Chapter 11
International Accounting
Standards;
Accounting
for Foreign Currency
Transactions
© 2003 The McGraw-Hill Companies,
Inc., All Rights Reserved
Scope of Chapter


Recent political and economic events have
focused on the pressing need for more
uniformity
in
international
accounting
standards.
Two organizations in the forefront of attempts
to achieve such uniformity are:
1.
2.
2
The International Accounting Standards Board
(IASB).
The International Organization of Securities
Commissions (IOSCO).
Chapter 11
International Accounting Standards
Committee (IASC)



3
The IASC was formed in 1973 by professional
accounting organizations of 10 countries.
Currently more than 140 groups from more
than 100 countries are members of the ISAC.
ISAC is headquartered in London and its
business is conducted by an International
Accounting Standards Board.
Chapter 11
International Accounting Standards
Committee (IASC)

Through 2001 the IASC has issued/revised 40
International Accounting Standards. Four or
these Standards dealt in this book are:
–
–
–
–
4
IAS 31: Financial Reporting of Interests in Joint
Ventures.
IAS 22: Accounting for Business Combinations.
IAS 27: Consolidated Financial Statements and
Accounting for Investment in Subsidiaries.
IAS 28: Accounting for Investment in Associates
Chapter 11
IAS 31: Financial Reporting of
Interests in Joint Ventures


IASB permits the Proportionate Consolidation
method or the Equity method for venturer’s
investment in a jointly controlled entity.
US accounting standards require:
1.
2.
5
Equity method of accounting for investments in
corporate joint ventures.
Permit either proportionate Consolidation method
or the Equity method method in unincorporated
joint ventures.
Chapter 11
IAS 22: Accounting for Business
Combinations



6
IASC requires purchase-type accounting for all
Business Combinations except those deemed a uniting
in interests – a combinantion in which stockholders of
the constituent companies combine into one entity and
share the risks and benefits as one entity.
In uniting of interest-type combination, pooling of
interests accounting is required.
Goodwill in a purchase-type combination must be
amortized over a period not exceeding 20 years unless
a longer period can be justified.
Chapter 11
IAS 27: Consolidated Financial
Statements and Accounting for
Investments in Subsidiaries




7
Consolidated policy is based on control rather than
ownership.
Intercompany transactions, gains or loss are eliminated
in full regardless of minority interest.
Minority interests in assets and income are shown
separately in consolidated statements. Thus there is no
parent company or economic unit concept.
Equity Method (required by the SEC) or Cost method
may be used to account for investment in subsidiary by
the parent company.
Chapter 11
IAS 28: Accounting for Investments in
Associates

8
Apart from using the term “Associate” for an
“Influenced Investee”, the provisions of IAS 28
resemble those of APB Opinion No. 18 – “The
Equity Method of Accounting for Investments in
Common Stock”.
Chapter 11
International Organization of
Securities Commissions (IOSCO)


9
The IOSCO includes securities regulators from
50 countries.
Their goal is to reduce the impact of
differences in securities trading regulations
among its members.
Chapter 11
SEC’s Eased Requirements for
Foreign Issuers of Securities in US




10
Adoption of multi-jurisdictional disclosure system for
eligible Canadian issuers to permit them to register
securities and report to the SEC using Canadian
registration and reporting requirements.
Acceptance of foreign issuer’s statement of cash flows in
accordance with IAS 7 – “Cash Flow Statements”.
Elimination of requirements for reconciliation of
differences between financial statements prepared under
certain IAS and US generally accepted accounting
principles.
Elimination of eight previously required financial
statement schedules, as discussed in chapter 13.
Chapter 11
Accounting for Foreign Currency
Transactions


11
In most countries foreign currency is treated
as a commodity or a money-market
instrument.
The buying and selling of foreign currency as
commodity results in variation in its exchange
rate.
Chapter 11
Accounting for Foreign Currency
Transactions

Different Exchange Rates:
1.
2.
3.
4.
Selling spot rate: The rate charged by the bank for current
sales in the foreign country.
Buying spot rate: The rate charged to dispose of a foreign
currency, typically lower than selling spot rate.
Agio: Spread between the selling and the buying spot rates
represents gross profit to a trader in foreign currency.
Forward Rates: Rates applied to foreign currency transactions
to be consummated at a future date.
Notes:
1.
2.
12
Foreign currencies have “Forward rates” which apply to “Forward contracts”
at a future date.
FSAB Statements 52 and 133 were issued to establish accounting standards
regarding foreign currency.
Chapter 11
Transactions Involving Foreign
Currencies


13
A “Multi-National Company” is one that
conducts its business in more that one country
via branches, joint ventures, subsidiaries etc.
If all its transactions are accounted for in one
currency, no problem arises, however often
local currencies are used which must be
denominated in some other currency – the
country where the company is headquartered.
Chapter 11
Transactions Involving Foreign
Currencies: Accounting Treatment



14
The transactions engaged into by the multinational
company must be recorded in the reporting currency
in the accounting records of the enterprise.
The appropriate spot rate is used for this purpose.
If the spot exchange rate for the foreign currency
changes on the date of financial statement preparation
prior to settlement of the transaction, or on the
settlement date itself, a foreign currency transaction
gain or loss is recognized for display in the income
statement of the enterprise for the accounting period in
which the rate changes.
Chapter 11
The Euro


15
The Euro is the currency of the 11 members of
the European Union.
For purchase of merchandise form a foreign
supplier, the selling spot rate is used to
determine the local currency denomination.
Chapter 11
Forward Contracts


16
A forward contract is an agreement to
exchange currencies of different countries on a
specified future date at the forward rate in
effect when the contract was made.
Forward rates may be smaller or larger than
the spot rates for a foreign currency based on
expectations regarding fluctuations in the
exchange rates for the currency.
Chapter 11
Forward Contracts as Derivative
Instruments
Defined by the FASB as follows:
A derivative instrument is a financial instrument with all
three of the following characteristics:
1.
2.
3.
17
It has one or more underlying and one or more notional amounts
or payment provisions or both.
It requires no initial net investment or an initial investment that is
smaller than would be required for other types of contracts that
would be expected to have a similar response to changes in
market factors.
Its terms require or permit net settlement, it can readily be
settled net by a means outside the contract, or it provides for
delivery of an asset that puts the recipient in a position not
substantially different from net settlement.
Chapter 11
Underlying, Notional Amount and
Payment provision

Underlying:
1.
2.


18
A specified interest rate, security price, commodity price,
foreign exchange rate, index of prices or rates or other
variable.
May be a price/rate of an asset/liability but not the
asset/liability itself.
Notional Amount: A number of currency units,
shares, bushels, pounds or other units specified in
the contract.
Payment provision: Specified a fixed or
determinable settlement to be made if the underlying
behaves in a specified manner.
Chapter 11
Forward Contracts Specified by FASB
Statement No. 133
FASB Statement No. 133 “Accounting for Derivative Instrument
and Hedging Activities” established accounting standards
for the following types of forward contracts:
1.
2.
3.
4.
5.
19
Forward contract not designated as a hedge.
Forward contract designated as a hedge of a foreign-currencydenominated firm commitment.
Forward contract designated as a hedge of an investment in an
available-for-sale security.
Forward contract designated as a hedge of a forecasted foreigncurrency-denominated transaction.
Forward contract designated as a hedge of a net investment in a
foreign operation.
Chapter 11
Disclosures Regarding Foreign
Currency Transactions



20
FASB Statement No. 52 requires disclosure in the
financial statements or notes thereto of the aggregate
foreign currency transaction gains and losses included in
the measurement of net income.
FASB Statement No. 133 requires numerous quantitative
and qualitative disclosures regarding all derivative
instruments, including those designated as hedges of
foreign currency exchange risks.
SEC requires disclosure outside the financial statements
and notes thereto, of both qualitative and quantitative
information about market risk inherent in derivative
instruments.
Chapter 11