(Posted September 2025)
Accounting for foreign currency transactions has been tested several times on the CPA Common Final Examination (CFE). This blog will focus on the key technical considerations relating to the accounting treatment for foreign currency transactions under both IFRS® Standards and ASPE.
A foreign currency transaction is a transaction that involves the use of a currency that is different from the company’s functional or reporting currency. For example, the company may purchase a capital asset from a foreign supplier that is denominated in the foreign supplier’s currency and agree to repay the amount at a subsequent date, creating an accounts payable balance. The reporting company must measure these transactions in its functional or reporting currency when preparing its financial statements. There are three main concepts to consider when assessing foreign currency transactions and how to measure and record them. Depending on the nature of the issue, company situation, and facts presented, one or more of these concepts will require assessment, as follows:
1. Unit of Measure
To be able to measure and record foreign currency transactions appropriately, both IFRS and ASPE require an assessment of the basis for which to measure and record transactions.
IFRS Standards
Under IAS 21, The Effects of Changes in Foreign Exchange Rate, a company must determine its functional currency, which is the currency of the primary economic environment in which they operate. A number of factors should be assessed when determining the functional currency, including which currency:
- Mainly influences sales prices for the goods and/or services offered by the company
- Belongs to the country whose competitive forces and regulations mainly determine the sales price of the company’s goods and/or services
- Mainly influences labour, material, and other costs of providing a company’s goods and/or services
Other relevant factors also exist, including assessing the currency in which any funds from financing activities are generated, and assessing the currency in which receipts from operating activities are usually retained.
The functional currency is then used as the basis for which foreign transactions are recorded.
ASPE
Under ASPE 1651, Foreign Currency Translation, the reporting currency is the basis or unit of measure used for financial statement purposes. These transactions are translated using the temporal method, which is explained below. There is no concept of functional currency under ASPE.
2. Initial Measurement (Date of Transaction)
Under both IFRS Standards and ASPE, at the date of the transaction, the exchange rate in effect on that date should be applied. This requires that the transaction be measured and recorded using the functional currency (IFRS Standards) or reporting currency (ASPE). To the extent that certain transactions occur frequently during a reporting period (e.g., sales), these can be recorded using an average exchange rate, provided that the exchange rate does not significantly fluctuate during the period.
3. Subsequent Measurement (End of Reporting Period / Settlement Date)
At the end of the reporting period, an important distinction must be made between monetary and non-monetary items to determine the appropriate treatment.
Monetary Items
A monetary item is cash or an asset and/or liability that has a fixed value to be received or paid for in a currency different from the functional (IFRS Standards) or reporting (ASPE) currency. Examples include accounts receivable and accounts payable.
These items must be measured and recorded at the closing exchange rate at the end of the reporting entity’s financial period, if they have not yet been settled as per the contractual terms. This will result in a gain or loss recorded in net income, depending on currency movements arising after the date of the initial transaction.
To the extent that the monetary items are settled prior to the end of the reporting period, a gain or loss will be recorded at the settlement date, and no further measurement is required at the end of the reporting period.
For monetary items that have settlement dates beyond the end of the reporting period, a third measurement aspect will be required. At this time, any gain or loss incurred due to currency movements arising after the end of the reporting period and up to the settlement date will need to be recorded, using the rate in effect at the settlement date.
Non-Monetary Items
A non-monetary item is an asset and/or liability that lacks the right to receive, or obligation to provide, a fixed or determinable number of units of currency. Examples include capital assets and inventory.
These items do not require further measurement at the end of the entity’s reporting period and remain at historical cost (e.g., the value measured and reported at the date of the initial transaction). No gain or loss is incurred on these items at the end of the reporting period. Depreciation or amortization, as well as impairment, are recorded at the same historical exchange rates as the assets to which they relate.
How to Write on the CFE
While you must adapt to the issue and case facts presented to you, there is an approach that can often be taken to develop sufficient depth in your analysis.
Step 1: Determine the functional (IFRS Standards) or reporting (ASPE) currency
Under IFRS Standards, you will need to apply case facts to the criteria to support your conclusion if the functional currency is not given. Under ASPE, it is likely a quick statement based on case facts to support the reporting currency.
Step 2: Assess the treatment at the transaction date
Using the spot rate (the exchange rate at the transaction date), measure the transaction in the functional (IFRS Standards) or reporting (ASPE) currency. The distinction between monetary and non-monetary items has no impact on the measurement of the transaction at this point, and no gains or losses will arise yet.
Step 3: Assess the subsequent treatment
Make a determination as to whether the items involved are monetary and/or non-monetary. Based on this conclusion, assess the appropriate treatment at the end of the reporting period and/or settlement date (depending on your user’s request) and conclude on the gain or loss to be recorded.