Mastering Foreign Currency Accounting: A Pedagogical Case Based on IAS 21
Ana Isabel Lopes
ISCTE-IUL Instituto Universitário De Lisboa, Portugal
Volume 19: 2024, pp. 00-00; ABSTRACT
This educational exercise offers a comprehensive application aimed at improving
understanding of the implications of fluctuations in foreign currency rates. Grounded in
International Accounting Standard (IAS) 21 - The Effects of Changes in Foreign Exchange Rates,
the case employs a structured two-step approach: firstly, elucidating the reporting of foreign
currency transactions within the functional currency, and secondly, illustrating the conversion of
financial statements into a presentation currency distinct from the functional currency. This scenario
mirrors real-world business scenarios, containing both isolated and combined forms of currency
exposure, thereby equipping students with practical accounting skills in navigating the complexities
of international finance. With the British pound (GBP) employed as the functional currency,
students engage in transactions denominated in US dollars (USD), culminating in the preparation of
financial statements at year-end in Euros (EUR) and the functional currency. Emphasising the
importance of professional judgment and critical thinking, the case challenges students to analyse
nuanced situations where definitive answers are not always evident. Furthermore, it fosters an indepth
understanding of the impact of exchange differences recognised in comprehensive income,
particularly those manifesting directly in profit or loss accounts or within various components of
shareholders’ equity. Designed for postgraduate and executive master's programmes, as well as
intermediate and advanced undergraduate courses, this case offers a dynamic learning opportunity
that transcends traditional classroom boundaries, empowering students to navigate the intricate
landscape of foreign currency accounting with confidence and expertise.
Keywords: currency translation; foreign exchange rate; foreign exchange transactions; instructional
exercise; functional currency; presentation currency; translation of financial statements.
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