IAS 21: Accounting Foreign Currency Transaction & Financial Statement Translation

Accounting For Foreign Currency Transactions
&
IAS 21
Translation of Financial Statement
01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

CHAPTER
REVIEWS
S
Course Class Presentation Outlines….
LEARNING OBJECTIVES After studying this chapters you should be able to
1. Understand Underlying basic concept of foreign 5. Describe the disclosure requirements of IAS
currency.. regulations in respect of foreign currency
2. Recognition and measurement Issues: IAS 21 translation
3. Important exchange currency terminology: 6. Translation to the presentation currency
 Functional and Presentation Currency 7. Tax Effects on foreign currency transaction
4. Understand meaning of conversion and translation.

Introduction
 In Today world economy, international business transactions are regular
occurrence.
 In a global economy most companies operating in other place, trade
overseas, buying and selling assets in foreign currencies.
 In fact, countries use Local currencies as functional currencies..
For all local trade…
-----------------------------------------------------------------------------------------------
o But, for international trade they expected to use to use currency
other than local currency to record transactions and translate
monetary and non-monetary items at the reporting date.
.i.e.used to buys or sells good or service
IAS 21:
Scope & Underlying Objective
Individual companies transaction Groups often contain overseas entities
 Let assume that Let assume that Ethiopian company
Ethiopian company: has a Kenyan subsidiary:-
Take a loan or  Financial statements prepared in
Shilling, but will need to be T
 Sold on credit.
 Required to translated into Ethiopia for
 Accounting Issues the purpose of preparing the group’s
 Transaction date consolidated financial statements.
 Subsequent date  Accounting Issues
 Method to Translate
 Effect of translation treatment
Foreign trade
• The underlying objective is to accurately
• Whenever a transaction measure the impact of the transaction on the
denominated in a foreign company and to facilitate integration with
the company’s other financial information.
currency occurs……
-----------------------------------------------------
• Responsibilities of the
accountant or others The major accounting issue:
too must determine how
best to record it in to i. On transaction date.
their local ii. Future period or other interim case
currencies..i.e.
Ethiopian, or Kenyan,
other countries currency

IAS 21
Measurement and Recognition
 Initial recognition:- Subsequent Recognition.
 This apply when For all Buying/Selling/ Borrowing/Lending/Receive
dividends in other currency transaction….. Closing rate:
• On transaction date:
o Balance sheet date rate..
o Spot rate (Historical rate)
o An average rate o Used for monetary items…
 If exchange rates do not fluctuate significantly. Historical rate:
 If company purchases goods on most o Transaction date rate.
days(ongoing basis) in the foreign currency
and difficult to administrate spot rate.. o Used for a non-monetary
items
Spot Rate: The exchange rate that is available today.
Monetary Items Non-Monetary Items
• Monetary items: Units of • They include tangible non-

currency held, or assets and current assets, investments in
liabilities to be received or paid other companies, investment
(in cash), in a fixed number of properties and deferred taxation
currency units. (which is a notional amount of
• Examples of monetary items tax rather than an actual amount
include cash itself, loans, trade of tax payable.)
payables, trade receivables and
interest payable.

1
IAS 21
Measurement and Recognition • A Ethiopian company (with the Eth Br as its
functional currency) has a financial year
 Initial recognition:- ending on 31 December.
 This apply when For all Buying/Selling/ Borrowing/Lending/Receive • It buys goods on account from an US
dividends in other currency transaction….. supplier (with the US dollar as its functional
• On transaction date: currency) on 1 December 20X6 invoiced in
$10,000 when 1 December 20X6 BR.35/$1
• The US supplier is eventually paid in March
o An average rate 20X7.
 If exchange rates do not fluctuate significantly.
 If company purchases goods on most Purchase 350,000
and difficult to administrate spot rate.. Acc/Payable 350,000

IAS 21
Measurement and Recognition Note that for practical purposes, if
the entity buys items in $
 Initial recognition:- frequently on going basis, it may
 This apply when For all Buying/Selling/ Borrowing/Lending/Receive be able to use an average spot rate
dividends in other currency transaction…..
for a period as a policy, for all
• On transaction date:
transactions during that period.
o An average rate
 If exchange rates do not fluctuate significantly.
 If company purchases goods on most
and difficult to administrate spot rate..

2
IAS 21
Subsequent Recognition:- On 31
Measurement and Recognition
December 20X6
• 1 December 20X6 Br.35/$1
• 31 December 20X6 Br.38/$1 Subsequent Recognition.
Closing rate:
Statement of loss 30,000 o Balance sheet date rate..
Acc/Payable 30,000 o Used for monetary items…
Historical rate:
Activities Exchange Rate BR
Initial Liability Br.35/$1 350,000
o Transaction date rate.
Exchange Adj Loss Br.38/$1 30,000 o Used for a non-monetary
Total Liability Br.38*10,000 380,000 items

• A Pakistani company (with the rupee as its IAS 21
functional currency) has a financial year ending Measurement and
on 31 December. Recognition
• It bought a building in Bahrain on 1 December
20X6 for 100,000 Bahraini dinar (BD). Subsequent
• The building was revalued to BD 120,000 on 31
Recognition.
December 20X6 as permitted by IAS 16.
Closing rate:
Exchange rates:
o Balance sheet date rate..
1 December 20X6 Rs.275/BD1
31 December 20X6 Rs.290/BD1 o Used for monetary items…
Historical rate:
PPE 275,000,000
o Used for a non-monetary
Acc/Payable 275,000,000 items
On 1 December 20X6
• A Pakistani company (with the rupee as its IAS 21
functional currency) has a financial year ending Measurement and
on 31 December. Recognition
• It bought a building in Bahrain on 1 December
20X6 for 100,000 Bahraini dinar (BD). Subsequent
• The building was revalued to BD 120,000 on 31 Recognition.
December 20X6 as permitted by IAS 16.
Closing rate:
Exchange rates: o Balance sheet date rate..
1 December 20X6 Rs.275/BD1 o Used for monetary items…
31 December 20X6 Rs.290/BD1
Historical rate:
PPE 7,300,000
o Used for a non-monetary
OCI 7,300,000 items
(5,800,000 + 1,500,000)
01/22/2021 On 31 December 20X6Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

Additional Transaction Example
On
On12/1/08,
12/1/08,Nuuk
Nuuksells
sellsinventory
inventoryto
toCoventry
CoventryCorp.
Corp.on
oncredit.
credit. Coventry
Coventry
will
willpay
payNuuk
NuukPound
Pound10,000
10,000inin90
90days.
days.
The
Thecurrent
currentexchange
exchangerate
rateisisPound
Pound11==.6425
.6425£.£.
Prepare
PrepareNuuk’s
Nuuk’sjournal
journalentry.
entry.
Nuuk's
BOBCO'sGeneral
GENERAL
Journal
JOURNAL Page 34
34
Date
Date Description
Description Debit
Debit Credit
Credit
Dec 1 A/R (to be collected in £) 15,564
Sales 15,564
On transaction 10,000£ ÷ .6425 = $15,564
date amounts rounded

Additional Transaction Example
On
On12/31/08,
12/31/08,the
theexchange
exchangerate
rateisisPound
Pound11==.64£.
.64£.
At
Atthe
thebalance
balancesheet
sheetdate
datewe
wehave
haveto
to“remeasure”,
“remeasure”,ororadjust,
adjust,the
the
original
originalA/R
A/Rto
tothe
thecurrent
currentexchange
exchangerate.
rate.
BOBCO's GENERAL
Nuuk's General JOURNAL
Journal Page
Page 34
34
Date
Date Description
Description Debit
Debit Credit
Credit
Dec 31 A/R 61
Foreign Exchange Gain 61
On balance $15,564 - (10,000£ ÷ .6400)
sheet date amounts rounded

Exchange Gain and Loss
Profit and Loss Statement
Operating Income
Operating Expense
Net Operating Income Balance Sheet
Pluss: Other non operating income  Assets section
Less: Other non operating expense  Liability section
Total taxable income  Capital section
Tax Rate (xx%) (OCI)
Income after tax
Other comprehensive income
(Unrealized Loss & Gain)
Total annual comprehensive Income

Foreign Exchange Transaction Example
• On 3/1/09, Coventry Corp. pays Nuuk the 10,000 for the 12/1/08
sale. The exchange rate on 3/1/09, was Pound 1 = .65£. On 3/1/09,
we have to do TWO things. First, we must “remeasure” the A/R.
Second, we must record receipt of the £.
On payment date
Nuuk's General Journal Page 34 Nuuk's General Journal Page 34
Date Description Debit Credit Date Description Debit Credit
Mar 1 Foreign Exchange Loss 240 Mar 1 Cash 15,385
A/R 240 A/R 15,385
$15,625 - (10,000£ ÷ .6500)
amounts rounded

Exchange Gain and Loss
Profit and Loss Statement
Operating Income
Operating Expense
Net Operating Income Balance Sheet
Pluss: Other non operating income  Assets section
Less: Other non operating expense  Liability section
Total taxable income  Capital section
Tax Rate (xx%) NO IN THIS SECTION
Income after tax (Realized)
Other comprehensive income
(Unrealized Loss & Gain)
Total annual comprehensive Income

On transaction date 12/1/08 $1 = .6425 £.
On B/sheet date 12/31/08 $1 = .64£.
On payment date 3/1/09, $1 = .65£.
Important other accounting issues…….

Important terms/definitions

Important terms/definitions
• Reporting Currency – is the currency in which the parent company prepares its
financial statements;
• Foreign Currency any currency other than the reporting currency of the parent
company. Exchange rate.
• Local Currency is the currency unit used in a country referenced. Eg Eth-Birr..
• Foreign Operation a subsidiary, associate, joint venture, or branch whose
activities are based in a country other than that of the reporting enterprise.
• Closing rate. The spot exchange rate at the year end date.
• Spot exchange rate. The exchange rate for immediate delivery.
• Exchange difference. The difference resulting from translating a given number
of units of one currency into another currency at different exchange rates.
Functional Currency
 The currency of the primary economic
The currency that mainly influences
environment in which an entity operates.
• Sales prices for goods and services
 Currency used for book keeping and
Financial statement. • Labor, material and other costs of
 This applies to stand-alone entities, parent providing goods or services.
companies and foreign operations..  The currency in which funds are
 Used to differentiate: Subsidiary Company generated by issuing debt and equity
is:-  The currency in which receipts from
o Self contained and Integrated to local operating activities are usually retained.
environment.
o Extension and Integrated to parent On this both IFRS & GAAP give emphases to the
company primary economic environment in determining an
entity’s functional currency.
However, US GAAP has no hierarchy of indicators. In
practice, there is a greater focus on the cash flows
rather than the currency that influences the pricing.
P is a UK-registered mining company whose shares are traded on the London
Stock Exchange. Its operating activities take place in the gold and diamond mines
of South Africa.
(a) What is the presentation currency of P?
(b) What is its functional currency?
Answer
(a) The presentation currency (reporting currency) is sterling (UK pounds). This is a
requirement of the UK financial markets regulator for UK listed companies.
(b) The functional currency is likely to be South African rand, even though the
company is based in the UK. This is because its operating activities take place in
South Africa and so the company will be economically dependent on the rand if
the salaries of most of its employees, and most operating expenses and sales are
in rand.
Conversion Translation
• Foreign currency translation, as distinct from
• Conversion is the process conversion, does not involve the act of
of exchanging amounts exchanging one currency for another.
of one foreign currency • Translation is required at the end of an
for another. accounting period when a company still holds
• Gains and losses: Possible assets or liabilities in its statement of financial
position which were obtained or incurred in a
o Reported as profit or
foreign currency.
loss..
 Any differences (Conversion) in exchanging monetary items
(receivable, Payable, loan cash etc..):
• Reported as profit or loss statement
 Any difference in exchange of non monetary items. (Revaluation of PPE)
• Reported as OCI…..

Conversion Translation
• Conversion is the process • Foreign currency translation, as distinct
of exchanging amounts from conversion, does not involve the act of
of one foreign currency exchanging one currency for another.
for another. • Translation is required at the end of an
• Gains and losses accounting period when a company still
holds assets or liabilities in its statement of
o Reported as profit or financial position which were obtained or
loss.. incurred in a foreign currency.
• IFRS: Recognized Gain or loss on partial disposal of foreign

operation.
• GAAP: Recognized gain or loss only on substantial or complete
disposal of foreign operation.
• Companies has get foreign • For example, suppose a local company buys a
currencies to pay the large consignment of goods from a supplier in
supplier . Germany. The order is placed on 1 May and the
• On payment date. agreed price is €124,250. At the time of delivery
However, if the rate of the rate of foreign exchange was €3.50 to $1.
exchange has altered to
€3.55 to $1, the cost of • The local company would record the amount
raising €124,250 would be owed in its books as follows.
(÷ 3.55)=$35,000. Inventory account (124,250 ÷ 3.5) $35,500
Payables account $35,500
€3.50 to $1
Since it would be administratively On payment date
difficult to alter the value of the Payables account $35,500
inventories in the company’s Cash
books of account, it is more Profit on conversion $500
$35,000
appropriate to record a profit on
conversion of $500.
€3.55 to $1
01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia. Conversion

• Suppose that another home company sells
goods to a Chinese company, and it is agreed
that payment should be made in Chinese Yuan
When the Y116,000 are paid, at a price of Y116,000.
the local company will convert • We will further assume that the exchange rate
them into $, to obtain (÷ 10.8) at the time of sale is Y10.75 to $1, but when
$10,750. the debt is eventually paid, the rate has altered
In this example, there has been to Y10.8 to $1. The company would record the
a loss on conversion of $50 sale as follows:
which will be written off to
Receivables account (116,000 ÷ 10.75) $10,800
profit of loss for the year:
Sales account $10,800
Cash $10,750
Loss on conversion $50
Receivables account $10,800
01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia. Conversion
IAS 21: Translation of Financial Statements in Foreign Currency
Recording foreign transaction
Preparing financial translation
• Translation is required at the end of an accounting
period when a company still holds assets or
Parent liabilities in its statement of financial position
which were obtained or incurred in a foreign
currency.
 Parent subsidiaries relationship.
o Subsidiaries operated in different place
 The use of different exchange rates:-
o Current/Historical/others
o Unbalance balance sheet
Subsidiary • Need “Translation Adjustment”
• Increase/decrease…
Translation Exchange rates
 Translation Exchange Rates
Translation methods may employ a single rate or multiple rates. There are three alternative
exchange rates for translation of foreign subsidiary financial statements to parent: current rate,
historical rate, and average rate.
 Current Rate – exchange rate prevailing as of the financial statement date/ the
exchange rate that exists at the balance sheet date /end period/.
 Historical Rate – the exchange rate that exists when a transaction occurs purchase
date or business combination date or others.
 Average Rate – is simple or weighted average exchange rate of either current or
historical exchange rates.
Translation Methods and Exchange Rates
 Any differences in exchanging

monetary items (receivable, Payable,
loan cash etc..):
• Reported as profit or loss
statement
 Any difference in exchange of non
monetary items. (Revaluation of Ppe)
• Reported as OCI

Example
TEMPORAL METHOD
 A subsidiary of Byner Corporation has one asset
(inventory) and no liabilities.
If the sub’s - functional currency
is the US $, and high inflation…  The functional currency for this subsidiary is the
rand.
 The inventory was acquired for 100,000 rand
CURRENT METHOD when the exchange rate was $0.16 = 1 rand.
 Consolidated statements are to be produced,
and the current exchange rate is $0.19 = 1 rand.
If the sub’s - functional currency is the
book or records or local currencies
Which method is correct translation method
When functional currency is not highly
inflation

Example
TEMPORAL METHOD
 P is a UK-registered mining company whose
If the sub’s - functional currency shares are traded on the London Stock
is the US $, and high inflation… Exchange. Its operating activities take place in
the gold and diamond mines of South Africa..
CURRENT METHOD What is its functional currency?

Which method is correct translation method?
When functional currency is not highly

inflation

Example
TEMPORAL METHOD
 The standard IAS 21:- When various
If the sub’s - functional currency currencies involved in the entity’ economic
is the US $, and high inflation… environment.
E.g. Co is registered in India, however greater % of
sales are in EUR/USD, it buys raw materials in USD,
CURRENT METHOD
lab our costs are in INR. Generally any loans are in
INR….
how would we decide functional currency in this
When functional currency is not highly instance?
inflation

Translation methods
TEMPORAL METHOD Translation Method Translation Adjustment
If the sub’s - functional currency Temporal Reported on I/statement

Gain (loss) in Net Income
is the US $, and high inflation…
Current rate Reported on B/sheet
separate component of Other
Comprehensive Income
CURRENT METHOD (Stockholders’ Equity)
If the sub’s - functional currency is

the book or records or local In translation process, two financial
currencies
accounts required separate treatment.
When functional currency is not
highly inflation • Retained earning and cost of good sold

Highly Inflationary
Economies
In
In highly
highly inflationary
inflationary Cumulative three year inflation exceeds 100 percent
economies,
economies, mandates
mandates Why?
the
the use
use of
of the
the Temporal
Temporal
Method
Method forfor translation.
translation.
Disappearing
Disappearing Plant
Plant Problem
Problem
IfIfthe
theCurrent
CurrentMethod
Methodwere
wereused,
used,the
theUS
US$$equivalent
equivalent
would
wouldbe
beVERY
VERYsmall
smalldue
dueto
tothe
therapidly
rapidlyincreasing
increasing
exchange
exchangerate.
rate.
Result higher negative translation…

Translation Methods and Exchange Rates
 Any differences in exchanging

monetary items (receivable, Payable,
loan cash etc..):
• Reported as profit or loss
statement
 Any difference in exchange of non
monetary items. (Revaluation of Ppe)
• Reported as OCI

Since
SinceR/E
R/Eis
isaacomposite
compositeof
ofmany
manyprevious
previoustransactions,
transactions,translating
translating
R/E
R/Erequires
requiresspecial
specialattention.
attention.
Translation of
Retained Earnings
At
At the
the end
end of
of the
the first
first year
year of
of operations:
operations:
Net Income from the translated Net Income
=
in FC income statement in US $
Dividends in historical exchange Dividends in
x =
- FC rate when declared US $
Ending R/E Ending R/E
in FC in US $
Ending
Ending R/E
R/E from
from year
year 1,
1, becomes
becomes Beginning
Beginning
R/E
R/E in
in Year
Year 2.
2.
Calculation of Cost of Goods Sold
Current
Current Rate
Rate Method
Method--translate
translateusing
usingthe
the
weighted
weightedaverage
averagerate
ratefor
forthe
thecurrent
currentperiod.
period.
• COGS in FC X Average ER = COGS in $
Temporal
Temporal Method
Method--decompose
decomposeCOGS
COGSinto
intoits
its
component
componentparts
partsand
andtranslate
translateeach
eachpart
partusing
usingthethe
appropriate
appropriaterate
rate
Beginning Inventory × Historical Rate
+ Purchases × Average Rate
- Ending Inventory × Historical Rate
= COGS

It should be on the reason when the
Change of currency circumstances change. For
1. Change in functional currency example, if one company exactly
when they stopped selling in
 The standard IAS 21 requires applying Euro/other currencies and started
all the procedures related to the change to sell in others types of
in functional currency prospectively currencies..
from the date of change.
2. Change in presentation currency
 No restatement of previous period.
• The change in presentation currency
 You simply need to translate all items of
is a change in accounting policy and
assets and liabilities into the new
functional currency using the exchange it is applied retrospectively.
rate at the date of change • Required restatement of previous
period.

IAS 21: Accounting Foreign Currency Transaction & Financial Statement Translation

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

IAS 21: Accounting Foreign Currency Transaction & Financial Statement Translation

Uploaded by

Copyright:

Available Formats

Accounting For Foreign Currency Transactions

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

LEARNING OBJECTIVES After studying this chapters you should be able to

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

• Monetary items: Units of • They include tangible non-

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

Spot Rate: The exchange rate that is available today.

Spot Rate: The exchange rate that is available today.

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

01/22/2021 On 31 December 20X6Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

Important other accounting issues…….

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

• IFRS: Recognized Gain or loss on partial disposal of foreign

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia. Conversion

 Any differences in exchanging

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

CURRENT METHOD What is its functional currency?

When functional currency is not highly

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

If the sub’s - functional currency Temporal Reported on I/statement

If the sub’s - functional currency is

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

Result higher negative translation…

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

 Any differences in exchanging

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

01/22/2021 Prepared by Ass.Pro Mesfin Yemer@DDU, Ethiopia.

You might also like