Foreign currency and foreign currency transaction

Learning objectives

• Distinguish foreign currency, functional currency and presentation currency.L1, L2

Normative references

• IAS 21 §8Terms defined in para. 8: closing rate (the spot exchange rate at the end of the reporting period); exchangeable currency (the entity is able to obtain the other currency within a time frame that allows for a normal administrative delay and through a market or exchange mechanism in which an exchange transaction would create enforceable rights and obligations); exchange difference (the difference resulting from translating a given number of units of one currency into another currency at different exchange rates); exchange rate (the ratio of exchange for two currencies); fair value (reference to IFRS 13); foreign currency (a currency other than the functional currency); foreign operation (a subsidiary, associate, joint arrangement or branch whose activities are based or conducted in a country or currency other than those of the reporting entity); functional currency (the currency of the primary economic environment in which the entity operates); group; monetary items (units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency); net investment in a foreign operation (the reporting entity's interest in the net assets of that operation); presentation currency; spot exchange rate (the exchange rate for immediate delivery).
• IAS 21 §20Definition: a foreign currency transaction is denominated or requires settlement in a foreign currency, including when the entity buys or sells goods or services whose price is denominated in a foreign currency, borrows or lends funds denominated in a foreign currency, or acquires, disposes of, incurs or settles assets or liabilities denominated in a foreign currency. Initial recording at the spot exchange rate is addressed in para. 21.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

2 questions

• According to the standard, what is a foreign currency for a given entity?L1
• An entity whose functional currency is the euro carries out several operations. Which of them are foreign currency transactions? More than one answer.L2