Before the transactions can be recorded in a single entity's financial records, they must be converted from sales or purchases made in foreign currencies into its functional currency. Which of the following foreign currency exchange rates may be used to translate the foreign currency purchases and sales in compliance with IAS 21 The Effect of Changes in Foreign Currency Exchange Rates?i) The rate that was in effect on the day the purchase or sale was madeii) The rate that was in effect at the start of the accounting periodiii) The average rate for the year, assuming there were no notable fluctuations during the year iv) The rate that was in effect at the end of the accounting period.a.(ii) and (iv)b.(i) and (iii)c.(iii) onlyd.(i) only
Question
Before the transactions can be recorded in a single entity's financial records, they must be converted from sales or purchases made in foreign currencies into its functional currency. Which of the following foreign currency exchange rates may be used to translate the foreign currency purchases and sales in compliance with IAS 21 The Effect of Changes in Foreign Currency Exchange Rates?i) The rate that was in effect on the day the purchase or sale was madeii) The rate that was in effect at the start of the accounting periodiii) The average rate for the year, assuming there were no notable fluctuations during the year iv) The rate that was in effect at the end of the accounting period.a.(ii) and (iv)b.(i) and (iii)c.(iii) onlyd.(i) only
Solution
According to IAS 21, all of the options (i), (ii), (iii), and (iv) can be used to translate foreign currency purchases and sales. However, the standard recommends using the exchange rate at the date of the transaction (option i). Therefore, the answer is not limited to one of the options provided in the question. But if we have to choose from the given options, the closest answer would be (b) (i) and (iii). This is because option (i) is recommended by the standard and option (iii) can be used if there are no significant fluctuations in exchange rates during the year.
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