Foreign exchange forex translation of foreign currency rental expenses. All monetary items in foreign currency using closing exchange rate at the . Your real cost incurred is USD 30 translated with exchange rate on the date of Your company (functional currency: EUR) wants to rent a property in .. Is it okay to track foreign currency received Advance Deposits at transaction time in forex.

Foreign exchange forex translation of foreign currency rental expenses

CPA - International Accounting - Week 5 Translation of Forex Fin Stmts

Foreign exchange forex translation of foreign currency rental expenses. transactions in a foreign currency, or to the translation of cash flows of a . Examples include: amounts prepaid for goods and services (eg prepaid rent); goodwill; the cost or carrying amount, as appropriate, translated at the exchange rate at.

Foreign exchange forex translation of foreign currency rental expenses


Transactions 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. 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.

Often, I receive one and the same question:. What is the correct accounting for prepayments in foreign currency under IFRS? How do IFRS treat the effect of moving exchange rates? 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. When you record your transactions in a foreign currency during the year, then you are translating the foreign currency amounts to your functional currency.

It is the date on which the transaction first qualifies for recognition in accordance with IFRS. Although this sounds quite straightforward, some difficulties may arise in determining the transaction date. For example — you receive goods in day 1, invoice for these goods in day 3 and you pay for these goods in day 4 — what is the date of transaction here? What currency rate shall be applied — day 1, 3 or 4? With regard to subsequent translation at the closing rate, IAS 21 makes a difference between monetary items and non-monetary items:.

Is the prepayment for your fixed asset monetary or non-monetary? Well, it can be either monetary, or non-monetary! A right to receive or obligation to deliver a fixed or determinable number of units of currency.

Prepayments as such may or may not carry this feature and you should assess each prepayment individually and carefully.

Read the specific contract — what does it say? Is your prepayment refundable and at what conditions? Therefore, your prepayment for a machine is in most cases a non-monetary item and as a result, you should NOT recalculate it using the closing rate at the year-end.

Your functional currency is EUR and you entered into a contract for the production of a machine with a US supplier. However, no asset can be recognized in line with IAS 16 Property, plant and equipment , as recognition criteria are not met.

Similarly, it is necessary to assess whether you should recognize some financial liability or not. In most cases, no financial liability related to firm commitments is recognized until the goods are delivered or shipped, depending on Incoterms , and the risks and rewards of ownership have passed. Remember, you have no machine yet. I know that many companies adopted similar practice — they simply book the first payment as debit PPE — machine and credit cash.

It is NOT correct, as there is no machine. In this case, the prepayment of USD 30 for a machine is non-monetary. This means no recalculation. Your statement of financial position will show the prepayment at the historical rate, that is in amount of EUR 22 This is exactly the date when you gain control over the machine. At this point, recognition criteria under IAS16 are met and you can recognize the machine as your own property, plant and equipment.

In this case, the date of transaction is 15 January 20X2, when a machine was delivered and the delivery gave rise to a financial liability. Cost of a machine is a non-monetary item, too — we recalculate nothing at all and keep it in historical rates. Now you may argue — but, the date when a machine appears in your financial statements is on delivery, so we should recalculate the full amount of USD with the rate applicable on delivery.

Your real cost incurred is USD 30 translated with exchange rate on the date of the first payment and USD 70 translated with exchange rate on the date of delivery. It is your EUR asset. Try to look at it this way: This should be crystal clear. You record your payment with the spot exchange rate on the date of payment and any difference is recognized in profit or loss. Your company functional currency: The deposit will be refunded at the end of rental term.

Here, the situation is a bit different because as a prepayment is refundable, it is a monetary asset. When you make a payment, you translate it using the spot exchange rate at the date of payment. Subsequently, you need to translate it using the closing rate on 31 December 20X1 and recognize any foreign exchange difference in profit or loss.

And, did this article help you? Please, let me know in a comment below the article and if you know someone who can use this information, please share — thank you! Update 05 February There was a great discussion on LinkedIn in relation to this topic.

I answered several questions around, as this is very confusing topic and lots of us have some doubts around. Please, if interested, read here. Learn top 7 IFRS mistakes that companies make in their reporting and how to avoid them easily! Shares are traded in the active market; 2. An active market does not exist for shares of subsidiary company.

Dear Mumtaz, thank you for the comment. Well, by definition, shares are NON-monetary asset, because there is no right to receive fixed or predetermined amount of a currency. However, the recalculation depends on how you classified these shares in your financial statements. Is it the financial instrument? If yes, then how did you categorize it? In this case, exchange rate differences are a part of revaluation to fair value. However, if you keep the shares at cost for whatever reason , then you do not recalculate it, as it is a non-monetary asset NOT at fair value.

My dear, you have made accounting very interesting to me because, you have simplified most complex and difficult IFRS issues very simple and interesting Iwish you long and healthy life. Thanks Silva for this educative endeavour. A company accrues rent income which it charges in a different currency on a monthly basis because it prepares its management accounts monthly. Is this a monetary item or non monetary? Which exchange rate must it use? Does the company need to re translate this item at the reporting date?

I must add that the tenants do not necessarily pay before they move into premises. When they eventually pay, how do you treat it? Dear Dasaa, this issue is not that easy as it seems, and indeed, there are a lot of views on it. In practice, the treatment varies, entity by entity, nation by nation. If you are interested, please read this paper published in November by the IFRS Foundation- it will give you some approaches. Thank you Dear Silvia, i have a question, about the presentation of prepayments, when do you allocated?

I reviewed the ifrs , and dont find this specificly , only IAS 1, mencioned about materiality in the presentation,. This is also what our own legislation requires.

Have a nice day! I have a slightly different question because I have a chf invoice booked in for expenses in bought using a chf bank account with chf bought in to pay off the chf invoice in Dec The invoice is a subscription for calendar year In order to fix the cost for in gpb we bought chf in oct to pay off the invoice in chf.

We paid the invoice in Dec The cost of the prepayment is equal to the cost of the chf paid from the chf bank. Effectively we used the average rate as proxy for spot rate to book the chf invoice. The chf bought to pay for invoice were booked at rate given and bought from the bank.

The company has always accounted for it this way but there is little guidance for this kind of situation in ifrs and would like some advice. Thanks Paul from UK. Pursuant to ASC , advances to suppliers that are not related to a fixed-price contract are considered to be rights to receive credit for a sum of money, and not claims to a specified quantity of goods or services and are considered to be monetary items.

In contrast, non-refundable advances to suppliers related to a fixed-price contract are classified as nonmonetary items because they are in effect claims for future goods and services and are recorded using the historical exchange rate. Thank you for a good and useful article. I would like to ask a question on advances received balances. Shall we also revalue the advances received in foreign currency from our customers?

Dear Mica, this is not so easy question as the situation here is unclear. If they are refundable and it is probable that they will be refunded, then yes, I would revalue them. But if they are non refundable, then I would not treat them as monetary liability and would not revalue. Thank you for your super helpful article. However, I have a question. What would be the accounting treatment for the machine in this case?

So we need to debit full amount of PPE on the date the machine was deliver?


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