Question 1

A foreign currency transaction shall be recorded on initial recognition in the:

Accepted Answer

A foreign currency transaction should be recorded in the functional currency of the entity. The functional currency is the currency of the primary economic environment in which the entity operates.

Question 2

Inventory is an example of a monetary item.

Accepted Answer

Inventory is considered a non-monetary item because its value is not fixed in terms of units of currency. Instead, its value can fluctuate based on market conditions and other factors.

Question 3

The effect of an increase in the exchange rate for British pounds relative to other major world currencies would include:

Accepted Answer

An increase in the exchange rate for British pounds means that the pound is stronger, making foreign goods cheaper for those holding pounds.

Question 4

IAS 21 requires foreign currency transactions to be recorded,on initial recognition in the presentation currency,by applying to the foreign currency amount the spot exchange rate between the presentation currency and the foreign currency at the date of the transaction.

Accepted Answer

IAS 21 requires foreign currency transactions to be recorded in the functional currency, not the presentation currency, using the spot exchange rate at the date of the transaction.

Question 5

IAS 21 defines an exchange rate as a ratio for the exchange of two currencies at a particular time.

Accepted Answer

IAS 21 defines an exchange rate as "the ratio of exchange of two currencies at which one currency may be exchanged for another at a particular time".

Question 6

Hedges cannot be designated and/or documented on a retrospective basis.

Accepted Answer

Hedges must be designated and documented at the inception of the hedge or within a short timeframe afterwards. Retrospective designation of a hedge is not permitted under accounting standards.

Question 7

Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.

Accepted Answer

This statement correctly defines monetary items as units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.

Question 8

Exchange gains or losses on a qualifying asset that arise before it ceases to be a qualifying asset are to be deferred and amortised over the life of the asset according to IAS 23.

Accepted Answer

IAS 23 requires that exchange differences on foreign currency borrowings are recognized in profit or loss in the period they occur, not deferred and amortized over the life of the asset.

Question 9

The effect of a fall in the exchange rate for British pounds relative to other major world currencies would include:

Accepted Answer

The answer of The effect of a fall in the...

Question 10

If the foreign currency exchange rate between Germany and the US was €1.00 = $0.55 on 1 October 2014 and moved to be €1.00 = $0.60 one month later,the euro has decreased relative to the foreign currency.

Accepted Answer

The euro has actually increased relative to the foreign currency.

Question 11

The exchange rate for a currency depends on many factors including:

Accepted Answer

The exchange rate for a currency is primarily determined by the demand for and supply of the currency in the foreign exchange market. Factors affecting demand and supply include economic performance, political stability, interest rates, inflation rates, and trade flows. Choices A, B, and C are not key factors in determining exchange rates.

Question 12

A hedge is defined by IAS 39 as an action taken,whether by entering into a foreign currency contract or otherwise,with the objective of maximising the possible positive effects of movements in exchange rates.

Accepted Answer

A hedge is defined by IAS 39 as an action taken to offset or reduce the risk of adverse movements in exchange rates or other financial risks, rather than to maximize the possible positive effects of such movements.

Question 13

There are two broad categories of foreign currency issues that arise in financial reporting.They are:

Accepted Answer

The two broad categories of foreign currency issues that arise in financial reporting are accounting for foreign currency transactions and translating the accounts of foreign subsidiaries. Reporting purchase price parity and reporting foreign interest rate adjustments are specific issues within these categories. Accounting for foreign currency debt and offshore financing and accounting for foreign currencies using the forex buy rate and the forex sell rate are not the two broad categories of foreign currency issues.

Question 14

The essential feature of a non-monetary item is the absence of a right to receive (or an obligation to deliver)a fixed or determinable number of units of currency.

Accepted Answer

The absence of a right to receive or obligation to deliver a fixed or determinable number of units of currency is the defining characteristic of a non-monetary item.

Question 15

In selecting the appropriate foreign currency exchange rates to apply in translating foreign currency transactions,the accountant exercises an important element of judgment about whether the rates are overvaluing or undervaluing the reporting currency.

Accepted Answer

The appropriate foreign currency exchange rates for translating foreign currency transactions are typically determined by accounting standards and regulations, not by the accountant's judgment about the valuation of the reporting currency.

Question 16

It seems pointless to distinguish between different types of hedges,as the accounting treatment is the same for all hedging,that is,all changes in fair values of hedging instruments are recognised in profit or loss.

Accepted Answer

Different types of hedges may have different accounting treatments, for example, cash flow hedges may have changes in fair value initially recognised in other comprehensive income and then transferred to profit or loss when the hedged transaction affects profit or loss. Therefore, it is important to distinguish between different types of hedges for proper accounting treatment.

Question 17

The purpose of 'hedge accounting' is to recognise the offsetting effects on profit or loss of changes in the nominal values of the financial instrument and the hedging instrument.

Accepted Answer

The purpose of hedge accounting is to recognize the offsetting effects on profit or loss of changes in the fair values or cash flows of the hedged item and the hedging instrument.

Question 18

An example of a foreign currency swap is when a loan denominated in one currency is swapped for a loan denominated in another currency.

Accepted Answer

This is a correct example of a foreign currency swap, where the borrower may want to change the currency of their loan to reduce exchange rate risk.

Question 19

If an organisation enters a foreign currency swap it will effectively insulate itself against the effects of changes in the spot rates.

Accepted Answer

A foreign currency swap allows an organisation to exchange one currency for another at a predetermined exchange rate, thereby eliminating the risk of changes in spot rates affecting their financial position.

Question 20

To classify an arrangement as a hedge,and therefore to apply 'hedge accounting',IAS 32 requires a set of strict conditions be met.

Accepted Answer

IAS 32 deals with the presentation of financial instruments, while hedge accounting requirements are specified in IFRS 9 and IAS 39.

Quiz 24: Accounting for Foreign Currency Transactions