Advanced Financial Accounting Report: Currency & Consolidation

This advanced financial accounting report delves into key concepts such as the distinction between monetary and non-monetary items, providing examples for each. It explores the accounting treatment required for reporting entities with foreign currency monetary items, referencing AASB 121. The report explains the impact of exchange rate fluctuations on financial statements. It also covers the accounting for foreign currency transactions, including the conversion of monetary and non-monetary items. Furthermore, it addresses the consolidation of subsidiaries, including the reversal of gains on asset sales and the treatment of impairment losses on financial assets. The report provides a comprehensive overview of these complex accounting topics, offering valuable insights into financial reporting practices.

ADVANCED
FINANCIAL
ACCOUNTING

Table of Contents
INTRODUCTION...........................................................................................................................1
1. Difference between monetary items and non-monetary items, providing two examples of
each.............................................................................................................................................1
2. Accounting treatment required when a reporting entity has foreign currency monetary items
at reporting date...........................................................................................................................2
3. Monetary items can be assets or liabilities, incomes or expenses arising from foreign
currency transactions or functional currency transactions. ........................................................3
4. Consolidation refers to merger of different companies of same industry...............................4
CONCLUSION................................................................................................................................4

INTRODUCTION
Topic advanced financial accounting focusses on consolidation of subsidiaries, foreign
currency transactions, foreign operation operating (Board, 2004). This report emphasizes on
providing differences and accounting treatment of business activities, foreign currency
transactions, gains recognised on sale of assets on consolidation. This report comprises of
accounting treatment of different reporting entities according to AASB 121, The Impact of
Alteration in Foreign Exchange Prices. Providing description of business entity transactions with
the help of examples. Accounting treatment when a reporting entity has overseas currency
monetary items at reporting day, difference between qualifying financial items and other
international currency monetary items. And also adjustments that need to be made in
consolidated financial statements.
1. Variations between monetary items and non-monetary items, providing two examples for
each
Differences are given in table below:
Cash Items Non cash Items
Financial items are calculated in units of
currency. These currency are received in assets
and liabilities but paid in fixed or definable
number of units of currency. Monetary items
are grow up from transaction of foreign
currency and in exchange rate change come
from date of settlement and the date of
transaction.
Non financial items are studied in status of
historical cost. That cost using for exchange
rate come from foreign currency that will be
translated on particular date. These items are
also measured at fair value for the exchange
rate that will be translated from foreign
conversation rate.
Cash items such as cash and cash equivalents
like pensions, other employee performance
incentives to be given in cash, cash earnings
are recognised as a liability and provisions that
are to be settled in cash.
Non monetary items like goods and services
that will be intangible but they have his
presence such as goodwill, property, plant and
equipment, inventories, prepaid amounts, and
reserves that are to be accomplished by the
transfer of a non monetary asset.

Monetary items commitment to convert one
currency into another and disclose the
reporting entity shows in a profit or loss
through currency fluctuations. According to
financial statements report on entity shows
exchange differences in gain or loss.
Non monetary items are related to cost less
depreciation and cost so these amounts are able
to represent date of acquisition of current
amounts. Historical cost apply on authorities
cost or on less cost depreciation of each item
and changes come in ordinary price index from
date of acquiring to the end of the financial
period.
2. Accounting treatment required when a reporting entity has external currency financial
items at reporting day
According to section of Australian Accounting Standards Board 121, The impact of alteration in
foreign exchange prices. Reporting entity refers to an accounting entity for which preparing
financial statements and reports is mandatory (Murray, 2007).
Foreign currency is a currency different from functional currency. Domestic currency is the
currency of entity's original economical surroundings in which it deals.
Financial or cash items are fixed number of units of monetary system in which assets and
liabilities are determined.
Overseas currency transactions are determined in international currency and includes
transactions of:
 Purchasing and selling of products or services in foreign currency
 Appropriation and disposal of funds in external currency
 Enter into an agreement with a party to an underperformed forward exchange contract
 Buying or selling of assets, or acquisition or agreement of liabilities
Treatment of business transactions whether cash or non cash arising out of outside transactions,
reporting at the end of financial periods:
 Using the last price or spot exchange rate overseas currency financial items should be
converted.
 With the help of conversation rate at transaction date, non-financial items which are
measured in accordance with existing cost in international currency should be
regenerated.
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 Non-cash items which are denominated at base value in foreign currency should be
converted through exchange prices at the date of base value determination.
Exchange fluctuations of monetary items arises due to modification in exchange rate between
date of foreign monetary system transaction and settlement (Street, Nichols and Gray, 2000).
Exchange differences does not occur when transaction is recorded and settled in same reporting
period.
Accounting management of international currency monetary items in the financial reports
or statements of reporting entity at reporting date:
Foreign currency is also known as other than domestic currency. So when a reporting
entity prepares books and records on the basis of foreign currency then according to paragraphs
20-26, all amounts of foreign currency monetary items compulsorily need to be converted into
domestic currency at the time of formulation of financial statements (Raar, 2014). Foreign
currency monetary items should be translated in functional currency in accordance with final
rate. Since non-monetary items are recorded on the basis of historical cost then these shall be
translated in functional currency according to dealing rate at the date of transaction activity.
3. Financial items can be assets or liabilities, incomes or expenses arising from other than
functional currency transactions or functional currency activities.
Monetary items include pensions, employee benefits paid in cash, cash related
provisions, cash dividends etc. which can be treated as general items by accountants and
corporations and their accounting treatment will be according to AAS (Australian Accounting
Standards) and Corporations Act 2001. While foreign currency monetary items are just cash
items expressed in international currency. And these are mandatory to record at final rate.
Account handling of exchange deviations arises in functional currency monetary item in a
reporting entity:
According to paragraph 28, monetary items of reporting entity denominated in functional
currency and if exchange differences arises then these are acknowledged in other comprehensive
income in financial reports that consists net investment in foreign operations (Van Greuning,
Scott and Terblanche, 2011).
At the date of realization of external currency financial items need to be translated in
foreign medium of exchange through exchange rate prevailing at that date. Foreign currency
monetary items should be converted at the spot price that were outstanding on balance date. In
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the time period exchange differences arise in foreign currency financial items must
acknowledged in profit and loss account. According to paragraph 21 of AASB 121, a reporting
entity needs to record overseas currency transactions, at the time of transaction date through
application of foreign currency sum of money to difference of spot transaction rate between
functional and foreign currency. And according to paragraph 22 of AASB, dealing date is the
date of acknowledgement of transaction for first time according to AAS (Australian Accounting
Standards).
Paragraph 28-29 of IAS 21 says that exchange difference in profit or loss of asset or liability of
monetary item shall be recognized between transaction date and settlement date.
4. Consolidation refers to merger of different companies of same industry.
In this one consolidated financial statement is prepared through combining assets,
equities, liabilities of parent company and its subsidiaries (Cotter, 2012). Assets are sold at the
time of consolidation between entities and if gains recognized then they will be reversed.
Because gains arrived through sale of assets are then utilized in covering losses of parent
company and subsidiary company. And also gains will be adjusted to losses of parent company
on priority basis, but if any gains left after adjusting then they will be adjusted to losses of
subsidiary company. In relation to other adjustments of consolidated group, impairment losses on
financial assets are also reflected and adjusted in consolidated income statements. Impaired
financial assets are of two types that are debt instruments and equity instruments. Debt
instruments will considered impaired when there is a doubt in recovery of full or related interest
and debt instruments when carrying amount may not be fully recovered (Principles of
consolidation, 2013).
CONCLUSION
This report summarizes variations in between cash items and non-cash items and major
difference is that cash items are considered in units of currency and non cash items are in status
of historical cost. Then accounting evaluation of foreign currency monetary items in reporting
entity, and difference between accounting explanation of monetary items and foreign medium of
exchange monetary items. Adjustments and other adjustments of gains on sale of assets in
consolidated accounts of group to their losses and other adjustments of impairment assets.
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REFERENCES
Book and Journal
Board, A. A. S. (2004). AASB 121 The Effect of Change in Foreign Exchange Rates. AASB,
Australian Government. Retrieved August.15. 2004.
Murray, J. H. (2007). TaxaTion of financial arrangeMenTs—furTHer DevelopMenTs. The
APPEA Journal.47(1). 443-468.
Raar, J. (2014). Biodiversity and Regional Authorities. In Accounting for Biodiversity (Vol. 103,
No. 123, pp. 103-123). ROUTLEDGE in association with GSE Research.
Van Greuning, H., Scott, D., & Terblanche, S. (2011). International financial reporting
standards: a practical guide. The World Bank.
Cotter, D. (2012). Advanced financial reporting: A complete guide to IFRS. Financial
Times/Prentice Hall.
Street, D. L., Nichols, N. B., & Gray, S. J. (2000). Assessing the acceptability of international
accounting standards in the US: An empirical study of the materiality of US GAAP
reconciliations by non-US companies complying with IASC standards. The
International Journal of Accounting.35(1). 27-63.
Mattli, W., & Büthe, T. (2005). Accountability in Accounting? The Politics of Private Rule‐
Making in the Public Interest. Governance.18(3). 399-429.
Online
Principles of consolidation, 2013. [online].
Availablethrough:<https://shareholdersandinvestors.bbva.com/microsites/
informes2012/en/Consolidatedfinancialstatements/2.html>.
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