Md.

Tareq Kamal, FCA, BBA & MBA (DU)

KPMG Bangladesh

IAS 21: Foreign Currency Translation

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.

Indicators of functional currency:

Primary indicators

 The currency that mainly influences sales prices for goods and services (often the currency in which prices
are denominated and settled)
 The currency of the country whose competitive forces and regulations mainly determine the sales prices
of its goods and services
 The currency that mainly influences labour, material and other costs of providing goods or services (often
the currency in which prices are denominated and settled)

Secondary indicators
 The currency in which funds from financing activities (raising loans and issuing equity) are generated
 The currency in which receipts from operating activities are usually retained

Reporting foreign currency transactions (We are talking about transaction gain/loss)

Rates used for assets, liabilities, incomes and expenses to translate foreign currency to functional currency

Initial Recognition
Income and Expense
Subsequent measurement
Monetary Items
Non-monetary items
Spot exchange rate for all items of assets and liabilities
Average rate close to actual rate, if there is high volume of transactions
average rate is may be used.
Closing Rate/ in case of FV measurement, determination of NRV spot rate is
used that means the rate when FV or NRV is measured.
The Rate when Historical cost is determined (Or in case of fair value
measurement, determination of NRV, revaluation of asset, impairment
review of asset the rate used at the date when they are measured or
determined)

Foreign Exchange Gain/Loss to be reported in Financial Statements

Items Exchange Gain/Loss reported to F/S

Monetary Items Profit and loss
Non-monetary Items OCI- When a gain or loss on a non-monetary item is
recognised as other comprehensive income

P & L- When a gain or loss (eg, fair value change) on a

non-monetary item is recognised in profit or loss

N.B. A particular monetary item where the gain/loss from instrument/item should be reported in OCI but the
foreign exchange gain/loss should be reported in P & L, (i.e. foreign currency bond held as AFS). As the instrument
is classified as FVOCI, gain/loss should be reported in OCI but as it is monetary item exchange gain/loss should
be reported in P & L.

Throughout the standard, it is very important to understand about ‘Monetary Item’ and ‘Non-monetary Item’
Md. Tareq Kamal, FCA, BBA & MBA (DU)
KPMG Bangladesh

Monetary Item:

The essential feature of a monetary item, as the definition implies, is the right to receive (or an obligation to deliver)
a fixed or determinable number of units of currency. Examples of monetary assets include the following:

employee benefits to be paid in cash

assets in which the fair value to be received (or delivered) equals a fixed or determinable number of units of currency

Non-monetary items

A non-monetary item does not give the right to receive or create the obligation to deliver a fixed or determinable
number of units of currency. Examples of non-monetary items include the following:

ery of a non-monetary asset

-for-sale financial assets

Measurement of financial assets

Initial measurement- At spot rate whether the instrument is measured at fair value or amortised cost

Subsequent measurement-

Measurement Basis Rate Used Recognition of exchange

differences
Amortised cost: Monetary Item Closing Rate P&L
Non-monetary Historical Rate OCI/P&L
Fair value: Both Monetary and Non- Spot rate when FV is determined Monetary Item- P & L
monetary Non-monetary Item- OCI/
P&L
From above chart we understand the Forex gain/loss always follow the rules of monetary and non-monetary items.
Where the particular item’s gain/loss follows the rules of respective IAS/IFRS.

Exceptions to the general rule:

(a) A monetary item designated as a hedge of a net investment in consolidated financial statements. In this case any
exchange difference that forms part of the gain or loss on the hedging instrument is recognised as other comprehensive
income.
(b) A monetary item designated as a hedging instrument in a cash flow hedge. In this case any exchange difference
that forms part of the gain or loss on the hedging instrument is recognised as other comprehensive income.
Md. Tareq Kamal, FCA, BBA & MBA (DU)
KPMG Bangladesh
(c) Exchange differences arising in respect of monetary items which are part of the net investment are recognised in
profit or loss in the individual financial statements of the entity or foreign operation as appropriate. However, in the
consolidated statement of financial position the exchange differences are recognised in equity.

Foreign currency translation of financial statements (Now we are talking about translation gain/loss)

Assets and Liabilities Closing Rate

Income and Expenses Average Rate closed to Actual Rate
Equity = Net Asset Closing Rate
Foreign Exchange gain on retranslation shall be reported in OCI and classified as a separate component of equity.

Goodwill and fair value adjustments

Use closing rate to retranslate into functional currency and exchange difference should be reported in OCI as
considering non-monetary item. We use the exchange rate at the date reporting date and the exchange difference arises
between current year and previous year exchange rate that should be reported to OCI.

Intra-group trading transactions

In consolidated FS, Intra-group transactions may need be eliminated but foreign exchange impact of such transaction
should not be eliminated and may need to be presented in consolidated FS.

Intercompany dividends

Dividends paid in a foreign currency during a period by a subsidiary to its parent may lead to exchange differences
being reported in the parent's financial statements. This will be the case where the dividend is recognised at the
transaction date, being the date on which the parent recognises the receivable, but receipt is not until a later date and
exchange rates have moved during this period. As with other intragroup exchange differences, these amounts should
not be eliminated on consolidation.

Disposal of a foreign operation

On the disposal of a foreign operation, the cumulative amount of exchange differences, which has been reported as
other comprehensive income and is accumulated in a separate component of equity relating to the foreign
operation, shall be recognised in profit or loss, along with gain or loss on disposal when it is recognised.