ias 21 the effects of changes in foreign exchange rates

05/01/2023 IAS 21 Effects of changes in foreign exchange rates 1

IAS 21THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES


Objective

Translating financial statements into presentation currency

Which exchange rates to use Reporting effects of exchange rate

movements


Scope

Foreign currency derivates are covered by IAS 39

Hedge Accounting is covered by IAS 39 IAS 21 covers

Transactions in foreign currency Translation of financial statements of

foreign operations▪ Consolidation▪ Proportionate consolidation▪ Equity method


Definitions

Closing rate •Spot exchange rate at balance

sheet date

Exchange

difference

•Results from translating one amount from one currency to another at different rates

Exchange rate •Ratio of exchange between two

currencies


Definitions

Fair Value

•Transaction between knowledgeable, willing parties

Foreign currenc

y •Currency other than functional currency of entity

Foreign operati

on•Subsidiary, associate, joint venture or branch•Operating in different currency or country from

reporting entity


Definitions

Functional

currency•Currency in primary economic environment of

operation

Group•Parent company and all its subsidiaries

Monetary items

•Units of currency held•Assets and liabilities in fixed determinable

amount of currency


Definitions

Net investment •Interest in net assets of a

foreign entity

Presentation

currency •Currency in which financial statements are presented

Spot exchange

rate •Exchange rate for immediate delivery


Primary indicators of functional currency

• Equity issued

• Debt issued

• Currency in which receipts are retained

• Labour and material costs

• Denomination and settlement

• Denomination and settlement currency

• Geographical source of competition and regulation of sales prices

Revenue

Costs

FinancingReceipts


Secondary indicators of functional currency

• Service own obligations

• Settled by reporting entity

• Directly affect reporting entity

• Readily available for remittance

• High or low volume

• Extension of RE (import/sell goods for RE)

• Autonomous (own cash, expenses, income)

Autonomy of

activities Transactions with

reporting entity

LiabilitiesCash Flows


Functional currency not obvious Choose currency with primary

economic effect of underlying transactions, events & conditions.

Do not select functional currency to avoid restating financial statements according to IAS 29 Financial Reporting in Hyperinflationary Economies


Net investment in a foreign operation Long term non-trade receivables and payables not likely to be settled in forseeable

future Treated as part of net investment in

foreign operation If owed to any group subsidiary by

another


Monetary Items

MONETARY ITEMS Right to receive fixed units

of currency Examples:

Pensions & employee benefits Provisions Dividends recognised as

liability Equity instruments receivable Assets receivable All above to be settled in cash

or at fixed fair value

NON-MONETARY ITEMS No right to receive fixed

determinable amount of currency Amounts prepaid for goods

and services Goodwill Intangible assets Inventories Property, plant &

equipment Provisions to be settled

with non-monetary assets


Summary of approach required by IAS 21GROUPS

Each entity in the group determines its functional currency

Translate results and position of each entity included in FS of reporting entity into the currency of the reporting entity

SINGLE ENTITY

Translate foreign currency items into functional currency

If functional currency differs from presentation currency, prepare in functional currency and translate to presentation currency


Foreign currency transactions

• At spot rate on the date of the transaction

Initial recognition

• Monetary items at closing rate

• Non-monetary items at spot rate on date of transaction

Balance sheet date

• On monetary items through P&L

• On non-monetary items where gain or loss is recognised

Exchange difference


Initial recognition of foreign currency transactions Denominated or requires settlement

in a foreign currency Record in functional currency at spot

exchange rate between functional currency and foreign currency at the date of the transaction

The use of an average rate for the week or month is permitted but not appropriate if the rate fluctuates significantly


Foreign currency transactions at subsequent balance sheet dates

Translate monetary items at closing rate on the balance sheet date

Translate non-monetary items measured at historical cost at the date of the transactionTranslate non-monetary items measured at fair value at date fair value was determined


Recognition of exchange differences Apply IAS 39 to hedge accounting and IAS 12 income taxes Monetary items:

Difference between translation rates at recognition and settlement date recognised in P&L

If monetary item is part of net investment in foreign operation, recognise in separate FS of reporting entity or foreign operation as appropriate

In consolidated FS, recognise initially as separate component of equity and in P&L on disposal of net investment

If recognition and settlement fall in different accounting periods, recognise change in each period

When the gain or loss on a non-monetary item is recognised in equity the resulting exchange difference is also recognised in equity

When the gain or loss on a non-monetary item is recognised in P&L, recognise the exchange difference in P&L

Apply rules prospectively from date of any change in functional currency


Presentation currency different to functional currency Balance sheet assets and liabilities at closing rates Income and expenses at rates at dates of transactions

Average rate for period permitted unless rate fluctuates significantly

Resulting exchange differences as a separate component of equity

Hyperinflationary economies: do not adjust comparatives that were presented in prior

year FS when functional currency is that of non-hyperinflationary economy; ▪ if it is, restate FS per IAS 29 before translation▪ If it ceases to be hyperinflationary, use restated prices at date that

it ceased to be hyperinflationary


• Goodwill• Fair value

adjustments

Closing rate

• Equity• P&L at

disposal

Elimination of intragroup balances • Rate at

balance sheet date of foreign operationDifferent

reporting periods


Translation of a foreign operation Translate goodwill on acquisition at closing rate Translate fair value adjustments to carrying

amounts of assets and liabilities at closing rate When eliminating intra-group balances and

foreign exchange differences arise, recognise in equity until disposal of net investment in foreign operation or otherwise in P&L

When using different reporting periods within 3 month time limit, use exchange rate at the balance sheet date of the foreign operation


Disposal of a foreign operation Recognise deferred foreign exchange

differences held in equity in the P&L on the date that the gain or loss is recognised

Recognise proportionate share of exchange difference on part disposal But not when the asset is being written

down


Disclosure Exchange differences recognised in profit or loss Net differences in separate component of equity Reconciliation of net exchange differences in equity

at beginning and end of period That the functional and presentation currency are

different and the reason for the change Change in functional currency and reasons for

change Clearly identify additional supplementary information

that does not comply with IFRS Disclose currency of supplementary information Disclose functional currency and method used to

translate supplementary information


Transitional provisions Apply IAS 8 Changes in Accounting

estimates except for Acquisition of foreign operations:

Apply prospectively or retrospectively from date of first application of IAS 21

If prospective treatment chosen for acquisitions of earlier years, ▪ do not restate prior years▪ Treat goodwill and FV adjustments as assets &

liabilities of reporting entity▪ Report in functional currency as non-monetary item▪ Translate at rate of date of acquisition

ias 21 the effects of changes in foreign exchange rates

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