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    • Profile photo of Swati says

      Thanks for your reply.

      The examiner has written the following solution:

      Loan-
      Under the provisions of IAS 21 – the effects of foreign exchange rates – the loan interest has been correctly treated, being translated at the rate of exchange in force at the date the transaction occurred. However the exchange difference of 2,000 on the loan should be included in the income statement under finance costs rather than being taken to equity.

      So, what i have understood from this is:
      Exchange difference on ‘Loan’ (which is a monetary item) will be taken to finance costs in Profit & Loss statement? Right?

      Regards
      Swati.

  1. Profile photo of Swati says

    Dear Sir,

    There was a past year question (June 2008). In it, Note #5 says:

    Note 5
    On 1 April 2007 Kappa borrowed 40 million euros for 20 years at a fixed annual rate of interest of 6%, payable in arrears. Relevant exchange rates ($ to 1 euro) are:
    1·2 on 1 April 2007.
    1·25 on 31 March 2008.
    The draft financial statements have included interest payable of $3 million (2·4 million euros x 1·25) in the income statement and an exchange loss on the loan of $2 million (40 million euros x ($1·25 – $1·20)) in the statement of comprehensive income.

    I have understood the treatment of $3 mn (interest payable). Could you please explain what to do of $2 mn & How do we treat this $2 mn in the accounts?

  2. avatar says

    Hello sir,
    I just wanted to confirm the following:
    1) When we hold a property abroad, which is classified under IAS16 Revaluation model, then, any increase in the value at the year end goes to OCE, whereas any decrease goes to RE
    2) Any changes in value of monetary assets/liabilities denominated in foreign currency go through RE, AND
    3) When we retranslate sub’s assets, the gain/loss goes to RE, while the gain/loss on the Goodwill goes to OCE! ( though the text says the entire difference should go through OCI, this is how it has been treated in the BPP kit)
    Please let me know if I am right with respect to the above!
    Thanks a ton!

  3. Profile photo of pannanikt says

    I have a word of explanation for Mike. I have been an accountant in Poland and now I am an accountant in the UK so have some understanding about both inventory and COS concepts. I think UK way is more difficult to really control the stock. In Poland purchases go to inventory and should be there until sale. Then you have the stocktaking at year and and can compare both records to discover missing/stolen/destroyed items. In Poland people working at warehouse-the employee are personally financially responsible for the inventory and are charged by employer if something is missing. Sometimes they have a limit of acceptable losses in inventory but employees should know this figure. In UK you put everything to purchases and deduct the closing stock but then you lose the info what should have been in the stock but it’s not there. It does not mean automatically that it is the purchase. Only because something is not in stock at the end of the year does not mean it is the cost of sale. In UK your HMRC is more people friendly and it is why the cost control is more relaxed, and employers are more keen to put everything as company expenses and employees are not financially charged for losses even if it is cash. UK attitude is that in general people are honest until you prove they are not. In Poland the attitude is that in general people lie and steal until they prove they are honest.

    • Profile photo of MikeLittle says

      Thank you Pannanikt for sharing with us all your insight into something which I personally find no problem with. In fact, my only problem in this area is understanding how a Continental Cost of Sales Account works – I simply cannot get my head around the mechanics of the double entry involved and, before any of you helpful readers tries to explain it, I really do not want to know (you can’t teach an old dog new tricks)

  4. avatar says

    for P2 it’s just an inventory account on the SFP – I think the COS A/c is something specific to the country where the lectures took place?
    I skimmed over that part until he got back to the question!! :-)

  5. avatar says

    Hi the $25,806 is the original transaction value with Potter ($80,000), divided by the exchange rate at time of actual payment (3/2/10) $1 = 3.1 litas.

    80,000 / 3.1 = 25,806.
    Basically we had a payable at year-end of 28,571, but the rate has moved in our favour between year-end and actual payment.
    The difference between the year-end payable 28,571 and amount actually paid 25,806 becomes income in the new financial year as the payable is fully discharged

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