In my last series on currency trading accounting, I got some comments but since standards don't cover these treatments, we have to interpret and apply them ourselves.
The main questions were; revenue recognition and revaluation of currency at balance sheet dates.
This series will have two parts:
✔ Treatment 1 - presents my views
✔ Treatment 2 - covers others' expectations
🔸 On January 1, 2023, AMALA LTD bought £50,000 at $1.5 per £.
🔸 By March 30, 2023, the rate changed to $1.7 per £.
🔸 On May 1, 2023, AMALA LTD sold the pounds at $1.75 per £.
💢 TREATMENT 1 - Check the previous series!
IAS 2 applies to inventories, including currencies bought for resale. These currencies should be listed on the balance sheet as inventories.
IAS 21, which deals with foreign exchange, is relevant here because these inventories consist of foreign currencies.
Therefore, after recognizing currencies as inventories under IAS 2, IAS 21 guides how to account for them due to their foreign nature.
According to IAS 21, when recording a foreign currency transaction:
🔶 You should use the exchange rate on the transaction date.
On 01/01/202;
£50,000 at $1.5 = £75,000
🔶 On each balance sheet date:
✔ Monetary items should use the closing exchange rate.
✔ Non-monetary items at historical cost use the exchange rate at the transaction date.
✔ Currency inventories are monetary items, so they should be reported using the closing rate.
On 30/03/2023:
£50,000 at $1.7 = $85,000
Revaluation gain = $85,000 - $75,000 = $10,000
🔶 Exchange differences on monetary items settled or translated at different rates are recorded in profit or loss.
On 01/05/2023:
Money received: £50,000 × $1.75 = $87,500
Current inventory book value: $85,000 (Value at 30/03/20230
Revenue: $87,500 - $85,000 = $2,500
✔ IFRS 15 — Revenue from Contracts with Customers allows using other standards if specific treatments are not covered within it.
✔ Similarly, when an entity trades livestock, which are considered inventories, IAS 41 — Agriculture should still be used to value the livestock.
💢 TREATMENT 2
Some argue:
✔ Only IAS 2 (Inventories) and IFRS 15 (Revenues) should be used
✔ IAS 21 (Effects of Changes in Foreign Exchange Rates) should be excluded as it concerns only inventory.
✔ Inventories must be stated at the lower of cost or net realizable value.
on 01/01/2023:
Purchases = £50,000 × $1.5 = £75,000
⭕ REVENUE RECOGNITION
🔶 According to IFRS 15's 5-step principle:
Revenue = £50,000 × $1.75 = $87,500
🔶 IAS 2 recognizes the cost of goods sold as Cost of Sales on the Profit and Loss:
Cost of sales = £50,000 × $1.5 = £75,000
Gross Profit = $87,500 - $75,000 = $12,500
NOTES:
✔ In both treatments, the effect of amount recognized in the P and L is the same:
$10,000 + $2,500 = $12,500
✔ If local currency is traded, IAS 21 will not be required as there are no foreign exchange effect. Treatment 2 will be applicable
WHICH TREATMENT DO YOU PREFER, OR CAN BOTH TREATMENTS BE USED?
Source: Taofiq Olalekan Jimoh FCCA FFA FTA FIPA’s LinkedIn Post
