IAS 21The Effects of Changes inForeign Exchange Rates

FOREIGN ACTIVITIESFOREIGN ACTIVITIES

Transactions in foreign currenciesTransactions in foreign currencies Foreign operationsForeign operations SubsidiariesSubsidiaries AssociatesAssociates JVsJVs BranchesBranches

Entity may present its financial Entity may present its financial statements in foreign currencystatements in foreign currency

PRINCIPAL ISSUESPRINCIPAL ISSUES

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

exchange rates ? exchange rates ?

CONTENTS

Scope

Definitions

Foreign currency transactions

Foreign currency financial statements

Disclosure

Summary

SCOPESCOPE

Standard applicable toStandard applicable to

a) All foreign currency transactions & a) All foreign currency transactions & balances in foreign currenciesbalances in foreign currencies

exceptexcept

derivative transactions & balances derivative transactions & balances within the scope of IAS 39/IFRS 9within the scope of IAS 39/IFRS 9

SCOPE (Contd.)SCOPE (Contd.)

b) Translating results/financial position b) Translating results/financial position in foreign operation for the purpose ofin foreign operation for the purpose of

consolidation - CFSconsolidation - CFS

proportionate consolidation – JVsproportionate consolidation – JVs

equity accounting – Associateequity accounting – Associate

c) Translating results/financial position c) Translating results/financial position into presentation currency.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 An entity does not have a free choice of functional currencycurrency

An entity cannot change functional currency unless An entity cannot change functional currency unless facts and circumstances relevant to its determination facts and circumstances relevant to its determination changechange

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 integrationwith 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 Average rates not reliable if currency fluctuates significantlyfluctuates significantly

In accounting policy note in FS disclose the In accounting policy note in FS disclose the policy, e.g. that rates at transaction dates are policy, e.g. that rates at transaction dates are usedused

Monetary Assets

CashCash

Cash equivalentsCash equivalents

Debt securitiesDebt securities

Accounts receivableAccounts receivable

Notes receivableNotes receivable

Items that will be received in a fixed or determinable amount of cash

Non-monetary Assets

Inventory Inventory Prepaid expensesPrepaid expenses Equity securitiesEquity securities Investment propertyInvestment property Property, plant, and equipmentProperty, plant, and equipment Intangible assets (e.g. goodwill) Intangible assets (e.g. goodwill)

Items that will not be received in a fixed or determinable amount of

cash

Monetary Liabilities

Accounts payableAccounts payable Notes payableNotes payable Bonds payableBonds payable Leases payableLeases payable AccrualsAccruals Deferred tax (usual classification) Deferred tax (usual classification)

Items that will be received in a fixed or determinable amount of cash

Non - monetary Liabilities

Deferred incomeDeferred income

Government grantGovernment 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 Cost or

Carrying amountCarrying amount

Net realisable Net realisable

value or recoverable value or recoverable amountamount

Historical rate OR rate Historical rate OR rate

at the date of the at the date of the

measurement/valuationmeasurement/valuation

Rate at the date that the Rate at the date that the amount is determined amount is determined (e.g. reporting date)(e.g. reporting date)

Comparison Comparison

withwith

Monetary Assets – Exchange gains and losses

Monetary AssetsMonetary Assets

RealisedRealised

Exchange differencesExchange differences

Recognised in P/L (both Recognised in P/L (both gains and losses)gains and losses)

UnrealisedUnrealised

Exchange differencesExchange differences

Non – monetary assets – Exchange gains and losses

Non-monetary assetsNon-monetary assets

Underlying income/expenseUnderlying income/expense

recognized in P/Lrecognized in P/L

Underlying income/expenseUnderlying income/expenserecognized in recognized in

other comprehensive incomeother comprehensive income

Exchange component Exchange component Recognised in P/LRecognised in P/L

Exchange component Exchange component Recognised in other Recognised in other

comprehensive incomecomprehensive income

Exchange differences – Net investments in a foreign operation

Net investment in a foreign operation- the amount of the entity’s Net investment in a foreign operation- the amount of the entity’s interest in the net assets of that foreign operationinterest in the net assets of that foreign operation

If the settlement of monetary item receivable from or payable to a If the settlement of monetary item receivable from or payable to a foreign operation is neither planned nor likely to occur in the foreign operation is neither planned nor likely to occur in the foreseeable future, exchange differences on such item are foreseeable future, exchange differences on such item are recognised :recognised :

In profit or loss by both the reporting entity and the foreign In profit or loss by both the reporting entity and the foreign operation in their individual financial statementsoperation in their individual financial statements

In other comprehensive income and accumulated in a separate In other comprehensive income and accumulated in a separate component of equity in the consolidated financial statementscomponent of equity in the consolidated financial statements

• Accumulated exchange differences are reclassified from equity Accumulated exchange differences are reclassified from equity to profit or loss on disposal of the foreign operationto profit or loss on disposal of the foreign operation

Change in functional currency

Only if there is a change to the underlying Only if there is a change to the underlying transactions, events and conditionstransactions, events and conditions

Translation procedures should be applied to the new Translation procedures should be applied to the new functional currency prospectively from the date of the functional currency prospectively from the date of the changechange

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/Lon 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 Translation of a Foreign OperationOperationIn addition to above, following procedures:In addition to above, following procedures: Normal consolidation proceduresNormal consolidation procedures Elimination of intra-group monetary Elimination of intra-group monetary

asset/liabilityasset/liability

- not without showing results of currency - not without showing results of currency fluctuations – in consolidated P&L or fluctuations – in consolidated P&L or consolidated OCIconsolidated OCI

Difference in dates – adjustments after Difference in dates – adjustments after considering exchange rateconsidering exchange rate

Goodwill/FV adjustments on consolidation –Goodwill/FV adjustments on consolidation –closing rateclosing 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

Thank You !!Thank You !!