Exam 24: Accounting for Foreign Currency Transactions

On 1 July 2015 Jarrets Plc borrows £500 000 from a British bank at an interest rate of 8 per cent,repayable in pounds sterling (£)and with interest due on 30 June each year.The term of the loan is 3 years.On the same date Fitners Plc borrows €1 million from a European bank at an interest rate of 10 per cent.The term of the loan is 3 years.Jarrets and Fitners decide to swap their interest and principal obligations on 1 July 2015.Exchange rate information is as follows: 1 July 2015 = £0.50 30 June 2016 = £0.55 Both Jarrets and Fitners are Dutch companies.What are the journal entries to record the swap for the period ended 30 June 2016 in Jarrets Plc's books (rounded to the nearest whole euro)?

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.

What is a forward rate agreement? Explain,with an example,how such an agreement can be used as a hedging instrument.

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.

Examples of monetary items that may be denominated in foreign currencies include:

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.

Which of the following is not a condition that must be met,according to IAS 39,before a relationship qualifies for hedge accounting?

Which of the following items is not a required condition for applying hedge accounting?

The three principal types of hedges referred to in IAS 39 are:

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

Describe,with examples,the two tests of hedge effectiveness.

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

The spot rate is defined in IAS 21 as:

The functional currency of an entity:

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.