Foreign currency translation according to ias21 sales

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Foreign currency translation According to IAS21 sales should be translated at the date of the transaction (or the average rate as an approximation). Given that sales are seasonal in the full year then there is a risk that the average rate may not be at an appropriate rate Staff bonus The bonus should only be recognised according to IAS19 when there is a constructive or legal obligation to make a payment. In this case, the full year’s revenue on which the bonus is based is expected to fall below £26m in the full year (see note 3 above) thus no bonus should be recognised in the interim or the final full year financial statements. Impairments of PPE The Gold product looks to be performing poorly in making losses and the estimate is that “Sales of Gold doors are not expected to increase in the foreseeable future.” Gold doors production seems likely to be a cash generating unit as the asset to make the Gold doors are separately identifiable from the Monty assets. Similarly, the revenue streams are also separately identifiable. As a consequence the value in use of the PPE used on the Gold production line (and other PPE specifically associated with the Gold product) seems likely to be low. Also the fair value less costs to sell also seem to be low as the “Production equipment is specialised and highly specific to each of the separate production processes”. In such circumstances the sharp downturn in Gold sales could represent an impairment event and therefore an impairment review of the Gold assets should be carried out. Receivables The amount for receivables is a monetary asset and so should be translated at the year end exchange rate. If in the recession bad debts are increasing then an impairment change should be considered. Examiner’s comments There were some excellent answers which really used the information given in the question to produce expected revenue and cost of sales figures and receivable and inventory ratios. Having produced the figures the audit issues were then relatively easy to identify and these candidates were able to score high marks. The weaker answers were those which made little attempt to use the figures given in the question, or only in a very basic way and answered the question using very basic presumptions. For example ‘there is a staff bonus scheme therefore revenue must be overstated’; or ‘revenue has declined therefore there is a cut off error’; or ‘cost of sales is understated therefore there is a foreign exchange error’. Very few candidates appreciated the significance of the fact that we were only 3/4 of the way through the year, so the inventory and receivables calculations were often incorrect.
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TI BR – Advanced Stage – July 2010 © The Institute of Chartered Accountants in England and Wales 2010 24 It was not uncommon for students to ignore the financial reporting requirements of the question. Where candidates tackled the financial reporting properly, they often did well in identifying appropriate issues, although less well in describing the accounting. There were also some excellent answers to this question, but those candidates who were not prepared to get into the numbers in the question and use them to identify audit issues did not achieve a pass on this question
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Foreign currency translation According to IAS21 sales...

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