Forex accounting

Forex accounting in foreign currencies are sometimes a nightmare. Obviously, we are trading with each other, our own currencies are different and foreign exchange rates are jumping up and down constantly. We are all aware of basic rules with regard to selection of appropriate exchange rate to apply.

If you would like to refresh a bit, you can sneak in my lesson from the IFRS In 1 Day dedicated to foreign currencies here. When it comes to more complicated transactions, then it’s hard to apply the rules. Dear Silvia, we entered a contract for production and delivery of a machine specific to our business and we paid the first down-payment in a foreign currency. What is the correct accounting for prepayments in foreign currency under IFRS? How do IFRS treat the effect of moving exchange rates? Let me tell you that here, it’s not all black or white.

It depends on more factors, especially the nature of a specific prepayment. Let me explain why and how. And let me illustrate 2 different scenarios in the examples. How to translate a foreign operation’s financial statements to presentation currency. When you record your transactions in a foreign currency during the year, then you are translating the foreign currency amounts to your functional currency. All non-monetary items in foreign currency carried at fair value using exchange rate at the date when fair value was determined.

To clarify the issue with prepayments, IASB issued IFRIC 22 Foreign Currency Transactions and Advance Considerations in 2016 which basically confirms that the date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. Date of transaction It’s all crystal clear that initially, you should use the spot exchange rate at the date of transaction for the translation. It is the date on which the transaction first qualifies for recognition in accordance with IFRS. For property, plant and equipment: when it’s probable that the future economic benefits from the asset will flow to the entity and the cost is reliably measurable.