IAS 21 The Effects of Changes in Foreign Exchange Rates

FOREIGN ACTIVITIES  Transactions in foreign currencies  Foreign operations Subsidiaries Subsidiaries Associates Associates JVs JVs Branches Branches Entity may present its financial statements in foreign currency Entity may present its financial statements in foreign currency

PRINCIPAL ISSUES Which exchange rates to be used ? Which exchange rates to be used ? How to report effects of changes in exchange rates ? How to report effects of changes in exchange rates ?

CONTENTS Scope Definitions Foreign currency transactions Foreign currency financial statements Disclosure Summary

SCOPE Standard applicable to a) All foreign currency transactions & balances in foreign currencies except except derivative transactions & balances within the scope of IAS 39/IFRS 9 derivative transactions & balances within the scope of IAS 39/IFRS 9

SCOPE (Contd.) b) Translating results/financial position in foreign operation for the purpose of consolidation - CFS consolidation - CFS proportionate consolidation – JVs proportionate consolidation – JVs equity accounting – Associate equity accounting – Associate c) Translating results/financial position into presentation currency.

IAS 21 Definitions Functional Currency The currency of the primary economic environment in which the entity operates Foreign Currency A currency other than the functional currency of an entity Presentation Currency The currency in which the financial statements are presented

Determination of functional currency - Primary factors Currency that influences Labour, material, other costs Currency in which funds from financing activities are generated Currency in which operating cash receipts are retained Currency of the country whose economy determines sale prices of goods and services Currency that influences sales prices (often denomination currency) Further evidence

Determination of functional currency - Additional factors for foreign operations Foreign operation is an entity that is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity. Influence of cash flows on parent’s cash flows Financial autonomy compared with parent Degree of operational independence from parent Proportion of transactions with parent

Choice of functional currency?  An entity does not have a free choice of functional currency  An entity cannot change functional currency unless facts and circumstances relevant to its determination change

IAS 21 functional currency - Summary Primary economic environment: Currency and economy influencing sales prices and operating costs Currency in which financing funds are received and operating receipts are retained Extent of integration with reporting entity (foreign operations only) Primary indicator Supporting evidence Mixed indicators? Use Judgement to choose FC that most faithfully presents economic effects of underlying transactions

Reporting foreign currency transactions in the functional currency – Initial recognition   Recognise transaction at the rate at the transaction date   May use e.g. average rate for week or month as a practical approximation  Average rates not reliable if currency fluctuates significantly  In accounting policy note in FS disclose the policy, e.g. that rates at transaction dates are used

Monetary Assets  Cash  Cash equivalents  Debt securities  Accounts receivable  Notes receivable Items that will be received in a fixed or determinable amount of cash

Non-monetary Assets  Inventory  Prepaid expenses  Equity securities  Investment property  Property, plant, and equipment  Intangible assets (e.g. goodwill) Items that will not be received in a fixed or determinable amount of cash

Monetary Liabilities  Accounts payable  Notes payable  Bonds payable  Leases payable  Accruals  Deferred tax (usual classification) Items that will be received in a fixed or determinable amount of cash

Non - monetary Liabilities  Deferred income  Government grant Items that will not be received in a fixed or determinable amount of cash

Reporting foreign currency transactions in the functional currency – Subsequent measurement Monetary Items Non - monetary Items at historical cost Revalued non-monetary items Rate at the reporting date Rate at the date of transaction Rate at the date of valuation

Reporting foreign currency transactions in the functional currency – carrying amount determined by comparing two amounts Cost or Carrying amount Net realisable value or recoverable amount Historical rate OR rate at the date of the measurement/valuation Rate at the date that the amount is determined (e.g. reporting date) Comparisonwith

Monetary Assets – Exchange gains and losses Monetary Assets Realised Exchange differences Recognised in P/L (both gains and losses) Unrealised Exchange differences

Non – monetary assets – Exchange gains and losses Non-monetary assets Underlying income/expense recognized in P/L Underlying income/expense recognized in other comprehensive income Exchange component Recognised in P/L Exchange component Recognised in other comprehensive income

Exchange differences – Net investments in a foreign operation  Net investment in a foreign operation- the amount of the entity’s interest in the net assets of that foreign operation  If the settlement of monetary item receivable from or payable to a foreign operation is neither planned nor likely to occur in the foreseeable future, exchange differences on such item are recognised : In profit or loss by both the reporting entity and the foreign operation in their individual financial statements In profit or loss by both the reporting entity and the foreign operation in their individual financial statements In other comprehensive income and accumulated in a separate component of equity in the consolidated financial statements In other comprehensive income and accumulated in a separate component of equity in the consolidated financial statements Accumulated exchange differences are reclassified from equity to profit or loss on disposal of the foreign operation Accumulated exchange differences are reclassified from equity to profit or loss on disposal of the foreign operation

Change in functional currency  Only if there is a change to the underlying transactions, events and conditions  Translation procedures should be applied to the new functional currency prospectively from the date of the change

Remeasurement into the Functional Currency   Remeasurement is a process of converting the accounting records of an entity maintained in a currency other than functional currency into the functional currency   Non-monetary assets, liabilities, and related income and expenses - use historical exchange rate   Monetary assets, liabilities, and related income and expenses – use current exchange rate If entity’s functional currency is the reporting currency of the enterprise, remeasurement obviates translation. If entity’s functional currency is different from the enterprise’s reporting currency, remeasurement into the entity’s functional currency is followed by translation into the reporting currency.

Translation to the presentation currency Assets and liabilities Income and expenses Rates at reporting date Rate at date of transaction (or average rate) All resulting exchange differences classified as a separate component of equity Reclassify to P/L on disposal

Foreign Currency Translation Adjustments   Do not affect cash flows   Are reported (net of tax) as a separate component of equity (in OCI)   Are recognized in earnings when realized (i.e. when investment in subsidiary is sold or liquidated)   At which time, reclassify proportionately to gain/loss on sale or liquidation of net assets of subsidiary

Translation of a Foreign Operation In addition to above, following procedures:  Normal consolidation procedures  Elimination of intra-group monetary asset/liability - not without showing results of currency fluctuations – in consolidated P&L or consolidated OCI - not without showing results of currency fluctuations – in consolidated P&L or consolidated OCI  Difference in dates – adjustments after considering exchange rate  Goodwill/FV adjustments on consolidation –closing rate

Significant Disclosures   Exchange rate differences included in: P/L (except for financial instruments measured at FV) Other comprehensive income In accounting policy note disclose that P/L items are translated at rate at transaction dates

Additional disclosures   Reasons (if applicable):   Why there has been a change in the functional currency   Why the presentation and functional currency are different   If entity’s presentation currency is different from its functional currency, its financial statements should only be described as compliant with IFRSs if all the requirements of IAS 21 are applied

Additional disclosures (continued)   If entity’s additional financial information is displayed in a currency different from either its functional or its presentation currency and all the requirements of IAS 21 have not been met:   Clearly identify such information as supplementary   Disclose the currency of the supplementary information   Disclose the entity’s functional currency and the method of translation used as a basis for presenting the supplementary information

Summary   An entity does not have a free choice of functional currency   Translation of foreign currency assets and liabilities   Monetary items at the reporting date’   Non-monetary items at the date of transaction or revaluation   Unrealized and realized exchange gains and losses recognized in P/L

Summary (Contd.)   Monetary item forming part of a net investment in foreign operation   Exchange differences recognized in - other comprehensive income in the consolidated financial statements - P or L in separate financial statements   Translation into presentation currency   Assets and liabilities at the reporting date   Income, expenses and capital transactions at transaction dates   Translation gain or loss recognized in other comprehensive income

Summary (Contd.)   Goodwill and fair value adjustments arising from the acquisition of a foreign entity are treated as assets/liabilities of the foreign operation translated at the rate at the reporting date

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