Chapter - 12 IAS-21 The effect of change in foreign exchange rates

IAS-21 The effect of change in foreign exchange rates

1. Initial recognition
A foreign currency transaction is a transaction that is denominated or requires settlement in
a foreign currency, including transactions arising when an entity:

(a) buys or sells goods or services whose price is denominated in a foreign currency;
(b) borrows or lends funds when the amounts payable or receivable are denominated in
a foreign currency; or
(c) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated
in a foreign currency.

On initial recognition, a foreign currency transaction shall be recorded in the functional

currency, by using spot exchange rate at the date of the transaction.

The date of a transaction is the date on which the transaction first qualifies for recognition in
accordance with IFRSs.

An average rate for a week or a month can be used for all foreign currency transactions
during that period only if exchange rate fluctuation is insignificant.

2. Reporting at the ends of subsequent reporting periods

At the end of each reporting period:

(a) foreign currency monetary items shall be translated using the closing rate;
(b) non-monetary items that are measured in terms of historical cost in a foreign currency
shall be translated using the exchange rate at the date of the transaction; and
(c) non-monetary items that are measured at fair value in a foreign currency shall be
translated using the exchange rates at the date when the fair value was measured.

At reporting date:

Non-Monetary
Monetary:

Translated
at closing Measured at Measured at fair
rate. historical cost: value in foreign
Translated at currency:
exchange rate at Translated at
transaction date exchange rate at
revaluation date

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Chapter - 12 IAS-21 The effect of change in foreign exchange rates

Monetary item explained:

Monetary items are units of currency held and assets and liabilities to be received or
paid in a fixed or determinable number of units of currency.

Examples of monetary items:

(a) Cash/Bank balance

(b) Receivables
(c) Payables
(d) Loan notes issued
(e) Investment in loan notes

Followings are not monetary items:

(a) Prepayments
(b) Advance from customers
(c) Shares issued
(d) Investment is shares

Note: These are only few examples to remove any confusion otherwise all items
other than monetary items are non-monetary items.

Impairment or NRV loss on non-monetary assets

The carrying amount of some items is determined by comparing two or more amounts. For
example, the carrying amount of inventories is the lower of cost and net realisable value in
accordance with IAS 2 Inventories. Similarly, in accordance with IAS 36 Impairment of
Assets, the carrying amount of an asset for which there is an indication of impairment is the
lower of its carrying amount before considering possible impairment losses and its
recoverable amount.

When such an asset is non-monetary and is measured in a foreign currency, the carrying
amount is determined by comparing:

(a) the cost or carrying amount translated at the exchange rate at the date when that
amount was determined (ie the rate at the date of the transaction for an item measured
in terms of historical cost); and
(b) the net realisable value or recoverable amount, as appropriate, translated at the
exchange rate at the date when that value was determined (eg the closing rate at the
end of the reporting period). The effect of this comparison may be that an impairment
loss is recognised in the functional currency but would not be recognised in the foreign
currency, or vice versa.

Multiple exchange rates

When several exchange rates are available, the rate used is that at which the future cash
flows represented by the transaction or balance could have been settled if those cash flows
had occurred at the measurement date. (For example, selling rate is used for foreign
currency payments and buying rate is used for foreign currency receipts)

If exchangeability between two currencies is temporarily lacking, the rate used is the first
subsequent rate at which exchanges could be made.

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Chapter - 12 IAS-21 The effect of change in foreign exchange rates

3. Recognition of exchange differences

Exchange differences arising on the settlement or translation of monetary items at rates
different from those at which they were translated on initial recognition during the period or in
previous financial statements shall be recognised in profit or loss in the period in which
they arise.

When a gain or loss on a non-monetary item is recognised in other comprehensive income,

any exchange component of that gain or loss shall be recognised in other comprehensive
income. Conversely, when a gain or loss on a non-monetary item is recognised in profit or
loss, any exchange component of that gain or loss shall be recognised in profit or loss.

Other IFRSs require some gains and losses to be recognised in other comprehensive
income. For example, IAS 16 requires some gains and losses arising on a revaluation of
property, plant and equipment to be recognised in other comprehensive income. When such
an asset is measured in a foreign currency, this Standard requires the revalued amount to
be translated using the rate at the date the value is determined, resulting in an exchange
difference that is also recognised in other comprehensive income.

4. Disclosure
An entity shall disclose:

(a) the amount of exchange differences recognised in profit or loss except for those arising
on financial instruments measured at fair value through profit or loss in accordance with
IFRS 9; and
(b) net exchange differences recognised in other comprehensive income and accumulated
in a separate component of equity, and a reconciliation of the amount of such exchange
differences at the beginning and end of the period.

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Chapter - 12 IAS-21 The effect of change in foreign exchange rates

Comprehensive Illustration
CI-1 ABC Ltd operates in Pakistan and imported a machine of 1,000 USD from Germany at
1 Oct 2017. Depreciation rate is 10% on straight line basis. Year end is 31 December.

Relevant exchange rates are:

PKR/USD
1 July 2017 110
1 Oct 2017 112
31 Dec 2017 115
31 March 2018 114

Pass accounting entries of complete transaction till settlement in all of the following
independent scenarios.

(i) 100% advance payment was made on 1 July 2017.

(ii) 40% advance payment was made on 1 July 2017 and remaining payment was made
on 31 March 2018.
(iii) 50% payment was made on 1 Oct 2017 and 50% payment was made on 31 March
2019.

CI-2 A plant was imported at 1 July 2017 of USD 10,000 when conversion rate was
PKR/USD 115. At 31 December 2017 and 2018 such rate was 118 and 135 respectively.
Plant has a useful life of 10 year and is being depreciated under straight line method. Plant
was revalued at 31 December 2018 at following fair value:

(a) USD 7,000

(b) USD 9,000

Required:

Prepare extract of statement of profit or loss and other comprehensive income and
statement of financial position for the year ended 31 December 2018 under both of the
above independent scenarios (Fair values).

CI-3 ABC Ltd is registered in Pakistan. At 1 July 2017 it purchased 5,000 shares of XYZ Ltd
which is listed in New York Stock Exchange (NYSE) at US$ 3 each. Total transaction cost
was US$ 50. On 20 December 2017 announced interim dividend of 20 cents per share. ABC
received dividend on 5 January 2018. At 31 Dec 2017 market value per share was $3.5.

Exchange rate detail is as follows:

PKR/USD
1 July 2017 110
20 Dec 2017 114
31 Dec 2017 115
5 Jan 2018 117

Required:

Record the above transaction by assuming that investments is classified as:

(a) FVTPL
(b) FVTOCI

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Chapter - 12 IAS-21 The effect of change in foreign exchange rates

CI-4 E-Mart registered in Pakistan in November 2017 for selling goods online thru its
website in all over the world but all sales invoices will be made in USD.

During the month of December, it sold goods of US$ 25,000 evenly throughout the month
and received 40% out of which 70% converted into Rs 795,000 and remaining are banked in
US $ account. 60% of the sales recoveries are pending at year end.

Followings are the relevant exchange rates:

PKR/USD
1 December 2017 113
31 December 2017 114
December Avg 113.6

Required:

Compute the impact of above transactions of the financial statements for the year ended 31
December 2017.

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Chapter - 12 IAS-21 The effect of change in foreign exchange rates

Practice Questions
PQ-1

Kangaroo Limited (KL), a Pakistan based company, is preparing its financial statements for
the year ended 31 December 2017. Following transactions were carried out during the year.

KL purchased an investment property in United States for USD 2.6 million. 10% advance
payment was made on 1 May 2017 and 70% payment was made on 1 July 2017 on transfer
of title and possession of the property. The remaining amount was paid on 1 August 2017.

On 1 September 2017, KL rented out this property at annual rent of USD 0.24 million for one
year and received full amount in advance on the same date.

KL uses fair value model for its investment property. On 31 December 2017, an independent
valuer determined that fair value of the property was USD 2.5 million.

Following spot exchange rates are available:

Date 1-May-2017 1-Jul-2017 1-Aug-2017 1-Sept-2017 31-Dec-2017

USD 1 Rs. 100 Rs. 105 Rs. 108 Rs. 110 Rs. 116

Following average exchange rates are also available:

Period 2017 Jul to Dec 2017 Sep to Dec 2017

USD 1 Rs. 105 Rs. 111 Rs. 113

Required:

Prepare the extracts relevant to the above transactions from KL’s statements of financial
position and comprehensive income for the year ended 31 December 2017, in accordance
with the IFRSs. (Comparative figures and notes to the financial statements are not required).

PQ-2

Omega Limited (OL) is incorporated and listed in Pakistan. On 1 May 2012, it acquired
20,000 ordinary shares (2% shareholding) in Al-Wadi Limited (AWL), a Dubai based
company at a cost of AED 240,000 which was equivalent to Rs. 6,000,000. The face value of
the shares is AED 10 each. OL intends to hold the shares to avail benefits of regular
dividends and capital gains.

On 1 June 2013, AWL was acquired by Hilal Limited (HL), which issued three shares in HL
in exchange for every four shares held in AWL.

Other relevant information is as under:

AWL HL
Final dividend received on 31 March 2013:
Cash 15% -
Bonus shares 10% -
Final cash dividend received on 10 April 2014 - 20%
Fair value per share as at: 31 December 2012 AED 13.00 -
1 June 2013 AED 14.00 AED 18.00
31 December 2013 - AED 19.50

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Chapter - 12 IAS-21 The effect of change in foreign exchange rates

Exchange rates on various dates were as follows:

31-Dec-2012 31-Mar-2013 1-Jun-2013 31-Dec-2013 10-Apr-2014

1 AED Rs. 25.00 Rs. 26.50 Rs. 28.00 Rs. 28.70 Rs. 28.20

Required:

Determine the amounts (duly classified under appropriate heads) that would be included in
OL’s statement of comprehensive income for the year ended 31 December 2013 in respect
of the above investment.

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Chapter - 12 IAS-21 The effect of change in foreign exchange rates

Solution of Practice Questions

SOLUTION NO. PQ-1

Kangaroo Limited
Statement of Financial Position
As on 31 December 2017

Assets Rs. in million

Investment property (W-1) 290.00
Liabilities
Unearned rent (0.24 × 8 ÷12 × 110) 17.60

Profit and Loss account

Rs. in million
Exchange loss on 20% payment (2.6 × 20% × (105 – 108) (1.56)
Increase in fair value of investment property (W-1) 18.30
Rent income (0.24 × 4÷12 × 110) 8.80

W-1: Investment property Rs. in million

Advance payment (2.6 × 10% × 100) 26.00
Initial recognition (2.6 × 70% × 105) 191.10
(2.6 × 20% × 105) 54.60
Total cost 271.70
Fair value (2.5 × 116) 290.00
Gain (P & L) 18.30

SOLUTION NO. PQ-2

Omega Limited
Extract from Statement of comprehensive income for the year ended 31 December 2013

Rupees
Profit for the year:
Dividend received from AWL (20,000*10*15%*26.5) 795,000
Transfer of FV gain reserve of 31-12-2012, on W.1 500,000
derecognition of AWL investment
FV / exchange gains on valuation of AWL shares on 1- W.1 2,124,000
6-2013
Loss on de-recognition of AWL' shares W.1 (308,000)
Other comprehensive income:
FV gain/(loss) on investment available for sale W.1 693,000
Exchange gain on investment available for sale W.1 225,225

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Chapter - 12 IAS-21 The effect of change in foreign exchange rates

W-1

Date No. of FV Investment Gain / Remarks

shares per (loss)
share
AED AED Conv.@ Rupees Rupees
1-May-2012 20,000 12.00 240,000 25.00 6,000,000
31-Dec-2012 20,000 13.00 260,000 25.00 6,500,000 500,000 FV gain
1-Jun-2013 22,000 14.00 308,000 28.00 8,624,000 2,124,000 Gain on
(20,000x1.1) valuation
of AWL on
its
acquisition
by HL
1-Jun-2013 16,500 18.00 297,000 28.00 8,316,000 (308,000) Loss on
(22,000/4*3) de-
recognition
of AWL
shares
31-Dec-2013 16,500 19.50 321,750 28.00 9,009,000 693,000 FV gain
31-Dec-2013 16,500 19.50 321,750 28.70 9,234,225 225,225 Exchange
gain
3,234,225

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Chapter - 12 IAS-21 The effect of change in foreign exchange rates

Past Papers
PP-1

Copper Limited (CL) entered into following transactions during the year ended 30 June 2019:

On 1 October 2018, CL imported a machine from China for USD 250,000 against 60%
advance payment which was made on 1 July 2018. The remaining payment was made on 1
April 2019.

On 1 January 2019, CL sold goods to a Dubai based company for USD 40,000 on credit. CL
received 25% amount on 1 April 2019, however, the remaining amount is still outstanding

Following exchange rates are available:

Date 1 Jul 2018 1 Oct 2018 1 Jan 2019 1 Apr 2019 30 Jun 2019 Average
1 USD Rs. 121 Rs. 124 Rs. 137 Rs. 140 Rs. 163 Rs. 135

Required:

Prepare journal entries in CL’s books to record the above transactions for the year ended 30
June 2019. (Aut-19, Q-1, Marks-08)

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