Question 1

An entity's may change its functional currency when there is a change in the underlying transactions,events and conditions.

Accepted Answer

A change in the underlying transactions, events and conditions may result in a change in the economic environment in which an entity operates, which could affect the entity's functional currency. Therefore, it is true that an entity may change its functional currency in such cases.

Question 2

According to AASB 123 a qualifying asset is one that necessarily takes a substantial period of time to get ready for its intended use or sale:

Accepted Answer

According to AASB 123, a qualifying asset is defined as "an asset that necessarily takes a substantial period of time to get ready for its intended use or sale."

Question 3

AASB 121 defines an exchange rate as a ratio for the exchange of two currencies at a particular time:

Accepted Answer

AASB 121 defines an exchange rate as a ratio for the exchange of two currencies at a particular time.

Question 4

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 AASB 123:

Accepted Answer

According to AASB 123 (Borrowing Costs), exchange gains or losses on foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs are not deferred and amortised over the life of the asset. Instead, they are typically recognized in profit or loss in the period in which they arise.

Question 5

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 6

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

Accepted Answer

The functional currency is the currency of the primary economic environment in which the entity operates. Therefore, all foreign currency transactions should be recorded in the functional currency on initial recognition.

Question 7

Management may exercise its judgement to determine the functional currency that most faithfully represents the economic effects of the underlying transactions,events and conditions.

Accepted Answer

The answer of Management may exercise its judgement to determine...

Question 8

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

Accepted Answer

Different types of hedges have different accounting treatments based on their effectiveness and the nature of the transaction being hedged. Some hedges may qualify for hedge accounting, where changes in fair value of the hedging instrument can be recognized in other comprehensive income instead of profit or loss. Therefore, it is important to distinguish between different types of hedges for proper accounting treatment.

Question 9

A hedge is defined by AASB 139 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 not defined as an action taken specifically to maximise the positive effects of movements in exchange rates. Rather, it is an action taken to reduce or eliminate the risks associated with fluctuations in the value of an asset or liability. This may include actions such as entering into a foreign currency contract, but the ultimate objective is risk management, not profit maximisation.

Question 10

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

Monetary items are assets and liabilities that are fixed in terms of a specific currency and can be easily converted into cash within a short period of time. Examples include cash, bank deposits, accounts payable, and short-term loans.

Question 11

If the foreign currency exchange rate between Australia and the US was $A1.00 = US$0.55 on 1 October 2004 and moved to be $A1.00 = US$0.60 one month later,the Australian dollar has decreased relative to the foreign currency:

Accepted Answer

The Australian dollar has actually increased relative to the foreign currency (US dollar) as it now takes more US dollars to buy one Australian dollar.

Question 12

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

Accepted Answer

Accountants use the exchange rates provided by financial markets or official sources, not personal judgment, to ensure consistency and accuracy in financial reporting.

Question 13

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

A non-monetary item does not have a fixed or determinable number of units of currency attached to it, therefore there is no right to receive or obligation to deliver a specific amount of currency.

Question 14

To classify an arrangement as a hedge,and therefore to apply 'hedge accounting',AASB 132 requires a set of strict conditions be met.

Accepted Answer

The standard that deals with hedge accounting is AASB 139 (Financial Instruments: Recognition and Measurement) or AASB 9 (Financial Instruments), not AASB 132, which deals with Financial Instruments: Presentation.

Question 15

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

Accepted Answer

Hedges must be designated and documented prospectively before the hedge transactions occur. Retrospective designation is not allowed under accounting standards.

Question 16

The functional currency of an entity is the currency of the prime economic environment in which the entity operates:

Accepted Answer

The functional currency of an entity is indeed the currency of the prime economic environment in which the entity operates. This is determined by factors such as the currency in which major sales and purchases are made or the currency in which financing is obtained. It is important for financial reporting purposes to properly identify the functional currency of the entity.

Question 17

AASB 121 requires foreign currency monetary items that are expected to be settled in the short term to be translated at the spot rate at reporting date,but does not require this treatment for long-term monetary items denominated in foreign currencies:

Accepted Answer

AASB 121 requires all foreign currency monetary items to be reported using the closing rate at the date of the balance sheet, regardless of whether they are short-term or long-term.

Question 18

Issues in relation to foreign currency arise when a reporting entity based in Australia has transactions with an overseas entity and the transaction is denominated in Australian currency:

Accepted Answer

Issues in relation to foreign currency arise when a reporting entity based in Australia has transactions with an overseas entity and the transaction is denominated in a foreign currency, not in Australian currency.

Question 19

AASB 121 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

The answer of AASB 121 requires foreign currency transactions to...

Question 20

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.

Quiz 35: Accounting for Foreign Currency Transactions