Foreign currency transactions should be recorded using which rate on initial recognition?

Foreign currency transactions should be recorded using the spot rate at the date of the transaction because this rate reflects the actual market exchange rate at which the transaction is executed. The exchange rate in effect at the time of the transaction provides an accurate measure of the value of the foreign currency in the functional currency, ensuring that the financial statements present a faithful representation of the transaction's economic effects.

Using historical rates, projected rates, or average rates would not accurately reflect the conditions at the time of the transaction. Historical rates might not be relevant as they do not capture current economic realities, while projected rates make assumptions about future exchange rates that may not happen. Average rates could obscure daily fluctuations in currency values and may not reflect the specific rate applicable at the time of each transaction. Recording at the spot rate ensures that financial statements align with the timing and specifics of the actual transaction, adhering to the principles of faithful representation and relevance in financial reporting.