Page 21 - CIMA MCS Workbook May 2019 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

TASK 3 – FINANCIAL REPORTING ISSUES
From: Finance Manager
To: Sales and Marketing Director
Date: Today

Suggested solution

Quoting house prices in US$, rather than C$

If customers were quoted house prices in US$, rather than C$, it would provide clarity and
certainty to the customer regarding the price of the house. However, it would introduce an
element of currency risk to Jord Homes that it does not currently have exposure to.

Revenue should be recognised in accordance with IFRS 15 Revenue from contracts with customers
(IFRS 15). Revenue will be recognised as, or when, a performance obligation is satisfied.

In accordance with IAS 21 the effects of changes in foreign exchange rates (IAS 21), when that
occurs, the invoice raised in US$ should be translated into C$ using the spot rate as at the date of
the transaction to record this in the accounting records. When the cash is subsequently received
from the customer to clear the amount due, Jord Homes will receive an amount in US$. This
needs to be translated at the rate ruling at the date of receipt of the cash.

The likelihood is that the exchange rate between the US$ and C$ will not be the same at both
dates. The recorded figure for revenue will not change. However, a foreign exchange difference
will arise on settlement of the receivable – either a gain or a loss depending upon how the
exchange rate has moved between the two dates. This foreign exchange gain or loss is taken to
profit or loss as an operating gain or operating expense in arriving at profit before tax.

If an amount invoiced is still outstanding from the customer at the reporting date, the receivable
is retranslated at the year‐end rate as the best estimate of the C$ amount receivable. Any
exchange gain or loss on this retranslation is taken to profit or loss as an item of operating income
or expense.

Incurring expenses in US$, rather than C$
The accounting treatment of incurring expenses denominated in foreign currency is similar to that
for invoicing customer in foreign currency

If suppliers charged prices in US$, rather than C$, it would provide clarity and certainty to them
but it would increase exposure to currency risk in the form of foreign exchange losses that Corvola
currently only has limited exposure to.

Expense invoices would need to be translated into C$ using the spot rate as at the date of the
transaction to record both the expense and amount payable to the supplier. When the supplier is
subsequently paid, the payment would be translated into C$ to record the payment and clearing
the amount payable. The original expense is not retranslated. However, an exchange gain or loss
will arise on settlement of the payable. This will be an item of operating expense or operating
income that would be included in profit or loss for the year.

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