Final answer:
The transaction date for foreign currency transactions is determined when the transaction qualifies for recognition, often on the day it occurs. This determines the exchange rate for currency conversion, which directly affects financial records and obligations.
Step-by-step explanation:
The transaction date for the purpose of initially recognising items from foreign currency transactions is determined at the point in time when the transaction first qualifies for recognition in accordance with the relevant financial reporting framework. Generally, this is the date on which the transaction occurs, which is when the obligations to pay or to receive money are established. Foreign currency transactions require immediate attention in terms of exchange rates because the rate can fluctuate between the transaction date and the settlement date, potentially affecting a firm’s finances.
For example, a Chinese firm exporting products abroad will earn revenue in, say, U.S. dollars. However, it will need Chinese yuan to pay local workers, suppliers, and investors. As the firm is involved in the foreign exchange markets, it acts as a supplier of U.S. dollars and a demander of Chinese yuan. The transaction date is crucial for converting these U.S. dollars into Chinese yuan, as it sets the exchange rate to be applied to the amount earned from the sale.