IAS 21 – Effects of Foreign

currency Transaction
 Introduction
A co may engage in foreign currency operation in
two ways:
a) Entering directly into transactions which are
denominated in foreign currencies
b) Conducting foreign operations through a
foreign entity (Subsidiary and associate).
The resultant transaction and balance must
translated into the presentation currency of
entity for inclusion in financial statements.
 Key issues
 Exchange rate to be used for transaction.
 The treatment of exchange differencies (which
arise because exchange rates vary overtime)
 Scope
 IAS 21 is applied
 To account for translation in foreign currencies.
 To translate the financial statement of foreign
operations that are included in the financial
statements of the entity by consolidation.
However the standard doesn’t deal with hedging
accounting foreign currency.
 Terminologies
i. Functional Currency:The currency of the
primary economic environment in which the
entity operates.e.g.mk for all companies in
Malawi.
ii. Presentation currency: The currency in
which financial statement are presented.
iii. Foreign currency : a currency other than
function currency of the entity.
 Cont’s
• Closing rate: The spot exchange rate at the
end of the reporting period.
• Monetary items: Money held and assets and
laibilities to be received or paid in fixed or
determinable number of units of currency.
• Spot exchange rate: The exchange rate for
immediate delivery.
 Cont’s
• Net investment in foreign currency: The
amount of the reporting entity’s interest in the
net asset of that operation.
• Foreign Operation: A subsidiary associated
joint venture or brand of the reporting entity,
the activities of which are based on conducted
in a country or currency other than country of
the reporting entity.
 BASIC TRANSACTION
• Initial Recognition
– It is initially recorded in an entity functional
currency using the spot exchange rate on the date
of the transaction.
– Any exchange differences arising on settlement of
a foreign currency transaction in the same
reporting period must be recognised in profit and
loss for the period.
 Subsequent Recognition
• At the endof each reporting,any foreign monetary item
must be retranslated using the closing exchange rate
• Any differences arising on retranslation be recognised
in profit or loss for the period.
• Non-Monetary items measured at fair value translated
using; the exchange rate when the value was
measured.
• Non- monetary items measured at historical cost are
translated at the exchange rate at the date of
transaction.
 Example of Forex transaction
• Aston has a year end of 31 December. On 25 October, Aston
goods from a Mexican supplier for 286,000 pesos.
• The goods were still in inventory at the year end.
• Exchange rates Pesos to $
• 25October 11.16
• 16 November 10.87
• 31 December 11.02
• Required
• Show the accounting entries for the transaction in each of the
following situations.
• a) on 16 November Aston pays the Mexican
supplier in full.
• b) the supplier remains unpaid at the year
end.
Consolidated Financial Statement
• Nature of Exchange Difference
The closing net assets figure comes from two
sources: a)Last year’s net assets
b) Profit from the period
The closing figure has been translated at a
different rate to its component figures.
 Cont’s
• Exchange difference on consolidation comes
from two sources:
– Restatement of opening net assets
– Translating retained profit at one rate and the net
assets at another rate.
 Determinants of functional currency
• The currency that mainly influences the
selling price of goods or services.
• The currency of the country whose
regulations mainly determine the selling
price of goods and services.
• The currency that affects labour,material and
other costs of providing goods and services.
 Secondary factors determinants
• The currency in which funds from financing
activities are generated.
• The currency in which monies from operating
activities are kept.
 Translation Rules
• Statement of financial position
Non current assets - closing rate
Goodwill - closing rate
Inventory - closing rate
Monetary items - closing rate
Share capital - historical rate
Pre- acquisition reserves- historical rate
• Statement of Comprehensive income
All items – an average rate
Calculation of Exchange difference
$
• Net assets of s:
• Closing (at closing rate) X
• Opening(at opening rate) (x)
• X
• Retained profit (average rate) (x)
• Exchange difference X
To P’s
 Disposal of Foreign Operation
• On disposal of foreign operation,cumulative
amount of the exchange differences which
have been deferred and which relate to that
foreign entity are recognised as income or as
expenses in the same period in which the gain
or loss on disposal is recognised.(Statement of
comprehensive Income)
 Cont’s
• Partial Disposal
• In the case of a partial disposal, only the
proportionate share of the related
accumulated exchange differences in included
in the gain or loss.
 Disclosure
• The amount of exchange differences included in
profit or loss for the period.
• Net exchange differences shown within OCI and a
reconciliation of the amount of such exchange
differences at the beginning and end of the period.
• When presentation currency is different to the
functional currency that fact must be stated along
with what is functional currency is and reason for
using a different reporting currency.
• Any changes in functional currency and the reason
for the change.