Foreign Currency Transaction


Transactions in foreign currency (indicated by comparison to the reference or functional currency) and the conversion of the Annual Accounts to the presentation currency are two significant differences from the old PGC of 1990. To put it another way, there were formerly just two sorts of currency: euro and foreign currency.
There are now two new currency concepts: functional and presentation money. The functional currency is that of the company’s primary operating environment. Unless shown differently, it will be assumed that the euro is the functional currency of enterprises based in Spain. Companies based in Spain, for example, that operate primarily in England may use the pound sterling as their functional currency rather than the euro.
A transaction in foreign currency is one in which the amount is denominated or must be settled in a currency other than the functional one. There are two types of equity elements in foreign currency: monetary items (to be received or paid with a specified number of monetary units such as cash, credits, or debts) and non-monetary items (to be received or paid with a specified number of non-monetary units such as cash, credits, or debts) (to be received or paid with an undetermined number of monetary units, such as property, plant and equipment, real estate investments or inventories).
Continuing with the example of a corporation based in Spain with the pound sterling as its functional currency, a transaction in dollars would have to be converted to the functional currency using the pound sterling/euro exchange rate in effect at the time.Initial assessment of both monetary and non-monetary items. On the date that the prerequisites for its recognition are completed, all transactions in foreign currency will be converted to functional currency by applying the spot exchange rate to the amount in foreign currency.

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