRMRBahtTranslate to RM
What determine the functional currency:
i)The currency that influence sales price for good and services ii)Country that mainly determine the sale for its goods and services iii)Currency that influence labor, material and other cost of providing goods and services iv)Currency in which financing fund generated
v)Currency in which profit from operation will be retained
Additional factors determines the functional currency of foreign entity same as currency of the reporting entity. i)Activities carry out – extension of reporting entity or ii)High transactions between foreign operation and parent
iii)The cash flow from foreign operation activities directly affect the cash flow of the parent, iv)The dependence on the parent with regard to funding of operation. and the parent
Accounting for Foreign Currency Transaction
Local Companies have to include FC transaction and operations in the accounting records and financial statements. FC transaction and financial statement need to be translated into MR. Issues related to translation of FC:
1.What rate to be used?
On initial recognition, record the amount by translating using the spot rate. Average rate for the month may be used to translate transaction during a particular month. 2.How to treat the exchange differences
Reporting Foreign Currency Transaction (FCT) in Functional Currency FRS121 FCT shall be recorded in functional currency at the exchange rate ruling at that time (the spot or the actual rate). Among the possible transactions are;
Pay for services
Purchase fixed assets
Repay or receive loan
The payment is made using local currency. When the transactions take place, they should be recorded in the functional currency using the spot rate. If the transaction happens frequently, average rate may be used.
The spot rate to be used depend whether the entity is in the buy or sell position or taking the average.
TransactionTrade positionExchange rate (sell or buy)
Has a trade receivable arising from sale of goodsSellBuying Has a trade payable arising from purchase of goodsBuyselling
Transaction settled during the reporting period; a realised exchange difference should be...