Section 30 Foreign Currency Translation The IFRS for SMEs Section 30 Foreign Currency Translation By: Olonje 11/19/2018

Section 30 - background An entity can have transactions in foreign currencies and it can have foreign operations. It may also present its FS in a foreign currency. Accounting for financial instruments denominated in a foreign currency and hedge accounting of foreign currency items are dealt with in Sections 11 and 12. i.e. ‘Basic financial instruments’ & ‘Other financial instruments issues’, respectively. By: Olonje 11/19/2018

Section 30 - Scope Section 30 prescribes how to: determine an entity’s functional currency measure foreign currency transactions include foreign operations in FS translate FS into a presentation currency It also specifies disclosures. By: Olonje 11/19/2018

Section 30- functional currency Each entity identifies its functional currency―the currency of the primary economic environment in which the entity operates (i.e. normally the one in which it primarily generates and expends cash) A foreign currency transaction is a transaction that is denominated or requires settlement in a foreign currency (i.e. a currency other than the entity’s functional currency) By: Olonje 11/19/2018

Section 30 – determine functional currency Most important factors to consider when determining an entity’s functional currency: The currency: that mainly influences sales prices (often the currency in which its sales are denominated and settled), and of the country whose competitive forces and regulations mainly determine its sales prices. the currency that mainly influences labour, material & other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled). By: Olonje 11/19/2018

Section 30- disclose functional currency Disclose currency in which financial statements are presented If presentation currency is not functional currency disclose: that fact the functional currency reason for using a different presentation currency When functional currency of entity or a significant operation changes disclose: reason for the change By: Olonje 11/19/2018

Section 30 – change functional currency Change functional currency only if change to underlying transactions, events and conditions e.g. a change in the currency that mainly influences the sales prices of goods and services Accounted for change prospectively translate all items using the exchange rate at the date of the change resulting translated amounts for non-monetary items are treated as their historical cost By: Olonje 11/19/2018

Section 30 – foreign currency transaction Initial recognition measure a foreign currency transaction in the functional currency using the spot exchange rate on the date when the transaction first qualifies for recognition By: Olonje 11/19/2018

Section 30 – examples initial recognition Example 1: A’s functional currency is Kshs. On 1/12/20X1 A buys goods on credit for $100,000 (dollar denominated) when spot currency exchange rate = $1:Kshs. 2. On 1/12/20X1 A recognises inventories and trade payables of Kshs. 200,000. By: Olonje 11/19/2018

Section 30 – examples initial recognition Example 2: A’s functional currency is Kshs. On 1/12/20X1 A buys an investment property for $100,000 when the spot currency exchange rate = $1:Kshs.2 (i.e. A pays Kshs. 200,000). A accounts for the investment property at its fair value. On 1/12/20X1 A recognises its investment property at Kshs. 200,000. By: Olonje 11/19/2018

Section 30 – subsequent measurement At the end of each reporting period translate foreign currency monetary items using the closing rate; translate non-monetary items that are measured in terms of historical cost in a foreign currency using the exchange rate at the date of the transaction; and translate non-monetary items that are measured at fair value in a foreign currency using the exchange rates at the date when the fair value was determined. By: Olonje 11/19/2018

Section 30 – translation gains and losses Monetary items recognise, in profit or loss when the exchange differences arise (i.e. on settlement or on retranslating (exception see paragraph 30.13). Non-monetary items recognise exchange differences (in profit or loss or OCI) follows classification of the underlying item. Disclose amount of exchange differences recognised in profit or loss (excluding those on items carried using the fair value model) By: Olonje 11/19/2018

Section 30 – subsequent measurement Example 1 continued: On 31/12/20X1 (A’s year-end) the spot currency exchange rate = $1:Kshs.2.1. On 1/2/20X2 when the spot rate = $1:Kshs.2.05 A pays Kshs. 205,000 to settle the $100,000 liability. At 31/12/20X1 A reports the trade payable at Kshs.210,000 and recognises loss of Kshs.10,000 in profit or loss. On 1/2/20X2 A derecognises the $100,000 payable and recognises gain of Kshs.5,000. By: Olonje 11/19/2018

Section 30 – subsequent measurement Example 2 continued: On 31/12/20X1 (A’s financial year-end) the fair value of the investment property = $100,000 (i.e. coincidentally no change) and the spot currency exchange rate = $1:Kshs.2.1. At 31/12/20X1 A remeasures the investment property at Kshs.210,000 and records a gain of Kshs.10,000 as a change in fair value (rather than exchange difference) in profit or loss. By: Olonje 11/19/2018

Section 30 – subsequent measurement Example 3: Same as Example 2 except: A accounts for its investment property using the cost model (because its fair value cannot be measured reliably on an ongoing basis). At 31/12/20X1 A records the investment property at Kshs. 200,000 (i.e. no remeasurement because it is a non- monetary asset carried at historical cost). By: Olonje 11/19/2018

Section 30 – presentation & disclosure The amount of exchange differences recognised in profit or loss (other than those arising from fair value changes) Non-monetary items recognise exchange differences (in profit or loss or OCI) follows classification of the underlying item. By: Olonje 11/19/2018