IAS 21

THE EFFECTS OF CHANGES IN FOREIGN

EXCHANGE RATES

1
PLANNING
Lecture 1 Slides 1 – 38
Lecture 2 Class examples 1 – 5
Lecture 3 Class example 6; Remaining slides; Class question 1
Lecture 4 Class example 7; Class question 2 (practical)

ILP Tuesday, 3 October 2023

Structured tut None

2
STUDY MATERIAL

• IAS 21 Effects of changes in foreign exchange rates

• Class questions
• Class examples
• Self study questions
• ILP question

3
PARAGRAPHS EXCLUDED FOR FA278

• Par 14 – hyper inflation

• Par 27 – hedge accounting
• Par 35 – 37 – change in FC (postgrad)
• Par 42 – 43 – hyper inflation
• Par 48 – 49 – sale of FO (postgrad)
• Par 50 – Tax effect (done in FA 379)
• Par 54 – disclosure postgrad

4
 PARAGRAPHS DISCUSSED IN IAS21: FOREIGN
OPERATIONS (Later this year)
• Par 8 – Definition of: Foreign operation
: Investment in foreign operations
• Par 11 – Considerations ito FC
• Par 15 and 15A – Net investment in FO
• Par 18 – Summary of approach for compilation of group
statements with FO
• Par 32 – 33 – Recognition of foreign exchange differences
from net investment in FO
• Par 41 – Foreign currency translation reserve
• Par 44 – 47 – Translation of FO to holder’s PC

5
 LEARNING
OUTCOMES
Application of guidelines to determine the
functional currency of an entity
Accounting of transactions in the functional
currency of an entity (initially as well as after
transaction date)
Translation from the functional to the
presentation currency of an entity’s separate
financial statements
Disclosure of foreign exchange transactions
IAS 21 is a pervasive topic and students must
be able to integrate IAS 21 with any other topic!

6
 BASIC CONCEPTS

NY
S
NEW YORK STATIONERY INC.

Invoice 7854
15 May 2020

5 x Modern design notebooks

$27
10 x Sticky notes
$15
How do we account
5 x Limited for gel
editions thepens
purchase transaction
denominated in USD $35 in our records (ZAR)?

How will the accountingTotal

differ when
$77 purchase on credit?
7
SUMMARY OF APPROACH (par 17)

Each entity determines its Functional currency (FC), translate

and account foreign currency items in FC of the entity
Functional currency (FC): (par 8)
Currency of primary economic environment in which the entity
operates

Foreign currency: (par 8)

A currency other than the functional currency of the entity

8
 ELABORATION ON DEFINITIONS (par 9 – 10,
12 - 13, 16)

Functional Currency:
Factors to consider (Par 9):
• Currency that mainly influence sales prices (normally
currency that SP’s are denominated in)
• Currency of country whose competitive forces and
regulations mainly determine the sales prices
• Currency that mainly influences labour costs, material
costs, etc.

9
ELABORATION ON DEFINITIONS (par 9 – 10,
12 - 13, 16)
Functional Currency (cont.):
Additional factors that may provide evidence (par. 10)
• currency in which financing is generate
• currency in which receipts from operating activities are
usually retained
When above factors are mixed, management uses
judgement to determine the FC that best reflect the
economic effects of the underlying transactions, events
and conditions (par. 12)
• Management gives priority to the par 9 considerations,
before considering the indicators of par 10

10
ELABORATION ON DEFINITIONS (par 9 – 10,
12 - 13, 16)

Functional Currency (cont.):

FC is determined to reflect the underlying transactions,
events and conditions. If the FC is determined, it is not
changed unless the underlying transactions, events and
conditions change (par. 13)

11
RECORDING FOREIGN CURRENCY
TRANSACTIONS IN FC (par 20 – 31,34)
Initial recognition
• Translate foreign currency to FC at spot rate on
transaction date (par 21)

Spot exchange rate (par 8)

The exchange rate for immediate delivery

Exchange rate (par 8)

Ratio of exchange for two currencies

12
RECORDING FOREIGN CURRENCY
TRANSACTIONS IN FC (par 20 – 31,34)
Initial recognition (cont.)
• Translate foreign currency to FC at spot rate on
transaction date (par 21)
Transaction date (par 22)
Date on which transaction qualifies for recognition in
accordance with IFRS

• For practical reasons spot rate may be average rate. If

exchange rate fluctuates significantly, it is not appropriate
(par 22)

13
 RECORDING FOREIGN CURRENCY
TRANSACTIONS IN FC (par 20 – 31,34)
Reporting at the end of subsequent reporting periods
At the end of each reporting period the following items must
be translated: (par 23)

Monetary items Non-Monetary Non-Monetary

items @ items @ fair
historical costs value
14
RECORDING FOREIGN CURRENCY
TRANSACTIONS IN FC (par 20 – 31,34)
Reporting at the end of subsequent reporting periods
(cont.)
• Monetary items (par 23)
Monetary items (par 8)
Units of currency held and assets & liabilities receivable or
payable in fixed or determinable number of units of currency.
(For elaboration of definition and examples see par 16)
Translate @ closing rate
Closing rate (par 8)
The spot exchange rate at end of reporting period (i.e. SFP
date)
15
 Transaction
date
EXAMPLE
Purchase property in the USA on 31 March 2020 for
$100 000. FC = ZAR.
Payment occurs on 15 May 2020. YE = 30 April 2020.
No depreciation applicable for yr.
Applicable exchange rates are as follows: Reporting
date
Date USD = 1
31/03/2020 17.88
30/04/2020 18.27

Monetary item?
Non-monetary item?

16
 Transaction
date
EXAMPLE
Purchase property in the USA on 31 March 2020 for
$100 000. FC = ZAR.
Payment occurs on 15 May 2020. YE = 30 April 2020.
No depreciation applicable for yr.
Applicable exchange rates are as follows: Reporting
date
Date USD = 1
31/03/2020 17.88
30/04/2020 18.27

Monetary item = Creditor

Non-monetary item?

17
 Transaction
date
EXAMPLE
Purchase property in USA on 31 March 2020 for $100 000.
FC = ZAR. Payment occurs on 15 May 2020.
YE = 30 April 2020.
No depreciation applicable for yr.
Applicable exchange rates are as follows: Reporting
date
Date USD = 1
31/03/2020 17.88
30/04/2020 18.27

Monetary item = Creditor

Transaction date = $100 000 x 17.88 = 1 788 000
Reporting date = $100 000 x 18.27 = 1 827 000
18
RECORDING FOREIGN CURRENCY
TRANSACTIONS IN FC (par 20 – 31,34)
Reporting at the end of subsequent reporting periods
• Non-monetary items measured at historical cost
Non-monetary items (par 16)
Absence of a right to receive (or an obligation to deliver) a
fixed or determinable number of units of currency
(Also see examples)

Translate @ exchange rate on transaction date

(Thus, no remeasurement at end of reporting period)

19
 Transaction
date
EXAMPLE
Purchase property in USA on 31 March 2020 for $100 000.
Payment occurs on 15 May 2020. YE = 30 April 2020. No
deprecation applicable for 30 April 2020.
Applicable exchange rates are as follows:
Reporting
Date USD = 1 date
31/03/2020 17.88
30/04/2020 18.27

Non-Monetary item = Property

Transaction date = $100 000 x 17.88 = 1 788 000
Reporting date = $100 000 x 17.88 = 1 788 000
20
RECORDING FOREIGN CURRENCY
TRANSACTIONS IN FC (par 20 – 31,34)
Reporting at the end of subsequent reporting periods
• Non-monetary items measured at fair value: (par 23)
Fair value (par 8)
Refer to IFRS13

translate @ exchange rate at date when fair

value was determined

21
 Transaction
date
EXAMPLE
Purchase property in USA on 31 March 2020 for $100 000
FC = ZAR. Payment occurs on 15 May 2020.
YE = 30 April 2020. FV of property on YE is $95 000.
Reporting
Applicable exchange rates are as follows: date
Date USD = 1
31/03/2020 17.88
30/04/2020 18.27

Non-Monetary item @ FV = Property (IAS 40)

Transaction date = $100 000 x 17.88 = 1 788 000
Reporting date = $95 000 x 18.27 = 1 735 650
22
RECORDING FOREIGN CURRENCY
TRANSACTIONS (par 20 – 31,34)

Recognition of exchange differences

Exchange difference (par 8)

Difference resulting from translating a given number of units
of one currency into another currency at different exchange
rates

23
RECORDING FOREIGN CURRENCY
TRANSACTIONS (par 20 – 31,34)
Recognition of exchange differences (cont.)
• Exchange differences arises from settlement / translation
of monetary items
• Recognise in profit or loss (par 28)

24
 Transaction
date
EXAMPLE
Purchase property in USA on 31 March 2020 for $100 000.
FC = ZAR. Payment occurs on 15 May 2020.
YE = 30 April 2020.
Applicable exchange rates are as follows:
Reporting
date
Date USD = 1
31/03/2020 17.88
30/04/2020 18.27

Monetary item = Creditor Diff =

Transaction date = $100 000 x 17.88 = 1 788 000 Exchance
Reporting date = $100 000 x 18.27 = 1 827 000 diff (P/L)

25
RECORDING FOREIGN CURRENCY
TRANSACTIONS (par 20 – 31,34)
Recognition of exchange differences (cont.)
• Exchange differences that is part of a profit or loss on
non-monetary items
• Recognise where the profit or loss is recognised (either
P/L or OCI) (par 30)

26
 Transaction
date
EXAMPLE
Purchase property in USA on 31 March 2020 for $100 000.
FC = ZAR. Payment occurs on 15 May 2020.
YE = 30 April 2020. FV of property on YE is $95 000.
Reporting
Applicable exchange rates are as follows: date
Date USD = 1
31/03/2020 17.88
30/04/2020 18.27

Non-Monetary item @ FV = Property (IAS 40) Diff =

Transaction date = $100 000 x 17.88 = 1 788 000 FV adj
Reporting date = $95 000 x 18.27 = 1 735 650 (P/L)

27
APPLICATION OF IAS 21 WITH IAS 16 (par 24)
In accordance with IAS 16 Property, plant and equipment
PPE is measured in terms of the historical cost or
revaluation model
• How is CP translated?
• How is revalued value translated?

Both revalued value and cost price (in foreign currency) is

translated in terms of IAS 21

28
 Transaction
date

EXAMPLE: PPE @ HISTORICAL COST

Purchase property in USA on 31 March 2020 for $100 000.
Payment occurs on 15 May 2020. YE = 30 April 2020.
Applicable exchange rates are as follows:

Date USD = 1 Reporting

31/03/2020 17.88 date
30/04/2020 18.27

31/3: Dr PPE ($100 000 x 17.88) 1 788

000
Cr Creditors ($100 000 x 17.88) 1 788
000
29
 Transaction
date

EXAMPLE: PPE @ HISTORICAL COST

Purchase property in USA on 31 March 2020 for $100 000.
Payment occurs on 15 May 2020. YE = 30 April 2020.
Assume no depreciation for YE. Applicable exchange rates
are as follows:
Date USD = 1
Reporting
31/03/2020 17.88 date
30/04/2020 18.27

30/4: PPE: $100 000 x 17.88 = 1 788 000

Creditors: $100 000 x 18.27 = 1 827 000
Dr Exchange rate diff (P/L) 39 000
Cr Creditors (1 827 000 – 1 788 000) (SFP) 39 000

30
 Transaction
date

EXAMPLE: PPE @ REVALUED VALUE

Purchase property in USA on 31 March 2020 for $100 000.
FC = ZAR. Payment occurs on 31 March 2020.
YE = 30 April 2020. Revalued value (FV) of property on
YE is $110 000.
Reporting
Applicable exchange rates are as follows: date
Date USD = 1
31/03/2020 17.88
30/04/2020 18.27
31/3: Dr PPE ($100 000 x 17.88) 1 788 000
Cr Bank ($100 000 x 17.88) 1
788 000

31
 Transaction
date

EXAMPLE: PPE @ REVALUED VALUE

Purchase property in USA on 31 March 2020 for $100 000.
FC = ZAR. Payment occurs on 31 March 2020.
YE = 30 April 2020. Revalued value (FV) of property on
YE is $110 000.
Reporting
Applicable exchange rates are as follows: date
Date USD = 1
31/03/2020 17.88
30/04/2020 18.27
30/4: PPE: $110 000 x 18.27 = 2 009 700
Dr PPE (2 009 700 – 1 788 000) 221 700
Cr Revaluation surplus (OCI) 221
700
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APPLICATION OF IAS 21 WITH IAS 2 (par 25)
In accordance with IAS 2 Inventories the carrying amount
of inventory is the lower of cost price and net realisable
value

• How is cost price translated?

• How is net realisable value translated?

33
 Transaction
date

EXAMPLE: INVENTORY
Purchase inventory from the USA on 31 March 2020 for
$50 000. FC = ZAR. Payment occurs on 31 March 2020.
YE = 30 April 2020. NRV of inventory is $48
000 on YE. No inventory is sold during the year. Applicable
exchange rates are as follows:
Reporting
Date USD = 1 date
31/03/2020 17.88
30/04/2020 18.27

31/3: Dr Inventory ($50 000 x 17.88) 894 000

Cr Bank ($50 000 x 17.88)
894 000

34
 Transaction
date

EXAMPLE: INVENTORY
Purchase inventory from the USA on 31 March 2020 for
$50 000. FC = ZAR. Payment occurs on 31 March 2020.
YE = 30 April 2020. NRV of inventory is $48
000 on YE. No inventory is sold during the year. Applicable
exchange rates are as follows:
Date USD = 1 Reporting
date
31/03/2020 17.88
30/04/2020 18.27

30/4: Inventory: $48 000 x 18.27 = 876 960

Dr Cost of sales (P/L) 17 040
Ct Inventory (SFP) (894 000 – 876 960) 17 040

35
APPLICATION OF IAS 21 WITH IAS 36 (par 25)
In accordance with IAS 36 Impairment of assets the
carrying amount of an asset (for which there is an
indication of possible impairment) is the lower of the
carrying amount (before considering possible impairment)
and its recoverable amount

• How is CA translated?
• How is recoverable amount translated?

Par 26: special provisions in terms of exchange rate

availability

36
 Transaction
date

EXAMPLE: IMPAIRMENT LOSSES

Purchase a machine from the USA on 31 March 2020 for
$150 000. FC = ZAR. Payment occurs on 31 March 2020.
YE = 30 April 2020. RA of machine is $140
000 on YE. No depreciation is applicable for YE. Applicable
exchange rates are as follows:
Reporting
Date USD = 1 date
31/03/2020 17.88
30/04/2020 18.27

31/3: Dr Machine ($150 000 x 17.88) 2 682 000

Cr Bank ($150 000 x 17.88) 2
686 000

37
 Transaction
date

EXAMPLE: IMPAIRMENT LOSSES

Purchase a machine from the USA on 31 March 2020 for
$150 000. FC = ZAR. Payment occurs on 31 March 2020.
YE = 30 April 2020. RA of machine is $140
000 on YE.
No depreciation is applicable for YE. Applicable exchange
Reporting
rates are as follows:
Date USD = 1 date
31/03/2020 17.88
30/04/2020 18.27

30/4: Machine: $140 000 x 18.27 = 2 557 800

Dr Impairment loss (P/L) 128 200
Cr Accumulated impairment (SFP)
(2 682 000 – 2 557 800)
128 200 38
CLASS EXAMPLES

Class examples 1 - 6

39
SUMMARY OF APPROACH (par 19)

Reporting entity may present its financial statements in

any currency

Presentation currency (PC) (par 8)

Currency in which financial statements are presented

If PC differ from FC, then translate FC to PC for

preparation of the financial statements (par 19)

40
USE OF PC OTHER THAN FC - (par 38 - 41)

Typically where investors require statements in different

currency from FC
Translate FC to the PC (par 39)

41
USE OF PC OTHER THAN FC - (par 38 - 41)

If differs, translate FC to PC as follow:

a) Assets & liabilities:
• translate @ closing rate on SFP date
b) Income & expenses:
• translate @ exchange rates on transaction dates (if
impractical – use ave rate) (par 40)

42
USE OF PC OTHER THAN FC - (par 38 - 41)

If differs, translate FC to PC as follow (cont.):

c) Resulting exchange differences:
• recognise in other comprehensive income)
(named the foreign currency translation reserve
(FCTR)) – read with par 41 – refer FO notes

43
CLASS EXAMPLES

Class example 7

44
DISCLOSURE (par 51 – 53, 55 - 57)

• Exchange differences recognised in profit/loss

• Net exchange differences recognised in other
comprehensive income
• Reconciliation of exchange differences accumulated in a
separate component of equity
• When PC differs from FC
• State the fact, FC and reasons

45
DISCLOSURE (par 51 – 53, 55 - 57)

• When Financial statements presented in currency other

than FC (par. 55)
• State that complying with IFRS, only if they comply with
all the requirements of IFRS

• Additional disclosure necessary when financial

statements are presented in a currency other than FC
and par. 55 requirements are not met
• See par 57 (a) – (c)

46