IAS 21 (revised 2003)

The Effects of Changes in

Foreign Exchange Rates
KPMG International Financial Reporting Group
AUDIT

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 1
Objectives

Understand how foreign currency transactions and

balances are translated into a company’s functional
currency

Understand how foreign currency financial

statements (FS) are translated for consolidation
purposes

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 2
Improvement of IAS 21 (revised 2003)

IASB’s project on Improvements of IAS

New requirements on:

the translation method
determining the functional and presentation currencies

Effective date
1January 2005

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 3
IAS 21 definitions

Foreign currency

A currency other than the functional currency of an entity

Functional currency

The currency of the primary economic environment in which the

entity operates

Presentation currency

The currency in which the financial statements are presented

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 4
Determination of functional currency –
Primary factors
Currency
Currencythat
that
Currency
Currencyofofthe
thecountry influences
country influences salesprices
sales prices
influencing the pricing
influencing the pricing for goods and services
for goods and services
ofoftransactions
transactions
Labour,
Labour,material,
material,
other
othercosts
costs

But also…

Currency
Currencyininwhich
whichfunds
funds
from financing activities Cash
from financing activities Cashreserves
reserves
are
aregenerated
generated

Reflects the underlying transactions, events and

conditions that are relevant to the entity
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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 5
Determination of functional currency –
Additional factors

Degree
Degreeofof
independence
independenceofofaa
foreign
foreignoperation
operation
from Proportion
Proportionofof
from itsparent
its parent
transactions
transactions
between
betweenaaforeign
foreign
operation
operation andits
and its
Influence
Influenceofofaaforeign
foreign parent
operation’s parent
operation’scashcash
flows on its parent’s
flows on its parent’s
cash
cashflows
flows
Financial
Financialautonomy
autonomyofofaa
foreign
foreignoperation
operation
compared
comparedwith
withits
its
parent
parent

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 6
Choice of functional currency?

An entity does not have a free choice of functional

currency

An entity cannot avoid restatement in accordance with

IAS 29
For example, adopting a stable currency (such as the
functional currency of its parent) as its functional
currency.

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 7
Reporting foreign currency transactions in
the functional currency – Initial recognition

Recognise transaction at the rate at the transaction

date
May use approximate rate e.g. average rate for week
or month
average rates not reliable if currency fluctuates
significantly

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 8
Reporting foreign currency transactions in the
functional currency – Subsequent measurement

Non-monetary Revalued
Monetary
items at non-monetary
items
historical cost items

Rate at the date of Rate at date

Closing rate
transaction of valuation

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 9
Change in functional currency

Only if there is a change to the underlying

transactions, events and conditions

Translation procedures should be applied to the new

functional currency prospectively from the date of
the change

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 10
Monetary assets

Cash
Cash equivalents
Marketable debt securities
Accounts receivable
Notes receivable

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 11
Non-monetary assets

Inventory
Prepaid expenses
Marketable equity security
Investment property
Property, plant, and equipment
Intangible assets (e.g. goodwill)

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 12
Monetary liabilities

Accounts payable
Notes payable
Bonds payable
Leases payable
Accruals
Deferred tax

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 13
Non-monetary liabilities

Deferred income
Government grant

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 14
Translation to the Presentation currency

Closing rate at the date

Assets and liabilities
of each BS presented

Rate at the date of

Income and expenses transaction
(or average rate)

All resulting exchange differences classified as equity

To P/L on disposal

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 15
Explanation of exchange rate difference

Rationalisation of the yearly foreign exchange difference:

Opening net assets x (EOY – BOY)

+
Net asset changes from P/L x (EOY – historical or average rate)

+
Net asset changes from other equity transactions x
(EOY – historical or average rate)

=
Translation adjustment in equity

EOY = Rate at year end (closing rate)

BOY = Rate at beginning of year (opening rate)
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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 16
Key disclosures

Exchange rate differences included in:

P/L (except for financial instruments measured at FV)
Equity (with a reconciliation)

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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 17
Additional disclosures

Reasons (if applicable):

why there has been a change in the functional currency
why the presentation and functional currency are different
If an entity’s presentation currency is different from its functional
currency, its financial statements should only be described as
compliant with IFRSs if all the requirements of IAS 21 have been
applied
If an entity’s additional financial information is displayed in a
currency different from either its functional or its presentation
currency and all the requirements of IAS 21 have not been met:
clearly identify such information as supplementary
disclose the currency of the supplementary information
disclose the entity’s functional currency and the method of
translation used as a basis for presenting the supplementary
information
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and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
IAS 21 - 18
Bottom line

An entity does not have a free choice of functional

currency
Translation of foreign currency assets and liabilities
distinguish between monetary and non-monetary
Unrealised exchange gains and losses recognised in
P/L
Comparative Financial Statements

© 2005 KPMG IFRG Limited, a UK registered company, limited by guarantee,

and a member firm of KPMG International, a Swiss cooperative. All rights reserved.
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© 2005 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative.
All rights reserved.