IAS 21
The Effects of Changes in
Foreign Exchange Rates
FOREIGN ACTIVITIES
Transactions in foreign currencies
 Foreign operations
 Subsidiaries
 Associates
 JVs
 Branches
Entity may present its financial statements in
foreign currency

PRINCIPAL ISSUES


Which exchange rates to be used ?
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
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
proportionate consolidation – JVs
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 sales prices
(often denomination
currency)
Currency of the country
whose economy
determines sale prices
of goods and services
Currency that
influences Labour,
material, other costs
Further
evidence
Currency in which
funds from
financing activities
are generated
Currency in which
operating cash
receipts are
retained
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.
Degree of
operational
independence
from parent
Influence of cash
flows on parent’s
cash flows
Proportion of
transactions with
parent
Financial autonomy
compared 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
Primary
indicator
Supporting
evidence
Currency in which financing
funds are received and
operating receipts are retained
Extent of integration
with reporting entity
(foreign operations only)
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
Rate at the reporting
date
Non - monetary
Items at historical cost
Rate at the date of
transaction
Revalued
non-monetary
items
Rate at the date
of valuation
Reporting foreign currency transactions in the
functional currency – carrying amount determined
by comparing two amounts
Net realisable
value or recoverable
amount
Cost or
Carrying amount
Comparison
with
Historical rate OR rate
at the date of the
measurement/valuation
Rate at the date that the
amount is determined
(e.g. reporting date)
Monetary Assets – Exchange gains and losses
Monetary Assets
Realised
Exchange differences
Unrealised
Exchange differences
Recognised in P/L (both
gains and losses)
Non – monetary assets – Exchange gains and
losses
Non-monetary assets
Underlying income/expense
recognized in P/L
Exchange component
Recognised in P/L
Underlying income/expense
recognized in
other comprehensive income
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 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
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
Rates at reporting date
Income and expenses
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
 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
Thank You !!