Effect of Changes of Foreign Exchange Rates
Effect of Changes of Foreign exchange Rates
Categories of Foreign Currency (FC) transaction and operation; FC Transaction : Local entity enters transaction with foreign entity using foreign currency Example: purchase or sale of products and payment in foreign currency. Lending or borrowing in foreign currency.
FC operation: Local entity has branches, subsidiaries, associate or JV in foreign countries. The accounts are in foreign currency.
Exchange exposure: the risk of exchange losses or gain from foreign currency transaction and operation arising from fluctuation of exchange rate of FR against MR.
Exchange gain/loss arise when the FC appreciate/depreciate against MR
Country Currency Original rate Current rate Current rate
Malaysia RM 1.00 1.00 1.00
Thailand Baht 10 Baht 9 baht 11 baht FC Appreciate FC Depreciate
Hold asset dominated in FC Gain Loss
Hold liability dominated in FC Loss Gain
Functional currency vs Presentation currency.
Functional Currency: currency of the primary economic environment
Presentation currency: currency in which fin. Statements are presented.
FRS121 requires individual entity shall determine its functional currency and measure its result and financial position in that currency. Once determine the Functional currency should not be changed.
Each entity shall translate foreign currency transactions and items into its functional currency and reports the effect
Country business reside Currency denominated Functional currency Foreign currency transaction Translation
Malaysia Ringgit Ringgit USD Translate to RM
Malaysia USD USD Ringgit Translate to USD
Malaysia Thai Baht Thai Baht Ringgit Translate to Baht
Thai MR MR Baht Translate to RM
What determine the functional currency:
i) The currency that influence sales price for good and services ii) Country that mainly determine the sale for its goods and services iii) Currency that influence labor, material and other cost of providing goods
Categories of Foreign Currency (FC) transaction and operation; FC Transaction : Local entity enters transaction with foreign entity using foreign currency Example: purchase or sale of products and payment in foreign currency. Lending or borrowing in foreign currency.
FC operation: Local entity has branches, subsidiaries, associate or JV in foreign countries. The accounts are in foreign currency.
Exchange exposure: the risk of exchange losses or gain from foreign currency transaction and operation arising from fluctuation of exchange rate of FR against MR.
Exchange gain/loss arise when the FC appreciate/depreciate against MR
Country Currency Original rate Current rate Current rate
Malaysia RM 1.00 1.00 1.00
Thailand Baht 10 Baht 9 baht 11 baht FC Appreciate FC Depreciate
Hold asset dominated in FC Gain Loss
Hold liability dominated in FC Loss Gain
Functional currency vs Presentation currency.
Functional Currency: currency of the primary economic environment
Presentation currency: currency in which fin. Statements are presented.
FRS121 requires individual entity shall determine its functional currency and measure its result and financial position in that currency. Once determine the Functional currency should not be changed.
Each entity shall translate foreign currency transactions and items into its functional currency and reports the effect
Country business reside Currency denominated Functional currency Foreign currency transaction Translation
Malaysia Ringgit Ringgit USD Translate to RM
Malaysia USD USD Ringgit Translate to USD
Malaysia Thai Baht Thai Baht Ringgit Translate to Baht
Thai MR MR Baht Translate to RM
What determine the functional currency:
i) The currency that influence sales price for good and services ii) Country that mainly determine the sale for its goods and services iii) Currency that influence labor, material and other cost of providing goods