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1、IAS 21The Effects of Changes inForeign Exchange Rates,FOREIGN ACTIVITIES,Transactions in foreign currenciesForeign operations SubsidiariesAssociatesJVsBranches Entity may present its financial statements in foreign currency,PRINCIPAL ISSUES,Which exchange rates to be used?How to report effects of ch
2、anges in exchange rates?,CONTENTS,ScopeDefinitionsForeign currency transactionsForeign currency financial statementsDisclosureSummary,SCOPE,Standard applicable toa)All foreign currency transactions&balances in foreign currencies except derivative transactions&balances within the scope of IAS 39/IFRS
3、 9,SCOPE(Contd.),b)Translating results/financial position in foreign operation for the purpose of consolidation-CFS proportionate consolidation JVs equity accounting Associatec)Translating results/financial position into presentation currency.,IAS 21 Definitions,Functional Currency The currency of t
4、he 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 La
5、bour,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),Furth
6、er 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 repor
7、ting entity.,Influence of cash flows on parents 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 currencyAn entity cannot change
8、functional currency unless facts and circumstances relevant to its determination change,IAS 21 functional currency-Summary,Primary indicator,Supporting evidence,Mixed indicators?Use Judgement to choose FC that most faithfully presents economic effects of underlying transactions,Reporting foreign cur
9、rency transactions in the functional currency Initial recognition,Recognise transaction at the rate at the transaction dateMay use e.g.average rate for week or month as a practical approximationAverage rates not reliable if currency fluctuates significantlyIn accounting policy note in FS disclose th
10、e policy,e.g.that rates at transaction dates are used,Monetary Assets,CashCash equivalentsDebt securitiesAccounts receivableNotes receivable,Items that will be received in a fixed or determinable amount of cash,Non-monetary Assets,Inventory Prepaid expensesEquity securitiesInvestment propertyPropert
11、y,plant,and equipmentIntangible assets(e.g.goodwill),Items that will not be received in a fixed or determinable amount of cash,Monetary Liabilities,Accounts payableNotes payableBonds payableLeases payableAccrualsDeferred tax(usual classification),Items that will be received in a fixed or determinabl
12、e amount of cash,Non-monetary Liabilities,Deferred incomeGovernment 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,MonetaryItems,Non-monetaryItems at historical cost,Revalued no
13、n-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,Historic
14、al rate OR rate at the date of the measurement/valuation,Rate at the date that the amount is determined(e.g.reporting date),Comparison with,Monetary Assets Exchange gains and losses,Monetary Assets,RealisedExchange differences,Recognised in P/L(both gains and losses),UnrealisedExchange differences,N
15、on monetary assets Exchange gains and losses,Non-monetary assets,Underlying income/expenserecognized in P/L,Underlying income/expenserecognized in other comprehensive income,Exchange component Recognised in P/L,Exchange component Recognised in other comprehensive income,Exchange differences Net inve
16、stments in a foreign operation,Net investment in a foreign operation-the amount of the entitys interest in the net assets of that foreign operationIf the settlement of monetary item receivable from or payable to a foreign operation is neither planned nor likely to occur in the foreseeable future,exc
17、hange differences on such item are recognised:In profit or loss by both the reporting entity and the foreign operation in their individual financial statementsIn other comprehensive income and accumulated in a separate component of equity in the consolidated financial statementsAccumulated exchange
18、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 conditionsTranslation procedures should be applied to the new functional currency prospectively from the d
19、ate 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 currencyNon-monetary assets,liabilities,and related income and expenses-use historical
20、 exchange rate Monetary assets,liabilities,and related income and expenses use current exchange rate,If entitys functional currency is the reporting currency of the enterprise,remeasurement obviates translation.If entitys functional currency is different from the enterprises reporting currency,remea
21、surement into the entitys 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
22、 as a separate component of equity,Reclassify to P/Lon disposal,Foreign Currency Translation Adjustments,Do not affect cash flowsAre 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
23、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 proceduresElimination of intra-group monetary asset/liability-not without showing results of currency fluc
24、tuations in consolidated P&L or consolidated OCIDifference in dates adjustments after considering exchange rateGoodwill/FV adjustments on consolidation closing rate,Significant Disclosures,Exchange rate differences included in:P/L(except for financial instruments measured at FV)Other comprehensive i
25、ncomeIn 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 currencyWhy the presentation and functional currency are differentIf entitys presentation currency is differe
26、nt 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 entitys additional financial information is displayed in a currency different from either its functional or its
27、 presentation currency and all the requirements of IAS 21 have not been met:Clearly identify such information as supplementaryDisclose the currency of the supplementary informationDisclose the entitys functional currency and the method of translation used as a basis for presenting the supplementary
28、information,Summary,An entity does not have a free choice of functional currencyTranslation of foreign currency assets and liabilitiesMonetary items at the reporting dateNon-monetary items at the date of transaction or revaluationUnrealized and realized exchange gains and losses recognized in P/L,Su
29、mmary(Contd.),Monetary item forming part of a net investment in foreign operationExchange differences recognized in-other comprehensive income in the consolidated financial statements-P or L in separate financial statementsTranslation into presentation currencyAssets and liabilities at the reporting
30、 dateIncome,expenses and capital transactions at transaction datesTranslation 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!,
