THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Thilanka Warnakulasooriya B.Com Special (Col), ACA, MBA Fin ( Col) POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE – 2015/2016 Principles of Financial and Cost Accounting

LKAS 21 The Effects of Changes in Foreign Exchange Rates

Definitions Functional currency is the currency of the primary economic environment in which the entity operates. Presentation currency is the currency in which the financial statements are presented. Foreign currency is a currency other than the functional currency of an entity. Closing rate is the spot exchange rate at the reporting date. Spot exchange rate is the exchange rate for immediate delivery.

Foreign operation is a subsidiary, associate, joint venture or branch of the reporting enterprise, the activities of which are based or conducted in a country other than the country of the reporting entity. Net investment in a foreign operation is the amount of the reporting entity’s interest in the net assets of that operation. Monetary items are currency held and assets and liabilities to be received or paid in fixed or determinable number of units of currency.

Determining functional currency The currency: That mainly influences sales price of country whose rules & regulations influence sales price that influences labour, materials and other costs in which financing generated in which receipts from activities retained

Initial recognition ◦ record foreign currency transactions in a consistent manner. ◦ Every transaction will be translated into the functional currency at the spot rate ruling at the time of the transaction. Reporting at the ends of subsequent reporting periods Closing rate – Rate prevailed at end of the reporting period. Monetary items Exchange rate at the date of the transaction Non monetary items measured at cost Exchange rate at the date when the FV was determined. Non monetary items measured at FV

Recognition of exchange differences Exchange differences arising on settlement, or translating at the reporting date, of monetary items all go to profit or loss. If gains/losses on a non-monetary item are taken to other comprehensive income (OCI) then any exchange difference is also taken to equity, through other comprehensive income. If gains/losses on a non-monetary item are NOT taken to equity then any exchange difference is taken to profit or loss.

Presentation currency If the presentation currency is different to the functional currency: ◦ Assets/liabilities are translated at closing rate ◦ Income/expenses are translated at actual rate (average may be used) ◦ Exchange differences are taken to equity, through other comprehensive income ◦ Cumulative exchange difference reclassified to profit or loss on disposal of subsidiary.