Question 1

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 defined as assets or liabilities that are fixed or determinable in terms of units of currency, such as cash, bank deposits, loans, and accounts payable. Non-monetary items, on the other hand, are assets or liabilities that do not meet this definition, such as property, plant, and equipment or goodwill.

Question 2

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 Australian currency.

Question 3

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 4

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

Accepted Answer

The functional currency is determined by the economic environment in which the entity operates, including the currency of the primary economic environment. Therefore, the statement is true.

Question 5

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

Accepted Answer

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

Question 6

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, and therefore there is no right to receive or obligation to deliver a specific amount of currency. Examples of non-monetary items include property, equipment, and inventory.

Question 7

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 8

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

Accepted Answer

The appropriate foreign currency exchange rates for translating foreign currency transactions are typically determined by accounting standards and regulations, not by the accountant's judgment about the valuation of the reporting currency.

Question 9

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

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

Question 10

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 11

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

Accepted Answer

According to IAS 21 The Effects of Changes in Foreign Exchange Rates, an entity may change its functional currency when there is a change in the underlying transactions, events and conditions, such as a change in the nature of the entity's activities, location of its operations, financing arrangements or economic indicators. Therefore, the statement is true.

Question 12

If the foreign currency exchange rate between Australia and the US was A$1.00 = US$0.55 on 1 October 2014 and moved to be A$1.00 = 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, so the statement is false.

Question 13

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.

Question 14

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

Accepted Answer

Hedges must be designated and documented prospectively, meaning before the hedge transaction takes place. It is not permissible to designate a hedge after the fact.

Question 15

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

Accepted Answer

Different types of hedges have different accounting treatments such as fair value hedge, cash flow hedge, and net investment hedge. The changes in fair value of hedging instruments are recognised differently in each case. Therefore, it is important to distinguish between different types of hedges for appropriate accounting treatment.

Question 16

An example of a foreign currency swap is when a loan denominated in one currency is swapped for a loan denominated in another currency.

Accepted Answer

This is an accurate description of a foreign currency swap, where two parties agree to exchange principal and interest payments on two loans denominated in different currencies. It is a common strategy used by multinational corporations and banks to manage currency risk and take advantage of interest rate differentials between countries.

Question 17

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 18

Management may exercise its judgment 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 judgment to determine...

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

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.

Quiz 32: Accounting for Foreign Currency Transactions