HKAS 21 - Effects of Changes in Foreign Exchange Rates

HKAS 21 - Effects of Changes in Foreign Exchange Rates

1. OBJECTIVE AND SCOPE

Objective (Paragraphs 1-2)

HKAS 21 prescribes how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency.

Principal Issues:

Which exchange rate(s) to use

How to report the effects of changes in exchange rates in the financial statements

Scope (Paragraphs 3-7)

HKAS 21 shall be applied to:

Application Area	Description
(a) Foreign currency transactions and balances	Except for derivative transactions within HKFRS 9 scope
(b) Foreign operations	Translating results and financial position of foreign operations included via consolidation or equity method
(c) Presentation currency	Translating an entity's results and financial position into a presentation currency

Exclusions from Scope:

Foreign currency derivatives within HKFRS 9 scope

Hedge accounting for foreign currency items (covered by HKFRS 9)

Presentation of cash flows in statement of cash flows (HKAS 7 applies)

Key Point: HKFRS 9 applies to many foreign currency derivatives. However, foreign currency derivatives not within HKFRS 9 scope (e.g., some embedded derivatives) remain within HKAS 21 scope.

2. DEFINITIONS (Paragraphs 8-16)

Key Definitions

Term	Definition
Closing rate	Spot exchange rate at the end of the reporting period
Exchange difference	Difference resulting from translating a given number of units of one currency into another currency at different exchange rates
Exchange rate	Ratio of exchange for two currencies
Fair value	Price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date (HKFRS 13)
Foreign currency	Currency other than the functional currency of the entity
Foreign operation	Subsidiary, associate, joint arrangement or branch of reporting entity, with activities based/conducted in a country or currency different from reporting entity
Functional currency	Currency of the primary economic environment in which the entity operates
Monetary items	Units of currency held and assets/liabilities to be received/paid in a fixed or determinable number of units of currency
Net investment in a foreign operation	Amount of reporting entity's interest in the net assets of that operation
Presentation currency	Currency in which financial statements are presented
Spot exchange rate	Exchange rate for immediate delivery

Exchangeability (Paragraphs 8, 8A-8B, A2-A10)

Definition: A currency is exchangeable into another currency when an 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.

Assessment Requirements:

Assess at a measurement date

Assess for a specified purpose

If entity can obtain no more than an insignificant amount of the other currency at measurement date for specified purpose, the currency is NOT exchangeable

Step I - Assessing Exchangeability:

Time Frame (A3):

Normal administrative delay does not preclude exchangeability

What constitutes normal administrative delay depends on facts and circumstances

Ability to Obtain (A4):

Consider ability, not intention or decision

Currency is exchangeable if entity can obtain other currency directly or indirectly (even if entity decides not to)

Markets or Exchange Mechanisms (A5):

Consider only markets/mechanisms where transaction creates enforceable rights and obligations

Enforceability is a matter of law

Purpose of Obtaining (A6-A9):

Different purposes require separate assessment:

Purpose	Assumption
Reporting foreign currency transactions in functional currency	Purpose is to realise/settle individual foreign currency transactions, assets or liabilities
Using presentation currency different from functional currency	Purpose is to realise/settle net assets or net liabilities
Translating results of foreign operation	Purpose is to realise/settle net investment in foreign operation

Limited Amounts (A10):

Currency is NOT exchangeable if entity can obtain no more than an insignificant amount of other currency for specified purpose

Compare amount obtainable with total amount required for that purpose

Functional Currency (Paragraphs 9-14)

Primary Indicators (Paragraph 9):

The primary economic environment is normally where the entity primarily generates and expends cash. Consider:

(a) The currency that:

(i) Mainly influences sales prices for goods and services (often currency in which sales prices are denominated and settled)

(ii) Of the country whose competitive forces and regulations mainly determine sales prices

(b) The currency that mainly influences labour, material and other costs (often currency in which such costs are denominated and settled)

Secondary Indicators (Paragraph 10):

(a) Currency in which funds from financing activities are generated

(b) Currency in which receipts from operating activities are usually retained

Additional Factors for Foreign Operations (Paragraph 11):

(a) Whether activities are extension of reporting entity vs. carried out with significant autonomy

(b) Whether transactions with reporting entity are high or low proportion of foreign operation's activities

(c) Whether cash flows from foreign operation directly affect reporting entity's cash flows

(d) Whether cash flows from foreign operation are sufficient to service debt without reporting entity funds

Priority of Indicators (Paragraph 12):

When indicators are mixed and functional currency is not obvious:

Management uses judgement

Give priority to primary indicators (paragraph 9) before considering secondary indicators (paragraphs 10-11)

Change in Functional Currency (Paragraph 13):

Once determined, functional currency is NOT changed unless there is a change in underlying transactions, events and conditions

Hyperinflationary Economies (Paragraph 14):

If functional currency is currency of hyperinflationary economy, financial statements must be restated per HKAS 29

Entity cannot avoid HKAS 29 restatement by adopting a different functional currency

Net Investment in a Foreign Operation (Paragraphs 15-15A)

Definition: Net investment in a foreign operation is the amount of reporting entity's interest in the net assets of that operation.

Monetary Items as Part of Net Investment:

Monetary item receivable from or payable to foreign operation

Settlement is neither planned nor likely to occur in foreseeable future

Includes long-term receivables or loans

Does NOT include trade receivables or trade payables

Group Context (Paragraph 15A):

Any subsidiary of the group can have the monetary item

Example: Subsidiary A grants loan to Subsidiary B (foreign operation)

Loan receivable from Subsidiary B is part of entity's net investment in Subsidiary B if settlement not planned/likely in foreseeable future

Monetary Items vs. Non-Monetary Items (Paragraph 16)

Monetary Items	Non-Monetary Items
Right to receive/obligation to deliver fixed or determinable number of units of currency	Absence of right to receive/obligation to deliver fixed or determinable number of units of currency
Examples: Pensions, employee benefits in cash, provisions settled in cash, lease liabilities, cash dividends recognised as liability	Examples: Prepayments, goodwill, intangible assets, inventories, PPE, right-of-use assets, provisions settled by delivery of non-monetary asset
Contract to receive/deliver variable number of entity's own equity instruments where fair value equals fixed/determinable number of currency units

3. SUMMARY OF APPROACH (Paragraphs 17-19)

Key Principle:

Each entity determines its functional currency and translates foreign currency items into its functional currency.

For Groups:

Each individual entity determines its functional currency

Results and financial position of entities with different functional currencies are translated into presentation currency

Presentation currency can be any currency

For Stand-alone Entities:

May present financial statements in any currency

If presentation currency differs from functional currency, translate per paragraphs 38-50

4. ESTIMATING SPOT EXCHANGE RATE WHEN CURRENCY IS NOT EXCHANGEABLE (Paragraph 19A, A11-A17)

Objective: Estimate the rate at which an orderly exchange transaction would take place at measurement date between market participants under prevailing economic conditions.

Step II - Estimating Spot Exchange Rate:

Using Observable Exchange Rate Without Adjustment (A12-A16):

Type	Description	Considerations
Observable rate for another purpose (A13-A14)	Rate for purpose different from assessment purpose	- Existence of multiple rates - Limited purposes for exchangeability - Free-floating vs. administered rate - Frequency of updates
First subsequent exchange rate (A15-A16)	First rate after exchangeability restored	- Time between measurement date and restoration - Inflation rates (especially hyperinflation)

Using Another Estimation Technique (A17):

May use any observable exchange rate (including from markets without enforceable rights)

Adjust rate as necessary to meet objective

5. REPORTING FOREIGN CURRENCY TRANSACTIONS IN FUNCTIONAL CURRENCY (Paragraphs 20-37)

Initial Recognition (Paragraphs 20-22)

Rule: A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.

Date of Transaction:

Date on which transaction first qualifies for recognition under HKFRSs

Practical Approximation:

Average rate for a week or month may be used

However, if exchange rates fluctuate significantly, average rate is inappropriate

Reporting at Subsequent Reporting Periods (Paragraphs 23-26)

Item Type	Translation Rule
Foreign currency monetary items	Translate using closing rate
Non-monetary items measured at historical cost in foreign currency	Translate using exchange rate at date of transaction
Non-monetary items measured at fair value in foreign currency	Translate using exchange rates at date when fair value was measured

Determining Carrying Amount (Paragraphs 24-25):

Carrying amount determined in conjunction with other Standards

For items requiring comparison (e.g., lower of cost and NRV for inventories):

(a) Cost/carrying amount translated at exchange rate when that amount was determined

(b) NRV/recoverable amount translated at exchange rate when that value was determined

Effect: Impairment may be recognised in functional currency but not in foreign currency, or vice versa

When Several Exchange Rates Available (Paragraph 26):

Use rate at which future cash flows could have been settled if they had occurred at measurement date

Recognition of Exchange Differences (Paragraphs 27-34)

General Rule (Paragraph 28):

Exchange differences arising on settlement of monetary items or translating monetary items at rates different from initial recognition or previous financial statements shall be recognised in profit or loss in the period in which they arise.

Exception: Paragraph 32 (net investment in foreign operation)

Timing of Recognition (Paragraph 29):

If transaction settled within same accounting period: all exchange difference recognised in that period

If settled in subsequent period: exchange difference recognised in each period determined by change in exchange rates during each period

Non-Monetary Items (Paragraph 30):

When gain/loss on non-monetary item recognised in OCI: exchange component also recognised in OCI

When gain/loss on non-monetary item recognised in profit or loss: exchange component also recognised in profit or loss

Example (Paragraph 31):

Revaluation of PPE under HKAS 16: gain recognised in OCI

Revalued amount translated using rate at date value determined

Resulting exchange difference also recognised in OCI

Net Investment in Foreign Operation (Paragraphs 32-33):

Financial Statements	Treatment
Separate financial statements of reporting entity or individual financial statements of foreign operation	Exchange differences recognised in profit or loss
Consolidated financial statements including foreign operation	Exchange differences recognised initially in OCI, reclassified from equity to profit or loss on disposal (per paragraph 48)

Currency Denomination Effects (Paragraph 33):

Denomination	Exchange Difference Arises In
Functional currency of reporting entity	Foreign operation's individual financial statements
Functional currency of foreign operation	Reporting entity's separate financial statements
Other currency	Both reporting entity's separate and foreign operation's individual financial statements

Books in Different Currency (Paragraph 34):

When entity keeps books in currency other than functional currency

At time of preparing financial statements, all amounts translated into functional currency per paragraphs 20-26

Produces same amounts as if recorded initially in functional currency

Change in Functional Currency (Paragraphs 35-37)

Rule: When there is a change in functional currency, the entity shall apply the translation procedures applicable to the new functional currency prospectively from the date of the change.

Conditions for Change:

Functional currency can be changed only if there is a change in underlying transactions, events and conditions

Example: Change in currency that mainly influences sales prices

Prospective Application:

Translate all items into new functional currency using exchange rate at date of change

Resulting translated amounts for non-monetary items treated as their historical cost

Exchange differences from translation of foreign operation previously recognised in OCI are NOT reclassified from equity to profit or loss until disposal of operation

6. USE OF PRESENTATION CURRENCY OTHER THAN FUNCTIONAL CURRENCY (Paragraphs 38-49)

Translation to Presentation Currency (Paragraphs 38-43)

General Rule (Paragraph 39) - Non-Hyperinflationary Economy:

Item	Translation Method
Assets and liabilities (including comparatives)	Translate at closing rate at date of that statement of financial position
Income and expenses (including comparatives)	Translate at exchange rates at dates of transactions
Resulting exchange differences	Recognise in other comprehensive income

Practical Approximation:

Average rate for period often used for income and expense items

Inappropriate if exchange rates fluctuate significantly

Sources of Exchange Differences (Paragraph 41):

(a) Translating income/expenses at transaction date rates and assets/liabilities at closing rate

(b) Translating opening net assets at closing rate different from previous closing rate

Treatment:

Exchange differences NOT recognised in profit or loss

Presented in separate component of equity until disposal of foreign operation

For consolidated but not wholly-owned foreign operations: accumulated exchange differences attributable to NCI are allocated to NCI

Hyperinflationary Economy (Paragraphs 42-43):

Scenario	Translation Method
Functional currency is hyperinflationary, translating into different presentation currency	All amounts (assets, liabilities, equity, income, expenses, comparatives) translated at closing rate at date of most recent statement of financial position
Translating into currency of non-hyperinflationary economy	Comparative amounts = those presented as current year amounts in prior year financial statements (not adjusted for subsequent price level or exchange rate changes)

Before Translation:

Entity must restate financial statements per HKAS 29

Exception: comparative amounts translated into non-hyperinflationary currency

When Economy Ceases to be Hyperinflationary:

Use amounts restated to price level at date entity ceased restating as historical costs for translation

Translation of Foreign Operation (Paragraphs 44-47)

Consolidation Procedures (Paragraph 45):

Follow normal consolidation procedures (elimination of intragroup balances and transactions)

However, intragroup monetary asset/liability cannot be eliminated without showing currency fluctuation effects

Exchange difference recognised in profit or loss (or OCI if from circumstances in paragraph 32)

Different Reporting Dates (Paragraph 46):

Foreign operation may prepare additional statements as of same date as reporting entity

If not, HKFRS 10 allows different date (maximum 3 months difference)

Assets and liabilities translated at exchange rate at end of foreign operation's reporting period

Adjustments for significant exchange rate changes up to reporting entity's reporting date

Same approach for equity method associates and joint ventures

Goodwill and Fair Value Adjustments (Paragraph 47):

Any goodwill arising on acquisition of a foreign operation and any fair value adjustments to carrying amounts of assets and liabilities arising on acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation. Thus they shall be expressed in the functional currency of the foreign operation and shall be translated at the closing rate.

Disposal or Partial Disposal of Foreign Operation (Paragraphs 48-49)

Full Disposal (Paragraph 48):

On disposal of a foreign operation, the cumulative amount of exchange differences relating to that foreign operation, recognised in OCI and accumulated in separate component of equity, shall be reclassified from equity to profit or loss (as a reclassification adjustment) when the gain or loss on disposal is recognised.

Partial Disposals Accounted as Disposals (Paragraph 48A):

(a) Partial disposal involving loss of control of subsidiary that includes foreign operation (regardless of whether NCI retained)

(b) Partial disposal where retained interest in joint arrangement or associate that includes foreign operation becomes a financial asset

Non-Controlling Interests (Paragraph 48B):

On disposal of subsidiary including foreign operation: cumulative exchange differences attributed to NCI shall be derecognised but NOT reclassified to profit or loss

Partial Disposal Not Resulting in Loss of Control/Joint Control/Significant Influence (Paragraph 48C):

For subsidiary: re-attribute proportionate share of cumulative exchange differences in OCI to NCI

For other partial disposals: reclassify to profit or loss only proportionate share of cumulative exchange differences in OCI

Definition (Paragraph 48D):

Partial disposal = any reduction in ownership interest in foreign operation

Except reductions in paragraph 48A accounted for as disposals

What Does NOT Constitute Partial Disposal (Paragraph 49):

Write-down of carrying amount of foreign operation due to its own losses or impairment recognised by investor

No part of foreign exchange gain/loss in OCI is reclassified to profit or loss at time of write-down

7. TAX EFFECTS (Paragraph 50)

Gains and losses on foreign currency transactions and exchange differences arising on translating results and financial position of an entity (including foreign operation) into a different currency may have tax effects. HKAS 12 Income Taxes applies to these tax effects.

8. DISCLOSURE (Paragraphs 51-57B)

Required Disclosures

Paragraph	Disclosure Requirement
52(a)	Amount of exchange differences recognised in profit or loss (except those on financial instruments at FVTPL under HKFRS 9)
52(b)	Net exchange differences recognised in OCI and accumulated in separate component of equity, with reconciliation of beginning and end of period amounts
53	If presentation currency differs from functional currency: state that fact, disclose functional currency and reason for using different presentation currency
54	Change in functional currency of reporting entity or significant foreign operation: state fact and reason for change
55	When presenting in currency different from functional currency: describe as complying with HKFRSs only if all requirements met including translation method
57	When displaying financial statements/information in currency different from functional currency or presentation currency and paragraph 55 not met: (a) clearly identify as supplementary information, (b) disclose currency, (c) disclose functional currency and translation method
57A-57B	When estimating spot exchange rate due to non-exchangeability: disclose information enabling users to understand how non-exchangeability affects or is expected to affect financial performance, position and cash flows

Additional Disclosures for Non-Exchangeability (Paragraphs A18-A20)

Required Information (A19):

(a) Currency and description of restrictions

(b) Description of affected transactions

(c) Carrying amount of affected assets and liabilities

(d) Spot exchange rates used and whether observable without adjustment or estimated using another technique

(e) Description of estimation technique, qualitative and quantitative information about inputs and assumptions

(f) Qualitative information about each type of risk

Additional for Foreign Operations (A20):

(a) Name of foreign operation, whether subsidiary/joint operation/joint venture/associate/branch, principal place of business

(b) Summarised financial information about foreign operation

(c) Nature and terms of any contractual arrangements that could require financial support

9. EFFECTIVE DATE AND TRANSITION (Paragraphs 58-60M)

Effective Dates

Amendment	Effective Date
Original HKAS 21	Annual periods beginning on or after 1 January 2005
Net Investment in a Foreign Operation (2006)	Annual periods beginning on or after 1 January 2006
HKAS 1 (revised 2007) amendments	Annual periods beginning on or after 1 January 2009
HKAS 27 (amended 2008) amendments	Annual periods beginning on or after 1 July 2009
Improvements to HKFRSs (May 2010)	Annual periods beginning on or after 1 July 2010
HKFRS 10, HKFRS 11, HKFRS 13 amendments	When applying those Standards
HKFRS 9 amendments	When applying HKFRS 9
HKFRS 16 amendments	When applying HKFRS 16
Lack of Exchangeability (September 2023)	Annual reporting periods beginning on or after 1 January 2025

Transition for Lack of Exchangeability (Paragraphs 60L-60M)

No Restatement of Comparatives:

Apply from date of initial application

For Foreign Currency Transactions:

At date of initial application, if functional currency not exchangeable:

Translate affected monetary items and non-monetary items at fair value using estimated spot exchange rate at that date

Recognise any effect as adjustment to opening balance of retained earnings

For Presentation Currency Translation:

At date of initial application, if functional currency not exchangeable into presentation currency:

Translate affected assets and liabilities using estimated spot exchange rate at that date

Translate affected equity items using estimated spot exchange rate if functional currency is hyperinflationary

Recognise any effect as adjustment to cumulative translation differences in equity

10. KEY TAKEAWAYS SUMMARY

Concept	Key Rule
Functional Currency	Currency of primary economic environment; determined by primary indicators (sales prices, costs) then secondary indicators (financing, receipts)
Initial Recognition	Spot exchange rate at transaction date
Monetary Items at Period End	Closing rate; exchange differences in profit or loss
Non-Monetary Items at Historical Cost	Exchange rate at transaction date
Non-Monetary Items at Fair Value	Exchange rate at date fair value measured
Net Investment in Foreign Operation	Exchange differences in OCI in consolidated financial statements; reclassified to P&L on disposal
Change in Functional Currency	Prospectively from date of change
Translation to Presentation Currency (Non-Hyperinflationary)	Assets/liabilities at closing rate; income/expenses at transaction date rates; exchange differences in OCI
Translation to Presentation Currency (Hyperinflationary)	All amounts at closing rate; comparatives as previously presented if translating to non-hyperinflationary currency
Goodwill on Foreign Operation	Treated as asset of foreign operation; translated at closing rate
Disposal of Foreign Operation	Cumulative exchange differences in OCI reclassified to P&L
Non-Exchangeability	Assess at measurement date for specified purpose; estimate spot exchange rate if not exchangeable

50 MULTIPLE CHOICE QUESTIONS

Q1. Which of the following is NOT within the scope of HKAS 21?

A. Accounting for foreign currency transactions and balances

B. Translating results of foreign operations included by consolidation

C. Hedge accounting for foreign currency items

D. Translating an entity's results into a presentation currency

Answer: C

Q2. According to HKAS 21, what is the closing rate?

A. The exchange rate at the date of the transaction

B. The spot exchange rate at the end of the reporting period

C. The average exchange rate for the period

D. The exchange rate at the date of settlement

Answer: B

Q3. Which of the following is a monetary item under HKAS 21?

A. Goodwill

B. Inventory

C. Lease liability

D. Prepaid expenses

Answer: C

Q4. When determining functional currency, which indicators are given priority?

A. The currency of financing activities

B. The currency of operating receipts

C. The currency that mainly influences sales prices and costs

D. The currency of the parent company

Answer: C

Q5. A foreign currency transaction shall be recorded initially using:

A. The closing rate at period end

B. The average rate for the period

C. The spot exchange rate at the date of the transaction

D. The forward rate

Answer: C

Q6. At the end of each reporting period, foreign currency monetary items shall be translated using:

A. The historical rate

B. The average rate

C. The closing rate

D. The forward rate

Answer: C

Q7. Exchange differences arising on settlement of monetary items shall generally be recognised in:

A. Other comprehensive income

B. Profit or loss

C. Equity directly

D. Deferred income

Answer: B

Q8. When a gain or loss on a non-monetary item is recognised in other comprehensive income, the exchange component shall be:

A. Recognised in profit or loss

B. Recognised in other comprehensive income

C. Deferred

D. Ignored

Answer: B

Q9. Exchange differences on a monetary item forming part of a net investment in a foreign operation in consolidated financial statements shall be:

A. Recognised in profit or loss immediately

B. Recognised initially in OCI and reclassified to P&L on disposal

C. Deferred indefinitely

D. Recognised in equity permanently

Answer: B

Q10. A change in functional currency shall be accounted for:

A. Retrospectively

B. Prospectively from the date of change

C. By restating all prior periods

D. Only with regulatory approval

Answer: B

Q11. When translating to a presentation currency for a non-hyperinflationary economy, assets and liabilities are translated at:

A. Historical rates

B. Average rates

C. Closing rates

D. Transaction date rates

Answer: C

Q12. When translating to a presentation currency for a non-hyperinflationary economy, income and expenses are translated at:

A. Closing rates

B. Exchange rates at dates of transactions

C. Historical rates

D. Forward rates

Answer: B

Q13. Exchange differences arising from translation to a presentation currency shall be recognised in:

A. Profit or loss

B. Other comprehensive income

C. Equity directly

D. Deferred income

Answer: B

Q14. Goodwill arising on acquisition of a foreign operation shall be:

A. Treated as an asset of the parent and translated at historical rate

B. Treated as an asset of the foreign operation and translated at closing rate

C. Treated as an asset of the parent and translated at closing rate

D. Treated as an asset of the foreign operation and translated at historical rate

Answer: B

Q15. On disposal of a foreign operation, cumulative exchange differences in OCI shall be:

A. Left in equity permanently

B. Reclassified from equity to profit or loss

C. Reversed against goodwill

D. Written off

Answer: B

Q16. Which of the following is NOT a factor in determining functional currency?

A. Currency that mainly influences sales prices

B. Currency that mainly influences labour and material costs

C. Currency in which the parent company reports

D. Currency in which financing activities generate funds

Answer: C

Q17. A currency is exchangeable into another currency when:

A. The entity intends to exchange it

B. The entity is able to obtain the other currency within a time frame allowing normal administrative delay through a market creating enforceable rights

C. The government permits exchange

D. The exchange rate is fixed

Answer: B

Q18. When a currency is not exchangeable, the entity shall:

A. Use the last available exchange rate

B. Estimate the spot exchange rate

C. Use the budgeted rate

D. Defer all transactions

Answer: B

Q19. Non-monetary items measured at fair value in a foreign currency shall be translated using:

A. Closing rate

B. Exchange rate at date fair value was measured

C. Historical rate

D. Average rate

Answer: B

Q20. When several exchange rates are available, the rate used is:

A. The most favourable rate

B. The least favourable rate

C. The rate at which future cash flows could have been settled at measurement date

D. The official rate

Answer: C

Q21. A monetary item that forms part of net investment in a foreign operation includes:

A. Trade receivables

B. Trade payables

C. Long-term loans where settlement is neither planned nor likely in foreseeable future

D. Short-term borrowings

Answer: C

Q22. In consolidated financial statements, exchange differences on intragroup monetary items that are part of net investment are:

A. Recognised in profit or loss

B. Recognised initially in OCI

C. Eliminated

D. Deferred

Answer: B

Q23. When an entity's functional currency is hyperinflationary, before translation to presentation currency it must:

A. Use historical cost

B. Restate financial statements per HKAS 29

C. Use average rates

D. Use closing rates only

Answer: B

Q24. For a hyperinflationary entity translating to a non-hyperinflationary presentation currency, comparative amounts shall be:

A. Restated for inflation

B. Translated at current closing rate

C. Those presented in prior year financial statements

D. Translated at historical rates

Answer: C

Q25. A write-down of carrying amount of a foreign operation due to impairment:

A. Constitutes partial disposal

B. Does not constitute partial disposal

C. Requires reclassification of exchange differences to P&L

D. Requires reversal of previous exchange differences

Answer: B

Q26. When an entity keeps books in a currency other than functional currency, at reporting date:

A. No translation is needed

B. All amounts are translated into functional currency per paragraphs 20-26

C. Only monetary items are translated

D. Only non-monetary items are translated

Answer: B

Q27. The date of a foreign currency transaction is:

A. The date of invoice

B. The date of payment

C. The date on which transaction first qualifies for recognition under HKFRSs

D. The date of delivery

Answer: C

Q28. Using an average rate for a period is inappropriate when:

A. Exchange rates are stable

B. Exchange rates fluctuate significantly

C. The period is short

D. The entity has few transactions

Answer: B

Q29. Exchange differences on monetary items that qualify as hedging instruments in a cash flow hedge are:

A. Recognised in profit or loss

B. Recognised initially in OCI to extent hedge is effective

C. Deferred

D. Ignored

Answer: B

Q30. When a foreign operation's financial statements are as of a different date, the maximum difference allowed is:

A. One month

B. Three months

C. Six months

D. One year

Answer: B

Q31. On partial disposal of a subsidiary including a foreign operation where control is retained, the entity shall:

A. Reclassify proportionate share of exchange differences to P&L

B. Re-attribute proportionate share of exchange differences to NCI

C. Reclassify all exchange differences to P&L

D. Leave exchange differences in equity

Answer: B

Q32. Which disclosure is required when presentation currency differs from functional currency?

A. Only the functional currency

B. The fact, functional currency, and reason for using different presentation currency

C. Only the presentation currency

D. The exchange rate used

Answer: B

Q33. When a currency is not exchangeable, which disclosure is NOT required?

A. Currency and description of restrictions

B. Carrying amount of affected assets and liabilities

C. Future exchange rate predictions

D. Spot exchange rates used

Answer: C

Q34. The objective of estimating spot exchange rate when currency is not exchangeable is to reflect:

A. The official rate

B. The rate at which orderly exchange transaction would take place between market participants under prevailing economic conditions

C. The black market rate

D. The historical rate

Answer: B

Q35. In assessing exchangeability for reporting foreign currency transactions, the assumed purpose is:

A. To realise net assets

B. To realise net investment

C. To realise or settle individual foreign currency transactions, assets or liabilities

D. To maximise profit

Answer: C

Q36. A currency is not exchangeable if entity can obtain:

A. Less than the full amount of other currency

B. No more than an insignificant amount of other currency for specified purpose

C. The other currency with delay

D. The other currency at unfavourable rate

Answer: B

Q37. When assessing exchangeability, entity considers:

A. Only markets where it has transacted before

B. Only markets or exchange mechanisms where transaction creates enforceable rights and obligations

C. All possible markets globally

D. Only government-approved exchanges

Answer: B

Q38. The first subsequent exchange rate after exchangeability is restored may be used as estimated spot rate if:

A. It is higher than previous rate

B. It meets the objective in paragraph 19A considering time and inflation factors

C. It is approved by auditor

D. It is the official rate

Answer: B

Q39. When using another estimation technique for spot exchange rate, entity:

A. Must use complex models

B. May use any observable exchange rate and adjust as necessary

C. Cannot use any observable rate

D. Must use government rate

Answer: B

Q40. Exchange differences arising from translation of foreign operation previously recognised in OCI are reclassified to P&L:

A. Annually

B. On disposal of the operation

C. When impairment occurs

D. When exchange rates change significantly

Answer: B

Q41. For a monetary item denominated in a currency other than functional currency of either reporting entity or foreign operation, exchange differences arise in:

A. Only reporting entity's separate financial statements

B. Only foreign operation's individual financial statements

C. Both reporting entity's separate and foreign operation's individual financial statements

D. Neither

Answer: C

Q42. When an entity loses control of a subsidiary that includes a foreign operation but retains NCI:

A. No exchange differences are reclassified

B. All exchange differences are reclassified to P&L

C. Only parent's share of exchange differences is reclassified to P&L

D. Exchange differences attributed to NCI are also reclassified to P&L

Answer: C

Q43. The Lack of Exchangeability amendments are effective for:

A. Annual periods beginning on or after 1 January 2024

B. Annual periods beginning on or after 1 January 2025

C. Annual periods beginning on or after 1 January 2026

D. Immediate application required

Answer: B

Q44. In transition for Lack of Exchangeability, comparative information:

A. Must be restated

B. Shall not be restated

C. May be restated at entity's option

D. Must be restated if material

Answer: B

Q45. When initially applying Lack of Exchangeability amendments for foreign currency transactions, any effect is recognised as adjustment to:

A. Opening balance of retained earnings

B. Opening balance of other comprehensive income

C. Cumulative translation differences in equity

D. Goodwill

Answer: A

Q46. When initially applying Lack of Exchangeability amendments for presentation currency translation, any effect is recognised as adjustment to:

A. Opening balance of retained earnings

B. Cumulative amount of translation differences in equity

C. Profit or loss

D. Goodwill

Answer: B

Q47. Fair value adjustments arising on acquisition of a foreign operation shall be:

A. Treated as assets/liabilities of parent and translated at historical rate

B. Treated as assets/liabilities of foreign operation and translated at closing rate

C. Amortised over useful life

D. Recognised in OCI

Answer: B

Q48. Which of the following is NOT an example of a monetary item?

A. Cash

B. Trade receivable

C. Prepaid insurance

D. Loan payable

Answer: C

Q49. When an entity's functional currency changes, exchange differences from translation of foreign operation previously recognised in OCI are:

A. Reclassified to P&L immediately

B. Not reclassified until disposal of the operation

C. Reversed

D. Recognised in retained earnings

Answer: B

Q50. An entity may present its financial statements in:

A. Only its functional currency

B. Only the currency of its parent

C. Any currency or currencies

D. Only the local currency of its country of incorporation

Answer: C