Dedication
We dedicate this project to :
Our beloved country which our hearts is hung to
"Palestine"
Our beloved symbol of sacrifice, faith and giving our
first teachers
"Our Fathers"
The moon is jealous from the light of their faces, God
made paradise under their feet, their blessings the secret
of our success
"Our Mothers"
The fine hearts that our happiness can't be completed
without them, those who shared us happiness and
sadness all our life
"Our Brothers and Sisters"
1
Acknowledgement
We want to thank everyone help and participated in
making this study starting from our honorable:
Mr. Salah Shubair
Who put a lot of faith in our capabilities and encouraged
us to complete this research ,
And all of our lecturers in the faculty of commerce.
2
Research Plan
Week
Title of the chapter
Chapter 1
First Week
Research Proposal
Chapter 2
Second Week
Introductory Chapter
Chapter 3
Third Week
Recognition of changes in foreign exchange rates
Chapter 4
Fourth week
Findings and Recommendations
3
Table of Contents
Research Plan ........................................................................ 3
Chapter One ............................................................... 7
Abstract:............................................................................. 8
Introduction ....................................................................... 8
Statement of the problem .................................................. 10
Objectives ......................................................................... 11
Main objective ................................................................... 11
Specific objectives .............................................................. 11
Significance of the project .................................................. 12
Scope and limitations of the project .................................... 13
Methodology ..................................................................... 15
Overview of the current state of the art .............................. 16
Related works .................................................................... 17
John Ammer; Nathanael Clinton; Gregory P. Nini 2005-843
(October 2005) ...................................................................17
Wadi study (2006). ............................................................. 18
Al-Sharairi et al study (2007) ............................................... 19
Gagnon study (2003) .......................................................... 20
Nsman study (2008) ........................................................... 20
Chapter Two .............................................................. 22
The general framework of the International Accounting
Standards ..........................................................................23
The importance of international accounting standards ......... 23
4
A Brief History and objectives of the International Accounting
Standards .......................................................................... 24
The reasons for the emergence of international accounting
standards ..........................................................................25
Main reasons: .................................................................... 25
Historical development of IAS 21 ........................................ 28
Chapter Three .......................................................... 30
Foreign currency accounting ............................................... 31
Foreign currency translation ............................................... 31
Exchange rate .................................................................... 32
Buying and selling rates of foreign currencies ...................... 33
Reporting foreign currency transactions in the functional
currency ............................................................................34
Initial recognition: .............................................................. 34
Reporting at the ends of subsequent reporting periods ........ 35
Recognition of exchange differences ................................... 36
Change in functional currency ............................................. 41
Use of a presentation currency other than the functional
currency ............................................................................42
Translation to the presentation currency ............................. 42
Translation of a foreign operation ....................................... 44
Disposal or partial disposal of a foreign operation ............... 46
Tax effects of all exchange differences ................................ 48
Disclosure .......................................................................... 48
Chapter Four ............................................................. 51
Analysis of Bank of Palestine (BoP) Financial Statements ..... 52
5
Research Findings .............................................................. 52
Recommendation............................................................... 54
Bibliography ...................................................................... 55
Websites ........................................................................... 55
Internet ............................................................................. 55
6
Chapter One
7
Abstract:
We aim through this study to illustrate the importance of applying IAS 21, “The
Effects of Changes in Foreign Exchange Rates,” by Palestinian financial institutions,
from the viewpoint of financial statement preparers at banks, companies, auditors, and
investing institutions. We also aim to illustrate the effects of applying IAS 21 on the
fair preparation of statements, as well as on disclosure adequacy in relation to
financial instruments in the financial statements at Palestinian banks. To achieve the
objectives of this study, we will be analyzing the concept of the IAS 21 and how it
can be easily applied in Palestinian banks and companies.
This study will target a sample of financial statement preparers at Palestinian Banks,
auditors, and investors. Upon analyzing responses and examining hypotheses, we will
determine the emphasis on the importance of IAS 21 application at the Palestinian
banks. It will also attempt to clarify whether there are any significant differences
between the opinions of financial statement preparers at the studied Palestinian banks,
auditors, or investors, in the fact that application of IAS 21 considerably contributes
to the accuracy of statement presentation and adequacy of the disclosure of financial
instruments in the financial statements.
Introduction
A financial entity may conduct foreign activities using two approaches. It may carry
on transactions in foreign currencies or it may have foreign operations. also, it may
present its financial statements in a foreign currency. The objective of this standard is
8
to prescribe how to include foreign currency transactions and foreign operations in the
financial statements of a financial entity and how to translate financial statements into
a presentation currency. The main problem here is which exchange rate/rates to use
and how to report the effects of changes in exchange rates in the financial statements?
In addition, this Standard does not apply to the presentation in a statement of cash
flows of the cash flows arising from transactions in a foreign currency, or to the
translation of cash flows of a foreign operation.
This model focuses on how to include foreign currency transactions and foreign
operations in the financial statements of financial entities, and how to translate
financial statements into a presentation currency that is different from the functional
currency according to Section 30 Foreign Currency Translation of the International
Financial Reporting Standard (IFRS) for Small and Medium-sized Entities (SMEs). It
introduces the learner to the subject, guides the learner through the official text.
In addition, the model includes questions developed to analyze the reader’s
knowledge of the requirements and case studies to develop the reader’s capabilities to
account for foreign currency transactions and to conduct foreign currency translations
in compliance with the IFRS for SMEs.
The objective of IAS 21 is to prescribe the basis for selecting an entity’s functional
currency and the accounting treatment for the recognition of, and subsequent
measurement of, transactions denominated in a foreign currency and the process of
9
translating financial statements denominated in a foreign currency.
Exchange differences arising when monetary items are settled or when monetary
items are translated at rates different from those at which they were translated when
initially recognized or in previous financial statements are reported in profit or loss in
the period, with one exception. The exception is that exchange differences arising on
monetary items that form part of the reporting entity's net investment in a foreign
operation are recognized, in the consolidated financial statements that include the
foreign operation, in other comprehensive income; they will be recognized in profit or
loss on disposal of the net investment.
As regards a monetary item that forms part of an entity's investment in a foreign
operation, the accounting treatment in consolidated financial statements should not be
dependent on the currency of the monetary item. Also, the accounting should not
depend on which entity within the group conducts a transaction with the foreign
operation. If a gain or loss on a non-monetary item is recognized in other
comprehensive income, any foreign exchange component of that gain or loss is also
recognized in other comprehensive income.
Statement of the problem
What are the requirements necessary to achieve stranded 21 " the effects of changes in
the foreign change rates " ?
10
Objectives
Main objective

To analyze the extent to which IAS 21 is applied in banks.
Specific objectives

Objective 1: To identify the requirements needed to apply it in those which do not
already apply IAS 21.

Objective 2: Outline the importance of applying IAS 21 “The Effect of changes in
exchange rates.

Objective 3: Study the opinions of accounting professionals to identify the effect of
applying IAS 21 “The Effect of changes in exchange rates” on accurate presentation
of financial statements at Palestinian banks. In addition, analyze the adequacy of
disclosure in relation to financial instruments in the financial statements at the
Palestinian banks.
11
Significance of the project
The importance of the study stems from the necessity of fair presentation of financial
statements according to IAS 21, where published financial statements present key
pieces of information of interest to different external parties and where disclosure is
made in a way that achieves adequacy of information and outlines its significance and
relevance. This is very important to serve the parties concerned with financial
statements as they make their relevant decisions according to the implications of IAS
21 . The disclosed information should be credible and reliable so that they help make
sound decisions related to credit, investment and other aspects. The IAS 21, “The
effect of changes in exchange rates” came to promote the further help financial
statement users understand the importance of financial instruments and the
requirements of presentation in income statement and determine the information to be
disclosed.
IAS 21 also indicates the importance of transition from historical to fair value cost, as
the latter provides great information for commercial purposes to determine the overall
financial position of a project, as well as for making decisions on the financial
instruments by users of financial statements, as it reflects in many cases an estimate
by financial markets for the present value of expected cash flows of financial
instruments. The standard also requires disclosure of concentrations of credit risk,
liquidity
risk,
cash
flow
risk,
and
market
risk.
Accordingly, the importance of this study stems from the necessity to identify the
significance of applying IAS 21 and outline its effect on the fair presentation of
income statements.
12
Scope and limitations of the project
An entity that prepares and presents financial statements under the accrual basis of
accounting
shall apply this Standard:

In accounting for transactions and balances in foreign currencies, except for
those
Derivative transactions and balances that are within the scope of IPSAS 21,
Financial
Instruments: Recognition and Measurement;

In translating the financial performance and financial position of foreign
operations
that are included in the financial statements of the entity by consolidation
, proportionate consolidation, or by the equity method; and

In translating an entity’s financial performance and financial position into
a presentation currency.
IPSAS 21 applies to many foreign currency derivatives and, accordingly, these are
excluded from the scope of this Standard. However, those foreign currency
derivatives that are not within the scope of IPSAS 21 (e.g., some foreign currency
derivatives that are embedded in other contracts) are within the scope of this Standard.
In addition, this Standard applies when an entity translates amounts relating to
derivatives from its functional currency to its presentation currency.
This Standard does not apply to hedge accounting for foreign currency items,
including the hedging of a net investment in a foreign operation. IPSAS 21 applies to
hedge accounting.
This Standard applies to all public sector entities other than Government Business
Enterprises.
13
The Preface to International Public Sector Accounting Standards issued by the
IPSASB explains that Government Business Enterprises (GBEs) apply IFRSs issued
by the IASB.
GBEs are defined in IPSAS 21, Presentation of Financial Statements.
This Standard applies to the presentation of an entity’s financial statements in a
foreign currency, and sets out requirements for the resulting financial statements to be
described as complying with IPSASs. For translations of financial information into a
foreign currency that do not meet these requirements, this Standard specifies
information to be disclosed.
This Standard does not apply to the presentation in a cash flow statement of cash
flows arising from transactions in a foreign currency, or to the translation of cash
flows of a foreign operation.
14
Methodology
Methods of Data Collection
In addition to the general IAS and the specific IAS 21,, as well as the research and
studies published in periodicals and scientific journals related to the study subject, the
researchers prepared a special questionnaire for this study based on the theoretical
framework and results of previous studies and in consistence with the study
objectives. The study consists of four sections. In the first, personal information about
the three categories was gathered. The
second section aims at measuring the
advocacy degree by respondents of the importance of applying IAS 21. The third
section incorporates the provisions stipulated in IAS 21 that have an impact on the
fair presentation of financial statements. The fourth section includes items that affect
the adequacy of disclosure regarding financial instruments in the financial statements
included in IAS 21
1.
Methods of Data Analysis
For the purposes of realizing the study objectives, testing its hypotheses and
analyzing its results, two groups of statistical methods were used as follows:

Descriptive statistical methods: where the mean, standard deviation, certain
percentages and frequencies were calculated to identify the characteristics of the
study sample and the basic characteristics of the study variables, in addition to
calculating the t-value.

Using the non-parametric statistical test (Kruskal-Wallis) to examine the study
hypotheses, this is used to measure any substantive differences between several
categories.
15
Overview of the current state of the art
10 January 2008 : Some revisions of IAS 21 as a result of the Business Combinations
Phase II
Project relating to disposals of foreign operations .
December 2005 : Minor Amendment to IAS 21 relating to net investment in a foreign
Operation .
16
Related works
Review of works, projects, papers, algorithms, approaches related to your project and
used in
to solving the problem identified or similar problems.
Gagnon study (2003)
This study aimed to identify the impact of changes in exchange rates on wages and
the general level of prices and profits in the United Kingdom during the nineties of
the last century, and that the two main sectors, the first sector of production
represented by the suppliers, and the second distribution sector represented by the
importers. The main findings of the study is that the devaluation of the pound
sterling in 1992 led to increased profits producers and lower profits distributors, and
increase the pound sterling in 1996 led to adverse consequences, and that the
change in the exchange rate had an impact very little on the cost of the work.
John Ammer; Nathanael Clinton; Gregory P. Nini
2005-843 (October 2005)
Publicly traded financial firms within the European Union will be required to adhere
to International Accounting Standards (IAS) in their financial reporting beginning in
2005, which can entail a higher degree of financial disclosure than was previously
mandated under national accounting standards. A number of European financial firms
had previously subjected themselves to additional disclosure by listing their stock on
U.S. exchanges, which obligates them to reconcile their financial accounts to U.S.
GAAP (Generally Accepted Accounting Principles). Among national accounting
17
systems, U.S. GAAP is considered to be both among the strictest and the most similar
to International Financial Reporting Standards (IFRS). To test whether U.S. GAAP
reconciliation effectively enhances disclosure, we examine several measures of
transparency for the cross-listed firms, relative both to pre-listing measures and to a
control sample of firms that have not cross-listed. Our measures include bid-ask
spreads, earnings forecast errors, analyst coverage, dispersion in earnings
expectations, and disagreement between Moody’s and S&P’s bond ratings. We find
evidence that cross-listing increases transparency in at least some cases. Our crosssectional results also distinguish a handful of European financial firms that had
already adopted IFRS before the European Commission announced that IAS would be
required in the near future, with results similar to those of the cross-listed firms.
Accordingly, to the extent that commitment to increased transparency has been a
motivation for cross-listing, the adoption of IAS in Europe may reduce the incentives
for European firms to cross-list in the United States.
Wadi study (2006).
This study aimed to clarify the impact of the phenomenon of inflation (changes in
price levels) on the measurement and accounting disclosure in the financial statements
prepared and published in Palestine, and also to find out the impact of inflation on the
credibility and fairness of the financial statements, and to identify the extent to which
the application of accounting disclosure in the financial statements.
The study resulted in inflation that affects the financial statements are given
misleading results because the phenomenon of inflation of the most influential
economic phenomena on accounting data and information published financial
18
statements, and to show the impact of inflation on the financial statements is
necessary and possible to apply in practice.
The study recommended providing financial statements adjusted within the annual
report of the facility in the form of separate lists or in the form of numbers compared
with the traditional figures within the menus core with the need to include the report
of the auditor's opinion in the consolidated amended, and the extent of it disclosure
about fact Activity of the facility and its financial position, as presented study model
proposal to provide revised financial statements and consider additional lists
complementary and not essential to show the lists realistic figures disclose financial
statements.
Al-Sharairi et al study (2007)
This study aimed to demonstrate the commitment of the Jordanian banks requirements
of IAS 21) from the point of preparers the financial statements in Jordanian banks and
external auditors, and the statement of the differences between the perspective of
preparers the financial statements in Jordanian banks and the point of view of external
auditors in the commitment of Jordanian banks requirements of IAS (21), and to
identify the problems and difficulties and the implications of the application of the
international Accounting standard No. (21), and through the distribution of
questionnaires on preparers of financial statements in Jordanian banks, as well as the
external auditors who audit the banks under study.
As a result of the study that Jordanian banks committed to apply the requirements of
the standard and that from the viewpoint of preparers and auditors of financial
19
statements in connection with the translation of the financial statements, as well as
with regard to investment in foreign companies, Regarding translate items of the
financial statements of branches of foreign banks vantage from the study that some
preparers lists Finance did not deal with some of the requirements of the standard by
such as the elimination of foreign subsidiaries, as well as the management of banks do
not all exchange differences are classified as equity until the disposal of the net
investment, but is working on recorded in the profit and loss.
The study recommended that banks should Jordanian that the classification difference
translation of financial statements of foreign affiliates such as the rights of ownership
until the disposal of the net investment and not in profit or loss in order to complete
the compliance requirements of International Accounting Standard (21), as well as the
Jordanian banks to activate the skills and expertise of the authors of menus some of
the financial requirements of the international Accounting standard No. (21)
concerning the accounting treatment for the liquidation of its subsidiaries in order to
acquire the expertise to deal with all the requirements of the standard.
Nsman study (2008)
This study aimed to examine the measurement and analysis of the extent of the
commitment of companies listed on the Palestine Securities Exchange standard IAS
21 "Effects of changes in foreign currency exchange rates, from the viewpoint of the
authors of the financial statements and the external auditors of these companies to
apply the requirements of this standard.
20
The study found a range of results, including that the companies listed on the
Palestine Securities Exchange is committed to the requirements of International
Accounting Standard No. (21), from the point of view both of the authors of the
financial statements and the external auditors of these companies, and that
companies verify the advantages of the application of the requirements of the
standard include improve decisions for users of financial statements, and increase
the efficiency of the financial statements, solving the problems of companies that
have branches of foreign regarding translating the financial statements, and in spite
of the existence of constraints limiting the application of the standard and of the
lack of courses related to the standards of the International Accounting as well as
the lack of clarity of the role played by associations and professional bodies to
oversee the application of the standard.
The study recommended the need to work on activating the role of Palestinian
Accountants and Auditors on international accounting standards, as well as benefit
from the experiences of Arab countries with regard to International Accounting
Standards, and for issues a Palestinian national standards compatible with the
Palestinians economic and social realities.
21
Chapter Two
22
The general framework of the International Accounting
Standards
International Accounting Standards are a major output of the International
accounting Standards Committee (IASC),which comprises Committee delegates to
the professional accounting experts, and International accounting standards
accepted by most of the organizations and professionals both in the developed
countries or developing countries, so they have become international accounting
standards as a reference guide professionals throughout The global world, due to
the lack of local standards governing developing countries then these standards are
considered as an incentive for regulators And supervisory accounting profession to
these countries, especially the Arab countries that oblige companies ,banks
,Financial institutions and the application of international accounting standards as
the basis for the preparation and disclosure of financial statements , Taking into
account that the application is compatible with the local economic statements ,
Taking into account that the application is compatible with the local economic
conditions of these countries.
The importance of international accounting standards
1- It defines the characteristics that must be available in accounting information .
2- It serves as the basic rule to be used to assess the quality of these information, so
you must specify the characteristics that make this information helpful in making
decisions .
23
3- Through the issuance of a set of accounting standards define methods for
measuring the impact of operations Events and conditions on the results of the
company, so the results are connected to the interested company.
A Brief History and objectives of the International Accounting
Standards
The use of international accounting standards has become an urgent need when you
do the preparation and processing lists Since these financial statements no longer
serve one party represented in the project owners but became servers multiple
parties, and therefore the adoption and use of international accounting standards
became Urgent necessity, it improves the quality of the published financial
statements until the comparability larger, thereby increasing the credibility which
enhances its usefulness for all parties related to these financial statements ( Belkoui
2004 , 164 ) stated that the results of the financial statements interact through
three groups:
1- Company administration:
represents the foundation associated with accounting procedures is that set up
reports that’s by accountants and internal auditors of the company.
2- Users:
The second group represented as the production of accounting information affected
their
interests and needs, this category includes existing shareholders and
24
prospective financial analysts and lenders and employees of the company and
government agencies.
3- the accountancy profession:
The third group of stakeholders and that can affect the Financial information and
verify that the data they contain financial statements conform with the principles
and accepted standards accounting even gaining the confidence of financial reports
external users.
The reasons for the emergence of international accounting
standards
There are several reasons contributed effectively and directly in the emergence of
international accounting standards, From These reasons, there are differences
related to treatments and to the absence of definitive answers to many of the
problems faced by accountants, globalization has also contributed directly to
establish these standards ,so companies can easily work at global markets and
enable it to list its shares on the global stock markets.
Main reasons:
I :The need to develop accountancy
Due to the fact that accountancy is based on a set of assumptions, concepts,
principles and rules, policies and accounting traditions and customs which led to
25
multiple definitions and concepts and contradiction between principles and
therefore did not identify accounting concepts in a clear and understandable.
Some examples of the different Titles, conflicts and contradictions between the
principles and the accounting policies are as follows:
A - The agreement between the accountants in the preparation of periodic reports,
but they disagree about the accounting period as well as the dates of the interim
reports.
B -Conflict between the policy of caution and the use of cost as the basis for the
valuation of assets.
C -The lack of a unified processors for many similar events, such as multiple
processors for pricing inventory and methods of depreciation of fixed assets.
D -There is no specific answers on some of the problems faced by the accountant
such as a change in prices, and measurement of intangible assets, and measuring the
social cost and benefit.
II: Globalization
The phenomenon of globalization began with the growing economic power of
multinational corporations, these corporations are not subject to a certain
responsibility because they do not represent the official authority for any nation,
Due to the openness economic world and attract more foreign investment has
insisted the investment community International on the need to improve the
26
existing international standards and issue new standards develop and the level of
performance exchange in the capital markets.
Globalization is defined in Wikipedia as "an economic process in the first place then
political, followed by social and cultural aspects, (www.ar.wikipedia.org 15/6/2008)
notes on this definition, focusing on the link globalization economy on the grounds
that it the main reason for the spread of globalization on the international level.
The reasons for the emergence International Accounting
Standard No. (21) "the effects of the change in foreign exchange
rates
International Accounting Standard No. (21) deals with One of the most difficult
problems faced by accountants in Practical life, main problem of transactions that
are denominated in foreign currencies, as well as translation of financial statements
for the company's reporting currency, and the standard is a reflection of the
practices of the process of financial accounting, and the importance of this is
standard reflected on the positive role of the transactions made in a foreign currency
as a result of a lot of request stakeholders in the companies, as well as for the
practices of an active role in providing them with financial information that
contribute to the decision-making .
The importance of the issuance of this standard to the fluctuation of foreign
exchange rates on international level, and the tremendous progress in information
technology and the emergence of the Internet and the possibility of holding
transactions between dealers, whether they are individuals or companies through a
27
network of international information , this increased reliance on automated
payment methods there has been a necessary and urgent need for a way You may
accounting in which companies from conducting financial transactions in a way so
You can instant from the conversion of such transactions to the currency of the
country or to the currency in which financial reports are prepared.
International Accounting Standard No. (21) deals with How the accounting treatment
for
companies that have foreign currency transactions or that have foreign
operations, and how the financial statements are presented transactions and foreign
operations carried out by the company and how to translate financial statements
reporting currency, The standard also addresses how to choose the exchange rate
used to demonstrate the impact of changes in prices exchange in the financial
statements .
Historical development of IAS 21
IAS 21 was reissued in December 2003 and applies to annual periods beginning on or
after 1 January 2005.
28
29
Chapter Three
30
Foreign currency accounting
The accounting and translation of foreign currency financial statements considered
as difficulties faced by companies, both national and local activities that have a
currency different from the currency financial reporting, or may have outside
activities are in the import and export of goods and services, or be multinational
companies are those companies that have branches and activities in foreign
countries, and given for multi-currency for those companies in carrying out its
activities and at the same time its commitment to the preparation of financial
reports currency may differ from trading currencies and may result in gains or losses
on the translation of financial statements.
Foreign currency translation
The problem of translation of foreign currency financial statements of the major
accounting problems faced by multinational companies and national companies that
have an activity or branches of foreign, many of these companies lead their daily
operations in different currencies, leading to appear assets and liabilities, income
and expenses denominated based on several currencies, the problem lies in the
foreign currency translation also that the companies may incur losses as a result of
changing currency exchange rates and therefore lead to a reduction in the profits
made by the company .
Foreign currency translation they include the following:
31
1- Measurement and recognition of transactions made in a foreign currency
undertaken by the company in national currency and then disclosure of the effects
of these transactions on the financial statements in the national currency, or
currency, which is the company's financial reports.
2- Translation of financial statements of operations, branches and foreign
subsidiaries to the parent company's currency the report of the State in which the
main branch of the company.
3- Selecting and applying appropriate exchange rate, and must be recognized in the
financial statements of the financial implications to changes in exchange rates.
In Palestine, the process of currency translation of the financial statements may
affect all companies operating due to the nonexistence of a national currency and
therefore the companies in the daily dealings of buying and selling the lending and
borrowing deal in more than one currency, which leads to the occurrence of
translation problems and you need to work on finding practical solutions so that
companies can demonstrate its financial statements.
Exchange rate
International Accounting Standard No. (21) defined exchange rate as "the exchange
rate between the two currencies “.
(Hermanson & Others, 1989: 532 ) explained that The exchange rate is determined
when there is a transfer of resources between two parties such as the purchase of
goods on the account, the price tracking accountant when submitting information
32
exchange, and that the diversion of resources requires registration price agreed
between the parties.
(Brighame & Gapenski, 1994: 1100 ) Identified the exchange rate as the number of
units of a particular currency through which the unit is purchased and one of the
other currency, and that currency exchange rate appears daily in the newspapers.
Buying and selling rates of foreign currencies
The presentation of foreign exchange rate requires the exchange have two prices :

Purchase rate
It is the rate at which the bank make his offer to buy the foreign currency.

selling rate
It is the rate at which the Bank make his offer to sell the foreign currency.
Note: Buying price and selling price is at those prices offered by the bank, and
therefore the purchase price of the currency from the point of view of the bank is
the selling price from the standpoint of currency seller, and vice versa for the sale
price, it is considered the purchase price from the standpoint of the buyer currency.
The difference between currency translation and currency
conversion
Since it may be confused with the concept of currency translation and currency
conversion we must be clarify the difference between both concepts, translation is
showing foreign currencies in financial statements compared with those of the local
currency, the process of converting is the process that is journal any records
33
accounting only, without an exchange of cash, whereby the real exchange of cash
between the local currency and foreign currency .
Reporting foreign currency transactions in the functional
currency
Initial recognition:
A foreign currency transaction is a transaction that is denominated or requires
settlement in a foreign currency, including transactions arising when an entity:
(a) buys or sells goods or services whose price is denominated in a foreign currency;
(b) borrows or lends funds when the amounts payable or receivable are
denominated in a foreign currency; or
(c) otherwise acquires or disposes of assets, or incurs or settles liabilities,
denominated in a foreign currency.
A foreign currency transaction shall be recorded, on initial recognition in the
functional currency, by applying to the foreign currency amount the spot exchange
rate between the functional currency and the foreign currency at the date of the
transaction.
The date of a transaction is the date on which the transaction first qualifies for
recognition in accordance with Indian Accounting Standards. For practical reasons, a
rate that approximates the actual rate at the date of the transaction is often used,
for example, an average rate for a week or a month might be used for all
transactions in each foreign currency occurring during that period. However, if
34
exchange rates fluctuate significantly, the use of the average rate for a period is
inappropriate.
Reporting at the ends of subsequent reporting periods
At the end of each reporting period:
(a) foreign currency monetary items shall be translated using the closing rate;
(b) non- monetary items that are measured in terms of historical cost in a foreign
currency shall be translated using the exchange rate at the date of the transaction;
and
(c) non- monetary items that are measured at fair value in a foreign currency shall
be translated using the exchange rates at the date when the fair value was
determined.
The carrying amount of an item is determined in conjunction with other relevant
Standards. For example, property, plant and equipment may be measured in terms
of fair value or historical cost in accordance with IAS 16 Property, Plant and
Equipment. Whether the carrying amount is determined on the basis of historical
cost or on the basis of fair value, if the amount is determined in a foreign currency it
is then translated into the functional currency in accordance with this Standard.
The carrying amount of some items is determined by comparing two or more
amounts. For example, the carrying amount of inventories is the lower of cost and
net realizable value in accordance with AS 2 Inventories. Similarly, in accordance
with AS 36 Impairment of Assets, the carrying amount of an asset for which there is
an indication of impairment is the lower of its carrying amount before considering
35
possible impairment losses and its recoverable amount. When such an asset is nonmonetary and is measured in a foreign currency, the carrying amount is determined
by comparing:
(a) the cost or carrying amount, as appropriate, translated at the exchange rate at
the date when that amount was determined (i.e. the rate at the date of the
transaction for an item measured in terms of historical cost); and
(b) the net realizable value or recoverable amount, as appropriate, translated at the
exchange rate at the date when that value was determined (e.g. the closing rate at
the end of the reporting period).
The effect of this comparison may be that an impairment loss is recognized in the
functional currency but would not be recognized in the foreign currency, or vice
versa.
When several exchange rates are available, the rate used is that at which the future
cash flows represented by the transaction or balance could have been settled if
those cash flows had occurred at the measurement date. If exchangeability between
two currencies is temporarily lacking, the rate used is the first subsequent rate at
which exchanges could be made.
Recognition of exchange differences
As noted in previous paragraphs (a) and 5, AS 39 applies to hedge accounting for
foreign currency items. The application of hedge accounting requires an entity to
36
account for some exchange differences differently from the treatment of exchange
differences required by this Standard.
For example, AS 39 requires that exchange differences on monetary items that
qualify as hedging instruments in a cash flow hedge are recognized initially in other
comprehensive income to the extent that the hedge is effective.
Exchange differences arising on the settlement of monetary items or on translating
monetary items at rates different from those at which they were translated on initial
recognition during the period or in previous financial statements shall be recognized
in profit or loss in the period in which they arise, except:
(i) exchange differences arising on a monetary item that forms part of a reporting
entity’s net investment in a foreign operation as described in previous paragraphs.
(ii) where an entity exercises the option provided in paragraph 29A in respect of
long-term monetary items.
When monetary items arise from a foreign currency transaction and there is a
change in the Exchange rate between the transaction date and the date of
settlement, an exchange difference results. When the transaction is settled within
the same accounting period as that in which it occurred, all the exchange difference
is recognized in that period. However, when the transaction is settled in a
subsequent accounting period, the exchange difference recognized in each period up
to the date of settlement is determined by the change in exchange rates during each
period. Paragraph 29A provides an option to recognize unrealized exchange
37
differences arising on translation of certain long-term monetary assets and longterm monetary liabilities from foreign currency to functional currency.
An entity may exercise the option in respect of recognition of exchange differences
arising on translation of long-term monetary items from foreign currency to
functional currency as follows:
(i) Unrealized exchange differences arising on long-term monetary assets and longterm-term monetary liabilities denominated in a foreign currency shall be recognized
directly in equity and accumulated in a separate component of equity. The amount
so accumulated shall be transferred to profit or loss over the period of maturity of
such long-term monetary items in an appropriate manner. The separate component
of equity shall be distinguished from any other component of equity representing
any other exchange difference recognized in other comprehensive income and
accumulated in equity.
(ii) The option provided in paragraph 29A(i) is not available for the long-term
monetary assets and long-term monetary liabilities during the period they are
classified as at fair value through profit or loss in accordance with AS 39, either
because they are held for trading or because of their designation as at fair value
through profit or loss.
(iii) The option provided in paragraph 29A(i) shall be exercised for the first time
when the exchange difference arising on a long-term monetary asset or a long-term
monetary liability mentioned in paragraph 29A(i) is recognized. The option, once
38
exercised, shall be irrevocable and shall be exercised in respect of all the long-term
monetary assets and long-term monetary liabilities mentioned in paragraph 29A(i).
(iv) For the purpose of this paragraph, a monetary asset or a monetary liability shall
be treated as long-term, if that asset or liability has a maturity period of twelve
months or more from the date of the initial recognition of that asset or liability.
When a gain or loss on a non-monetary item is recognized in other comprehensive
income, any exchange component of that gain or loss shall be recognized in other
comprehensive income. Conversely, when a gain or loss on a non-monetary item is
recognized in profit or loss, any exchange component of that gain or loss shall be
recognized in profit or loss.
Other Indian Accounting Standards require some gains and losses to be recognized in
other comprehensive income. For example, AS 16 requires some gains and losses
arising on a revaluation of property, plant and equipment to be recognized in other
comprehensive income. When such an asset is measured in a foreign currency,
paragraph 23(c) of this Standard requires the revalued amount to be translated using
the rate at the date the value is determined, resulting in an exchange difference that
is also recognized in other comprehensive income.
Exchange differences arising on a monetary item that forms part of a reporting
entity’s net investment in a foreign operation shall be recognized in profit or loss in
the separate financial statements of the reporting entity or the individual financial
39
statements of the foreign operation, as appropriate. In the financial statements that
include the foreign operation and the reporting entity (e.g. consolidated financial
statements when the foreign operation is a subsidiary), such exchange differences
shall be recognized initially in other comprehensive income and reclassified from
equity to profit or loss on disposal of the net investment in accordance with what
was mentioned above.
When a monetary item forms part of a reporting entity’s net investment in a foreign
operation and is denominated in the functional currency of the reporting entity, an
exchange difference arises in the foreign operation’s individual financial statements
in accordance with paragraph If such an item is denominated in the functional
currency of the foreign operation, an exchange difference arises in the reporting
entity’s separate financial statements in accordance with paragraph 28. If such an
item is denominated in a currency other than the functional currency of either the
reporting entity or the foreign operation, an exchange difference arises in the
reporting entity’s separate financial statements and in the foreign operation’s
individual financial statements in accordance with paragraph 28. Such exchange
differences are recognized in other comprehensive income in the financial
statements that include the foreign operation and the reporting entity (i.e. financial
statements in which the foreign operation is consolidated, proportionately
consolidated or accounted for using the equity method).
When an entity keeps its books and records in a currency other than its functional
currency, at the time the entity prepares its financial statements all amounts are
translated into the functional currency in accordance with paragraphs 20–26. This
40
produces the same amounts in the functional currency as would have occurred had
the items been recorded initially in the functional currency. For example, monetary
items are translated into the functional currency using the closing rate, and nonmonetary items that are measured on a historical cost basis are translated using the
exchange rate at the date of the transaction that resulted in their recognition.
Change in functional currency
When there is a change in an entity’s functional currency, the entity shall apply the
translation procedures applicable to the new functional currency prospectively from
the date of the change.
As noted in previous paragraphs, the functional currency of an entity reflects the
underlying transactions, events and conditions that are relevant to the entity.
Accordingly, once the functional currency is determined, it can be changed only if
there is a change to those underlying transactions, events and conditions. For
example, a change in the currency that mainly influences the sales prices of goods
and services may lead to a change in an entity’s functional currency.
The effect of a change in functional currency is accounted for prospectively. In other
words, an entity translates all items into the new functional currency using the
exchange rate at the date of the change. The resulting translated amounts for nonmonetary items are treated as their historical cost. Exchange differences arising from
the translation of a foreign operation previously recognized in other comprehensive
income in accordance with paragraphs 32 and 39(c) are not reclassified from equity
to profit or loss until the disposal of the operation. When the option provided in
41
paragraph 29A is exercised, exchange differences previously recognized directly in
equity and accumulated in a separate component of equity in accordance with that
paragraph are not transferred to profit or loss immediately on change of the entity's
functional currency. They shall continue to be transferred to profit or loss in the
manner stated in that paragraph.
Use of a presentation currency other than the functional
currency
Translation to the presentation currency
An entity may present its financial statements in any currency (or currencies). If the
presentation currency differs from the entity’s functional currency, it translates its
results and financial position into the presentation currency. For example, when a
group contains individual entities with different functional currencies, the results
and financial position of each entity are expressed in a common currency so that
consolidated financial statements may be presented.
The results and financial position of an entity whose functional currency is not the
currency of a hyperinflationary economy shall be translated into a different
presentation currency using the following procedures:
(a) assets and liabilities for each balance sheet presented (ie including comparatives)
shall be translated at the closing rate at the date of that balance sheet;
42
(b) income and expenses for each statement of profit and loss presented (ie
including comparatives) shall be translated at exchange rates at the dates of the
transactions; and
(c) all resulting exchange differences shall be recognized in other comprehensive
income.
For practical reasons, a rate that approximates the exchange rates at the dates of
the transactions, for example an average rate for the period, is often used to
translate income and expense items. However, if exchange rates fluctuate
significantly, the use of the average rate for a period is inappropriate.
The exchange differences result from:
(a) translating income and expenses at the exchange rates at the dates of the
transactions and assets and liabilities at the closing rate.
(b) translating the opening net assets at a closing rate that differs from the previous
closing rate.
These exchange differences are not recognized in profit or loss because the changes
in exchange rates have little or no direct effect on the present and future cash flows
from operations. The cumulative amount of the exchange differences is presented in
a separate component of equity until disposal of the foreign operation. When the
exchange differences relate to a foreign operation that is consolidated but not
wholly-owned, accumulated exchange differences arising from translation and
attributable to non-controlling interests are allocated to, and recognized as part of,
non-controlling interests in the consolidated balance sheet.
43
The results and financial position of an entity whose functional currency is the
currency of a hyperinflationary economy shall be translated into a different
presentation currency using the following procedures:
(a) all amounts (i.e. assets, liabilities, equity items, income and expenses, including
comparatives) shall be translated at the closing rate at the date of the most recent
balance sheet, except that
(b) when amounts are translated into the currency of a non-hyperinflationary
economy, comparative amounts shall be those that were presented as current year
amounts in the relevant prior year financial statements (i.e. not adjusted for
subsequent changes in the price level or subsequent changes in exchange rates).
When an entity’s functional currency is the currency of a hyperinflationary economy,
the entity shall restate its financial statements in accordance with AS 29 before
applying the translation method set out in paragraph 42, except for comparative
amounts that are translated into a currency of a non- hyperinflationary economy.
When the economy ceases to be hyperinflationary and the entity no longer restates
its financial statements in accordance with AS 29, it shall use as the historical costs
for translation into the presentation currency the amounts restated to the price level
at the date the entity ceased restating its financial statements.
Translation of a foreign operation
The incorporation of the results and financial position of a foreign operation with
those of the reporting entity follows normal consolidation procedures, such as the
44
elimination of intergroup balances and intergroup transactions of a subsidiary (see
AS 27 and AS 31 Interests in Joint Ventures). However, an intergroup monetary
asset or liability), whether short-term or long-term, cannot be eliminated against the
corresponding intergroup liability (or asset) without showing the results of currency
fluctuations in the consolidated financial statements. This is because the monetary
item represents a commitment to convert one currency into another and exposes
the reporting entity to a gain or loss through currency fluctuations.
Accordingly, in the consolidated financial statements of the reporting entity, such an
exchange difference is recognized in profit or loss or, if it arises from the
circumstances described in previous paragraphs, it is recognized in other
comprehensive income and accumulated in a separate component of equity until the
disposal of the foreign operation. When the option provided in paragraph 29A is
exercised, in the consolidated financial statements of the reporting entity, such an
exchange difference is directly recognized in equity and disposed of in the manner
prescribed in that paragraph.
When the financial statements of a foreign operation are as of a date different from
that of the reporting entity, the foreign operation often prepares additional
statements as of the same date as the reporting entity’s financial statements. When
this is not done, AS 27 allows the use of a different date provided that the difference
is no greater than three months and adjustments are made for the effects of any
significant transactions or other events that occur between the different dates. In
such a case, the assets and liabilities of the foreign operation are translated at the
exchange rate at the end of the reporting period of the foreign operation.
45
Adjustments are made for significant changes in exchange rates up to the end of the
reporting period of the reporting entity in accordance with AS 27. The same
approach is used in applying the equity method to associates and joint ventures and
in applying proportionate consolidation to joint ventures in accordance with AS 28
Investments in Associates and AS 31.
Any goodwill arising on the acquisition of a foreign operation and any fair value
adjustments to the carrying amounts of assets and liabilities arising on the
acquisition of that foreign operation shall be treated as assets and liabilities of the
foreign operation. Thus they shall be expressed in the functional currency of the
foreign operation and shall be translated at the closing rate in accordance with
previous paragraphs.
Disposal or partial disposal of a foreign operation
On the disposal of a foreign operation, the cumulative amount of the exchange
differences relating to that foreign operation, recognized in other comprehensive
income and accumulated in the separate component of equity, shall be reclassified
from equity to profit or loss (as a reclassification adjustment) when the gain or loss n
disposal is recognized (see AS 1 Presentation of Financial Statements).
A In addition to the disposal of an entity’s entire interest in a foreign operation, the
following are accounted for as disposals even if the entity retains an interest in the
former subsidiary, associate or jointly controlled entity:
(a) the loss of control of a subsidiary that includes a foreign operation;
46
(b) the loss of significant influence over an associate that includes a foreign
operation; and
(c) the loss of joint control over a jointly controlled entity that includes a foreign
operation.
On disposal of a subsidiary that includes a foreign operation, the cumulative amount
of the exchange differences relating to that foreign operation that have been
attributed to the non-controlling interests shall be derecognized, but shall not be
reclassified to profit or loss.
On the partial disposal of a subsidiary that includes a foreign operation, the entity
shall re-attribute the proportionate share of the cumulative amount of the exchange
differences recognized in other comprehensive income to the non-controlling
interests in that foreign operation. In any other partial disposal of a foreign
operation the entity shall reclassify to profit or loss only the proportionate share of
the cumulative amount of the exchange differences recognized in other
comprehensive income.
A partial disposal of an entity’s interest in a foreign operation is any reduction in an
entity’s ownership interest in a foreign operation, except those reductions in
paragraph 48A that are accounted for as disposals.
An entity may dispose or partially dispose of its interest in a foreign operation
through sale, liquidation, repayment of share capital or abandonment of all, or part
of, that entity. A write-down of the carrying amount of a foreign operation, either
because of its own losses or because of an impairment recognized by the investor,
does not constitute a partial disposal. Accordingly, no part of the foreign exchange
47
gain or loss recognized in other comprehensive income is reclassified to profit or loss
at the time of a write-down.
Tax effects of all exchange differences
Gains and losses on foreign currency transactions and exchange differences arising
on translating the results and financial position of an entity (including a foreign
operation) into a different currency may have tax effects. AS 12 Income Taxes
applies to these tax effects.
Disclosure
An entity shall disclose:
(a) the amount of exchange differences recognized in profit or loss except for those a
rising on financial instruments measured at fair value through profit or loss in
accordance with AS 39;
(b) net exchange differences recognized in other comprehensive income and
accumulated in a separate component of equity, and a reconciliation of the amount
of such exchange differences at the beginning and end of the period; and
(c) net exchange differences recognized directly in equity and accumulated in a
separate component of equity in accordance with paragraph 29A, and a
reconciliation of the amount of such exchange differences at the beginning and end
of the period.
48
When the presentation currency is different from the functional currency, that fact
shall be stated, together with disclosure of the functional currency and the reason
for using a different presentation currency.
When there is a change in the functional currency of either the reporting entity or a
significant foreign operation, that fact, the reason for the change in functional
currency and the date of change in functional currency shall be disclosed.
When an entity presents its financial statements in a currency that is different from
its functional currency, it shall describe the financial statements as complying with
Accounting Standards only if they comply with all the requirements of each
applicable Standard including the translation method set out in paragraphs 39 and
42.
An entity sometimes presents its financial statements or other financial information
in a currency that is not its functional currency without meeting the requirements of
previous paragraphs. For example, an entity may convert into another currency only
selected items from its financial statements. Or, an entity whose functional currency
is not the currency of a hyperinflationary economy may convert the financial
statements into another currency by translating all items at the most recent closing
rate. Such conversions are not in accordance with Indian Accounting Standards and
the disclosures set out in previous paragraphs are required.
When an entity displays its financial statements or other financial information in a
currency that is different from either its functional currency or its presentation
currency and the requirements of previous paragraphs are not met, it shall:
49
(a) clearly identify the information as supplementary information to distinguish it
from the information that complies with International Accounting Standards;
(b) disclose the currency in which the supplementary information is displayed; and
(c) disclose the entity’s functional currency and the method of translation used to
determine the supplementary information.
50
Chapter Four
51
Analysis of Bank of Palestine (BoP) Financial Statements
Bank of Palestine uses the U.S. dollar as the currency of financial reports. But
certainly there are a lot of processes and transactions that are denominated in a
currency other during the year, such as the Israeli shekel and the Jordanian dinar and
others. Accordingly, the Bank records the transactions that are denominated in
foreign currencies during the year at the exchange rates prevailing at the date of the
transaction. And are converted balances of financial assets and financial liabilities at
the foreign exchange rates prevailing at the date of the consolidated financial
statements. The bank has made a profit during the year 2012 worth $ 2,449,043 as a
result of changes in currency exchange rates, as shown in the statement of
comprehensive-income.
Research Findings
Data collection and financial information are essential for decision making,
therefore, it was necessary to find a way through which to measure the effects of
fluctuations in foreign currency exchange rates, especially multinational companies
that are directly affected by exchange rate fluctuations, due to the fact that these
companies have great reliance on international economic relations, and their
practices are affected by various political policies, and they are facing pressure from
groups that are affected by its activities, which resulted in the need for more useful,
relevant, and most importantly recent information for decision-making, that can be
reliably used to measure the effects caused by changes in the value of currency, and
communicate that information to interested parties.
52
Thus, the aim of translating transactions in foreign currency as well as the translation
of the financial statements is to provide information consistent with the possible
effects of changes in exchange rates for the cash flows of the companies that affect
property rights, and stressing on the fact that the financial statements provide truly
useful information, and the financial statements reflect accurate financial results
that have been measured in foreign currency financial statements during the current
period.
According to the text of the standard, the objective of the standard is to clarify that
companies can conduct foreign activities in two ways:

To conduct transactions in foreign currencies

To conduct foreign operations
In order to cover foreign currency transactions and foreign operations in the
financial statements of the company, it must be expressed in transaction currency of
the company that prepared the statements, it also must translate the financial
statements of foreign operations into the currency of the company that prepared
the report, and are basic items mentioned by the standard in determining the
exchange rate to be used and how to recognize the impact of changes in exchange
rates in the financial statements. (International Accounting Standards.
53
Recommendation
The following recommendations are suggested to avoid the negative implications of
changes in exchange rates, and to provide a more accurate representation of
financial statements:
1. We recommend applying IAS 21.
2. Accounting departments should take special care when dealing with foreign
Currency exchange rates.
3. A law should be issued to force companies to apply IAS 21 for better financial
disclosures.
4. Using IAS 21 will provide a more accurate and reliable presentation of
financial statements
5. Banks which do not apply IAS 21 should either train their employees in that
area, or hire specialists in that field.
6. Banks should optimize their data collection methods in order to collect the most
Relevant, reliable, and useful information.
54
Bibliography
1. International Accounting, Frederick D. S. Choi, Gerhard G. Mueller .
2. International Accounting Standards: From UK Standards to IAS, an
Accelerated Route to Understanding the Key Principles of International
Accounting Rules .
3. Indian Accounting Standards, Bhattacharyya .
4. International Accounting/Financial Reporting Standards Guide
2009, David Alexander, Simon Archer.
5- Accounting theory , Ahmed Riahi-Belkaoui .
Websites
1. www.accaglobal.com .
2. www.bdointernational.com .
3. www.fesaconsol.com .
4. www.cpaireland.ie .
Internet
1. www.iasplus.com/en/standards/ias/ias21 .
2. www.ifrs.org/Documents/IAS21 .
3. http://www.icaew.com/en/library/subject-gateways/accountingstandards/ifrs/ias-21 .
4. www.slideshare.net/achawla/ias-21-foreign-currencies .
5. www.ifrsclass.com/gaap/ias/ias-21.htm .
6. http://www.iasplus.com/en/standards .
7. www.Ifrs.org/updates .
55