CBIZ & MHM Executive Education Series™
IFRS: Accounting for Foreign Currency
Transactions
Presented by: Marco Pulido, Shar...
2#CBIZMHMwebinar
 To view this webinar in full screen mode, click on view
options in the upper right hand corner.
 Click...
3#CBIZMHMwebinar
 This webinar is eligible
for CPE credit. To receive
credit, you will need to
answer periodic
participat...
4#CBIZMHMwebinar
The information in this Executive Education Series
course is a brief summary and may not include all
the ...
5#CBIZMHMwebinar
Today’s Presenters
Marco Pulido, CPA
Shareholder
310.268.2746 | mpulido@cbiz.com
Marco has 15 years of ex...
6#CBIZMHMwebinar
Today’s Agenda
Principal concepts of IAS 21
Determining the Functional Currency of an entity
Effects of c...
7#CBIZMHMwebinar
 The standard applies:
 in accounting for transactions and balances in foreign
currencies, except for t...
8#CBIZMHMwebinar
 DEFINITION: The currency of the primary economic
environment in which the entity operates.
 Primary ec...
9#CBIZMHMwebinar
 The currency:
 that mainly influences sales prices for goods and services (this will
often be the curr...
10#CBIZMHMwebinar
 The following factors may also provide evidence of an entity’s
functional currency:
 the currency in ...
11#CBIZMHMwebinar
1
1
Additional factors to consider in determining the functional
currency of a foreign operation
Does th...
12#CBIZMHMwebinar
1
2
Additional factors to consider in determining the functional
currency of a foreign operation
Does th...
13#CBIZMHMwebinar
 When the indicators are mixed and the functional currency is
not obvious, management uses its judgment...
14#CBIZMHMwebinar
 A monetary item is a right to receive (or an obligation to deliver) a fixed or
determinable number of ...
15#CBIZMHMwebinar
Question:
 Yes or No — A corporation in the U.S. purchases inventory from a supplier in
China in Chines...
16#CBIZMHMwebinar
Question:
 Yes or No — A corporation in the U.S. purchases inventory from a supplier in
China in Chines...
17#CBIZMHMwebinar
 Financial statements must be maintained in the “functional currency” of each
entity.
 If maintained i...
18#CBIZMHMwebinar
 Translation of financial statements from functional currency to
presentation currency
 The results an...
19#CBIZMHMwebinar
Question:
 Yes or No — A foreign subsidiary of a U.S. corporation (whose functional
currency is the US ...
20#CBIZMHMwebinar
Question:
 Yes or No — A foreign subsidiary of a U.S. corporation (whose functional
currency is the US ...
21#CBIZMHMwebinar
 IAS 29 Financial Reporting in Hyperinflationary Economies is
applied when the functional currency is t...
22#CBIZMHMwebinar
 The method of consolidation is not specified, either the “direct”
or “step-by-step” method of consolid...
23#CBIZMHMwebinar
Background
 Canada Mining is a diamond mining company and is jointly controlled as follows:
 50% Diamo...
24#CBIZMHMwebinar
Response- 2008
 Answer is B, US dollars. It is considered that the dollar is the
functional currency of...
25#CBIZMHMwebinar
Question 2
What was the functional currency of Canada Mining in 2009?
a) Canadian dollars
b) US dollars
...
26#CBIZMHMwebinar
Response- 2009
 Answer B, US dollars. No change from 2008 since there were
no changes in transactions, ...
27#CBIZMHMwebinar
Questions?
28#CBIZMHMwebinar
 Join us for these upcoming IFRS courses:
 September 4: Business Combinations Under IFRS
 October 23:...
29#CBIZMHMwebinar
Connect with Us
linkedin.com/company/
mayer-hoffman-mccann-p.c.
@mhm_pc
youtube.com/
mayerhoffmanmccann
...
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Webinar Slides: Accounting for Foreign Currencies Under IFRS

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Original air date: July 10, 2014
Archived recording available at http://www.mhmcpa.com

Please join us for this webinar in which our IFRS experts will talk about issues surrounding International Accounting Standard (IAS) 21: The Effects of Changes in Foreign Exchange Rates, a standard developed by the IASB to prescribe the accounting effects on a company that operates in more than one currency and reporting requirements when the operational currency of a subsidiary is different relative to that of the parent company.

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Webinar Slides: Accounting for Foreign Currencies Under IFRS

  1. 1. CBIZ & MHM Executive Education Series™ IFRS: Accounting for Foreign Currency Transactions Presented by: Marco Pulido, Shareholder July 10, 2014
  2. 2. 2#CBIZMHMwebinar  To view this webinar in full screen mode, click on view options in the upper right hand corner.  Click the Support tab for technical assistance.  If you have a question during the presentation, please use the Q&A feature at the bottom of your screen. Before We Get Started…
  3. 3. 3#CBIZMHMwebinar  This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar.  External participants will receive their CPE certificate via email immediately following the webinar. CPE Credit
  4. 4. 4#CBIZMHMwebinar The information in this Executive Education Series course is a brief summary and may not include all the details relevant to your situation. Please contact your service provider to further discuss the impact on your business. Disclaimer
  5. 5. 5#CBIZMHMwebinar Today’s Presenters Marco Pulido, CPA Shareholder 310.268.2746 | mpulido@cbiz.com Marco has 15 years of experience in public accounting working with U.S. GAAP, IFRS and other foreign accounting standards in the U.S., Europe and in Latin America with Big 4 accounting firms. He has experience with SEC filers (foreign and domestic) and private companies. Marco is a CPA certified in California and has IFRS certifications by the Institute of Chartered Accountants in England and Wales (ICAEW) and the American Institute of Certified Public Accountants (AICPA). Technical accounting expertise includes the following industries: Energy (Oil & Gas) - Retail, Distribution & Manufacturing - Transportation - Utilities - Consumer Services - Construction/Real Estate - Health Sciences – Financial Services – Agriculture.
  6. 6. 6#CBIZMHMwebinar Today’s Agenda Principal concepts of IAS 21 Determining the Functional Currency of an entity Effects of changes in exchange rates on Monetary Items Use of a Presentation Currency other than the Functional Currency 1 2 3 4 5 6 Other issues IFRS vs. US GAAP differences
  7. 7. 7#CBIZMHMwebinar  The standard applies:  in accounting for transactions and balances in foreign currencies, except for those derivative transactions and balances that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments  in translating the results and financial position of foreign operations that are included in the financial statements of the entity by consolidation or the equity method; and  in translating an entity’s results and financial position into a presentation currency. <IAS 21.3> Scope of IAS 21
  8. 8. 8#CBIZMHMwebinar  DEFINITION: The currency of the primary economic environment in which the entity operates.  Primary economic environment:  Is normally the one in which it primarily generates and expends cash. Functional Currency
  9. 9. 9#CBIZMHMwebinar  The currency:  that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and  of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.  that mainly influences labor, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled). <IAS 21.9 > Determining Functional Currency Primary factors
  10. 10. 10#CBIZMHMwebinar  The following factors may also provide evidence of an entity’s functional currency:  the currency in which funds from financing activities (i.e., issuing debt and equity instruments) are generated.  the currency in which receipts from operating activities are usually retained.  U.S. GAAP difference: U.S. GAAP has a list of factors to consider, all of which are generally given equal importance. Factors are not distinguished by primary and other. <IAS 21.10 > Determining Functional Currency Secondary factors
  11. 11. 11#CBIZMHMwebinar 1 1 Additional factors to consider in determining the functional currency of a foreign operation Does this factor suggest that the functional currency of the foreign operation is the same as the reporting entity? The activities of the foreign operation are carried out as an extension of the reporting entity. Yes or No? The activities of the foreign operation are autonomous. Yes or No? Transactions with the reporting entity represent a large proportion of the business activities of the foreign operation. Yes or No? Cash flows of the foreign operation are readily remittable to the reporting entity. Yes or No? Cash flows of the foreign operation are sufficient to service existing and normally expected debt obligations without funds being made available by the reporting entity. Yes or No? <IAS 21.11> Determining Functional Currency Functional currency of a foreign operation vs. reporting entity
  12. 12. 12#CBIZMHMwebinar 1 2 Additional factors to consider in determining the functional currency of a foreign operation Does this factor suggest that the functional currency of the foreign operation is the same as the reporting entity? The activities of the foreign operation are carried out as an extension of the reporting entity. Yes The activities of the foreign operation are autonomous. No Transactions with the reporting entity represent a large proportion of the business activities of the foreign operation. Yes Cash flows of the foreign operation are readily remittable to the reporting entity. Yes Cash flows of the foreign operation are sufficient to service existing and normally expected debt obligations without funds being made available by the reporting entity. Yes <IAS 21.11> Determining Functional Currency Functional currency of a foreign operation vs. reporting entity
  13. 13. 13#CBIZMHMwebinar  When the indicators are mixed and the functional currency is not obvious, management uses its judgment to determine the functional currency giving priority to the primary indicators.  Once determined, the functional currency is not changed unless there is a change in the underlying transactions, events and conditions.  A change in functional currency can only be applied prospectively.  The exchange rate of the new functional currency is applied on the date of the change. < IAS 21.12, 13 and 35 > Determining Functional Currency
  14. 14. 14#CBIZMHMwebinar  A monetary item is a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency.  E.g., Receivable or payable in a foreign currency  Monetary items denominated in a foreign currency must be converted to the functional currency of the reporting entity using the spot exchange rate.  At reporting dates and until the monetary item is settled, gains or losses due to changes in the exchange rate are recorded in the P&L as “exchange gain (loss)”  Conversely, the essential feature of a non-monetary item is the absence of a right to receive or (an obligation to deliver) a fixed amount of units of currency.  Similarly, items are converted to functional currency at date of purchase. However, no subsequent recognition of an “exchange gain (loss)” for changes in exchange rates.  This includes items such:  Prepayments for goods or services  PP&E purchased in foreign currency (converted at exchange rate at date of purchase to functional currency of the reporting entity with no subsequent adjustment to the cost basis) <IAS 21.16 and 21> Monetary vs. Non-monetary Items
  15. 15. 15#CBIZMHMwebinar Question:  Yes or No — A corporation in the U.S. purchases inventory from a supplier in China in Chinese Yuan. Upon receipt of the inventory, the U.S. corporation records a payable. Is the payable a monetary item? Example – Purchase of Inventory in Foreign Currency
  16. 16. 16#CBIZMHMwebinar Question:  Yes or No — A corporation in the U.S. purchases inventory from a supplier in China in Chinese Yuan. Upon receipt of the inventory, the U.S. corporation records a payable. Is the payable a monetary item? Response:  Yes. The payable represents an obligation to deliver a fixed amount of units of currency. Hence, this monetary item should be translated to the functional currency of the U.S. corporation (dollar) at the date that the payable is recognized, with periodic adjustments to the payable to reflect changes in the exchange rate until settlement date.  Changes in the payable due to changes in the exchange rate are recorded as an “exchange gain (loss)” on the income statement. Example – Purchase of Inventory in Foreign Currency
  17. 17. 17#CBIZMHMwebinar  Financial statements must be maintained in the “functional currency” of each entity.  If maintained in a different currency, i.e. “reporting currency,” the financial statements must be translated to the functional currency. This entails recognizing all transactions at their original exchange rate, which will result in a gain (loss) at closing dates.  U.S. GAAP calls this a “remeasurement gain (loss)”.  An entity may then have to convert their financials to a “presentation currency”, e.g. for purposes of consolidating with the reporting entity.  This process requires a translation of the financial statements. <IAS 21.38 > Use of a Presentation Currency other than the Functional Currency Reporting Currency Functional Currency Presentation Currency
  18. 18. 18#CBIZMHMwebinar  Translation of financial statements from functional currency to presentation currency  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:  Assets and liabilities for each balance sheet presented shall be translated at the closing rate at the date of the balance sheet, equity at historical exchange rates;  Income and expenses for each income statement shall be translated at exchange rates at the dates of the transactions, i.e. historical (avg. ex. rate for year is often used); and  All resulting exchange differences are recognized in other comprehensive income (OCI).  Accumulated effect in OCI carries over to future periods and is recognized in P&L once foreign operation is disposed of. <IAS 21.39 and 48 > Use of a Presentation Currency other than the Functional Currency
  19. 19. 19#CBIZMHMwebinar Question:  Yes or No — A foreign subsidiary of a U.S. corporation (whose functional currency is the US dollar) has determined that the Euro is its functional currency. However, the foreign subsidiary maintains its financial statements, i.e., reporting currency, in US dollars. Must the foreign subsidiary convert its financial statements to its functional currency as required by IAS 21.38? Example – Use of a Presentation Currency other than the Functional Currency
  20. 20. 20#CBIZMHMwebinar Question:  Yes or No — A foreign subsidiary of a U.S. corporation (whose functional currency is the US dollar) has determined that the Euro is its functional currency. However, the foreign subsidiary maintains its financial statements, i.e., reporting currency, in US dollars. Must the foreign subsidiary convert its financial statements to its functional currency as required by IAS 21.38? Response:  Yes. IAS 21 requires that all entities maintain their financial statements in their functional currency. In this case, the foreign subsidiary must convert their financial statements to its functional currency, which is the Euro. In order to consolidate its financial information with the U.S. corporation, it will then need to translate its financial statements from its functional currency to the presentation currency using the procedures noted in IAS 21.39.  Conversion process = US dollar – Euro – US dollar Example – Use of a Presentation Currency other than the Functional Currency
  21. 21. 21#CBIZMHMwebinar  IAS 29 Financial Reporting in Hyperinflationary Economies is applied when the functional currency is the currency of a hyperinflationary economy.  The cumulative inflation rate over three years is approaching, or exceeds, 100%.  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 (IAS 29) using the following procedures:  Assets, liabilities, equity – Closing exchange rate  Income and expenses – Closing exchange rate  U.S. GAAP – Functional currency changes from hyperinflationary currency to US dollar or currency of reporting entity, if different. IFRS maintains the functional currency. <IAS 21.42 and 43> Functional Currency is Currency of a Hyperinflationary Economy
  22. 22. 22#CBIZMHMwebinar  The method of consolidation is not specified, either the “direct” or “step-by-step” method of consolidation is used  Direct method – Each entity within the consolidated group is directly translated into the functional currency of the ultimate parent and then consolidated into the ultimate parent (i.e., the reporting entity) without regard to any intermediate parent.  Step-by-Step method – Each entity should be consolidated by the enterprise that controls the entity. Hence, each entity is consolidated into its immediate parent until the ultimate parent has consolidated the financial statements of all the entities below it.  The choice of consolidation method used could affect the cumulative translation adjustments in OCI at intermediate levels, and exchange rate differences upon disposal of an intermediate foreign operation.  U.S. GAAP – Step-by-Step is the only allowable method. Consolidation of Foreign Operations
  23. 23. 23#CBIZMHMwebinar Background  Canada Mining is a diamond mining company and is jointly controlled as follows:  50% Diamond Mining USA (whose functional currency is the dollar)  50% British Mining (company in the UK whose functional currency is the pound).  Canada Mining is autonomous and the president previously worked for British Mining.  International diamond trade follows U.S. regulations and all sales are denominated in dollars.  In 2009, Diamond Mining USA sold its participation in Canada Mining to British Mining. Question 1 What was the functional currency of Canada Mining in 2008? a) Canadian dollars b) US dollars c) British pounds Case Study – Determination of the Functional Currency
  24. 24. 24#CBIZMHMwebinar Response- 2008  Answer is B, US dollars. It is considered that the dollar is the functional currency of Canada Mining in 2008, since it is the currency:  that mainly influences sales prices for goods and services, and  whose competitive forces and regulations mainly determine the sales prices of its goods and services.  The primary indicators at IAS 21.9 (primary factors) precede those that are noted at IAS 21.10 and 11 (secondary factors). Case Study – Determination of the Functional Currency
  25. 25. 25#CBIZMHMwebinar Question 2 What was the functional currency of Canada Mining in 2009? a) Canadian dollars b) US dollars c) British pounds Case Study – Determination of the Functional Currency
  26. 26. 26#CBIZMHMwebinar Response- 2009  Answer B, US dollars. No change from 2008 since there were no changes in transactions, facts and underlying conditions that would justify a change in the functional currency.  The functional currency could have changed had Canada Mining become less autonomous, due to an increased dependence on British Mining, and a possible change in the currency which influences pricing. Case Study – Determination of the Functional Currency
  27. 27. 27#CBIZMHMwebinar Questions?
  28. 28. 28#CBIZMHMwebinar  Join us for these upcoming IFRS courses:  September 4: Business Combinations Under IFRS  October 23: Consolidated Financial Statements Using IFRS  November 20: The Impact of IFRS on Income Taxes If You Enjoyed This Webinar…
  29. 29. 29#CBIZMHMwebinar Connect with Us linkedin.com/company/ mayer-hoffman-mccann-p.c. @mhm_pc youtube.com/ mayerhoffmanmccann slideshare.net/mhmpc linkedin.com/company/ cbiz-mhm-llc @cbizmhm youtube.com/user/ BizTipsVideos slideshare.net/CBIZInc MHM CBIZ
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