THE INSTITUTE OF CHARTERED
ACCOUNTANTS OF SRI LANKA
POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE 2014/2015
Principles of Financial and Cost Accounting
Thilanka Warnakulasooriya
B.Com Special (Col), ACA, MBA Fin ( Col)
LKAS 21
The Effects of Changes in Foreign Exchange Rates
LKAS 21
The Effects of Changes in Foreign Exchange Rates

Definitions

Functional currency is the currency of the primary economic
environment in which the entity operates.

Presentation currency is the currency in which the financial
statements are presented.

Foreign currency is a currency other than the functional
currency of an entity.

Closing rate is the spot exchange rate at the reporting date.

Spot exchange rate is the exchange rate for immediate
delivery.

Foreign operation is a subsidiary, associate,
joint venture or branch of the reporting
enterprise, the activities of which are based
or conducted in a country other than the
country of the reporting entity.

Net investment in a foreign operation is the
amount of the reporting entity’s interest in
the net assets of that operation.

Monetary items are currency held and assets
and liabilities to be received or paid in fixed
or determinable number of units of currency.
Determining functional currency
The currency:

That mainly influences sales price

of country whose rules & regulations influence
sales price

that influences labour, materials and other costs

in which financing generated

in which receipts from activities retained

Initial recognition
◦ record foreign currency transactions in a
consistent manner.
◦ Every transaction will be translated into the
functional currency at the spot rate ruling at
the time of the transaction.

Reporting at the ends of subsequent reporting
periods
Monetary items
• Closing rate – Rate prevailed at end of the reporting period.
Non monetary items measured
• Exchange rate at the date of the transaction
at cost
Non monetary items measured
• Exchange rate at the date when the FV was determined.
at FV
Recognition of exchange differences

Exchange differences arising on settlement,
or translating at the reporting date, of
monetary items all go to profit or loss.

If gains/losses on a non-monetary item are
taken to other comprehensive income (OCI)
then any exchange difference is also taken
to equity, through other comprehensive
income.

If gains/losses on a non-monetary item are
NOT taken to equity then any exchange
difference is taken to profit or loss.
Presentation currency
If the presentation currency is different to the
functional currency:
◦ Assets/liabilities are translated at closing
rate
◦ Income/expenses are translated at actual
rate (average may be used)
◦ Exchange differences are taken to equity,
through other comprehensive income
◦ Cumulative exchange difference reclassified
to profit or loss on disposal of subsidiary.