ExpertMedium2 marksMultiple Choice
ACCA · Question 09 · Foreign Currency Transactions
Section A
On 1 October 20X6, EuroBuild Co (functional currency: Euros) took out a loan of $1,000,000 USD. The exchange rate on this date was €1 = $1.10. At the financial year-end on 31 December 20X6, the exchange rate was €1 = $1.05.
What is the foreign exchange gain or loss to be recognized in profit or loss for the year ended 31 December 20X6?
Section A
On 1 October 20X6, EuroBuild Co (functional currency: Euros) took out a loan of $1,000,000 USD. The exchange rate on this date was €1 = $1.10. At the financial year-end on 31 December 20X6, the exchange rate was €1 = $1.05.
What is the foreign exchange gain or loss to be recognized in profit or loss for the year ended 31 December 20X6?
Answer options:
A.
€43,290 gain
B.
€43,290 loss
C.
€50,000 loss
D.
€0, as the loan is a non-monetary item.
How to approach this question
Translate the loan at the transaction date rate. Translate it again at the closing rate. The difference is the FX gain/loss. Remember, if you owe foreign currency and your home currency weakens, you make a loss.
Full Answer
B.€43,290 loss✓ Correct
Under IAS 21 The Effects of Changes in Foreign Exchange Rates, monetary liabilities (like a loan) are retranslated at the closing rate. Initial recognition: $1m / 1.10 = €909,091. Year-end: $1m / 1.05 = €952,381. The liability has increased by €43,290, resulting in an exchange loss recognized in profit or loss.
Common mistakes
Confusing gains and losses when exchange rates are quoted as foreign currency per unit of functional currency.
Practice the full ACCA FR — Financial Reporting Practice Exam 4
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