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All foreign currency transactions should be initially measured and recorded in an entity’s functional currency using the exchange rate on the date of the transaction. See FX 4.4.1 for information on monetary and nonmonetary transactions, and see FX 4.5 for information on exchange rates.
Example FX 4-1 illustrates the initial measurement of a foreign currency transaction.
EXAMPLE FX 4-1
Initial measurement of a foreign currency transaction
USA Corp is a US registrant with a US dollar (USD) functional currency.
On August 1, 20X1, USA Corp purchases office printers (capitalized assets) on account for 1,000 British pound sterling (GBP). The exchange rate on August 1, 20X1 is USD 1.5 = GBP 1.
How does USA Corp measure and record this foreign currency transaction?
Analysis
Because the transaction is denominated in a currency other than the USA Corp’s functional currency, the purchase of the printers is considered a foreign currency transaction. Accordingly, USA Corp should measure and record the office printers and corresponding account payable in its functional currency, the US dollar, using the exchange rate on the purchase date.
GBP 1,000 × (1.5/ 1) = USD 1,500
To record its purchase of office printers, USA Corp would record the following entry in US dollars:
Dr. Office printers
USD 1,500
Cr. Accounts payable
USD 1,500
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