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Ias 21 – Foreign Currencies
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Ias 21 – Foreign Currencies

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    Ias 21 – Foreign Currencies Ias 21 – Foreign Currencies Presentation Transcript

    • IAS 21 – Foreign Currencies Copyright www.ifrsmc.com 1
    • Foreign Currencies • Objective • Scope • Local Currency, Functional Currency & Presentation Currency • Determination of functional currency • Change in Functional Currency • Foreign Currency Transactions • Recognition of exchange differences • Translation to presentation currency • Consolidated financial statements • Different reporting dates • Net investment in foreign operations • Presentation & Disclosure Copyright www.ifrsmc.com 2
    • Objective • Include foreign currency transactions and foreign operations in an entity’s financial statements • Specify which exchange rates to use and how to report the effects of changes in exchange rates in financial statements • Translate the financial statements into a presentation currency Copyright www.ifrsmc.com 3
    • Scope • Accounting for transactions and balances in foreign currencies • Translating the results and financial position of foreign operations that are included in the entity’s financial statements by consolidation, proportionate consolidation or by equity accounting • Translating an entity’s result and financial position into a presentation currency Copyright www.ifrsmc.com 4
    • Types of Currencies • Recording of transactions Local • Currency of the economic environment in which the entity operates Functional • Reporting Currency Presentation Copyright www.ifrsmc.com 5
    • Currency Determination Maintaining books of accounts Local Currency This may be the Functional local currency Currency Presentation Currency Reporting Currency (Legal requirements / Consolidation) Copyright www.ifrsmc.com 6
    • Indicators • Sales & Cash Inflows Primary Indicators Primary • Expenses & Cash Outflows Secondary Indicators Indicators Copyright www.ifrsmc.com 7
    • Indicators • Financing Activities Primary Indicators Secondary • Retention of Operating Income Secondary Indicators Indicators Copyright www.ifrsmc.com 8
    • Primary Indicators • Currency of the economy which determines the pricing of transactions; denomination of transactions is not relevant Sales & cash inflows • Currency of the country whose competitive forces and regulations mainly determine the sales prices of goods and services • Currency that mainly influences the labour, material and other costs of providing goods Expenses and Cash Outflows and services Copyright www.ifrsmc.com 9
    • Sales and Cash inflows • A US company (X) appoints a distributor (Y) in India for distribution of its goods across India. This is the business model adopted by the X to sell its goods through distributors who have market penetration and expertise to distribute goods. X sells goods to Y in USD and maximum price per item is quoted to Y in USD on a weekly basis. The price of goods tends to decline with time. Therefore, the rebates are given to Y in USD on the closing inventory on a weekly basis. • What is the functional currency where Y quotes the price in USD to the eventual customer? The invoices carry the INR value to arrive at the VAT amount. Copyright www.ifrsmc.com 10
    • Sales and Cash Inflows • Miracle Inc sells consulting services through Miracle India Pvt. Ltd, its India subsidiary, to Pinnacle India and invoices to latter in USD on an hourly basis (US $ 200 per hour). • What is the functional currency of Miracle India? Copyright www.ifrsmc.com 11
    • Expenses and Cash Outflows • Miracle Inc sells consulting services through Miracle India Pvt. Ltd, its India subsidiary, to Pinnacle India and invoices to latter in USD on an hourly basis (US $ 200 per hour or INR 10,000 per hour), depending upon its clientele. Miracle India incurs all expenditure in INR. • What is the functional currency of Miracle India? Copyright www.ifrsmc.com 12
    • Sales & Cash Inflows and Expenses Outflows • Miracle Inc sells consulting services through Miracle India Pvt. Ltd, its India subsidiary, to Pinnacle India and invoices to latter in USD on an hourly basis (US $ 200 per hour). Miracle India incurs all expenditure in INR, other than the royalty payment to Miracle Inc made in USD, which is the biggest component of its expenditure. • What is the functional currency of Miracle India? Copyright www.ifrsmc.com 13
    • Secondary Indicators • Currency in which funds from financing activities are generated Financing Activities (debt / equity) • Currency in which the receipts of Retention of operating Income operating activities are usually retained Copyright www.ifrsmc.com 14
    • Secondary Indicators Miracle Inc sells consulting services through Miracle India Pvt. Ltd its India subsidiary to Pinnacle India and invoices to latter in USD on an hourly basis (US $ 200 per hour or INR 10,000 per hour), depending upon its clientele. Miracle India incurs all expenditure in INR. Miracle India’s funding is all in USD through Miracle Inc. What is the functional currency of Miracle India? Copyright www.ifrsmc.com 15
    • Foreign entity • Additional indicators: • Degree of autonomy • Frequency of transactions with reporting entity • Cash flow impact on reporting entity • Financing Copyright www.ifrsmc.com 16
    • Determination of Functional Currency X ($ functional currency) appoints Y for funding its eventual X (Parent) subsidiaries A (Euro), B (Yen) & C (INR). The only source of inflow to Y is funding from X in USD, and Y Y in turn funds to A, B & C in their (Intermediate respective currencies. Y charges Parent) fee & receives dividends from subsidiaries and remits these back A B C to X. (Subsidiary) (Subsidiary) (Subsidiary) Copyright www.ifrsmc.com 17
    • Determination of Functional Currency X ($ functional currency) appoints Y as treasury centre for providing X (Parent) treasury professional services to its eventual subsidiaries A (Euro), B (Yen) & C (INR). Y charges the fee Y from subsidiaries in Euro, Yen & (Treasury Centre) INR respectively. Y remits back the surplus to X. Y’s local expenses are incurred in GBP. A B C (Subsidiary) (Subsidiary) (Subsidiary) Copyright www.ifrsmc.com 18
    • Mixed Indicators • Management judgment is required Copyright www.ifrsmc.com 19
    • Change in functional currency • Used consistently, unless significant changes in economic facts, events and conditions clearly indicate that the functional currency has changed • Accounted for prospectively Copyright www.ifrsmc.com 20
    • Foreign Currency Transactions • Foreign currency is a currency which is not the functional currency • Recorded on the spot exchange rate (date of transaction) • Average rate is permitted Copyright www.ifrsmc.com 21
    • Subsequent Measurement Monetary Closing rate Items Fair value or Non-monetary historical cost Items Copyright www.ifrsmc.com 22
    • Non-monetary items Fair Value • Exchange rate at the date of fair value • Exchange rate at the date of transaction Historical • No retranslation on subsequent balance sheet dates Cost Copyright www.ifrsmc.com 23
    • Recognition of exchange differences Profit & Loss Profit & Loss Account Account Monetary Non-Monetary Items Items Equity Copyright www.ifrsmc.com 24
    • Non-monetary Items Investment property purchased on 3rd Jan = $ 10 million Gain / loss (Exchange rate = Rs 50 / USD) identified in equity Value = 500 million Revalued on 31st Mar = $ 12 million Exchange gain / (Exchange rate = Rs 40 / USD) loss in equity Value = 480 million Revaluation Loss : 20 million Copyright www.ifrsmc.com 25
    • Non-monetary Items Investment property purchased on 3rd Jan = $ 10 million Gain / loss identified (Exchange rate = Rs 50 / USD) in Profit / Loss Value = 500 million Impaired on 31st Mar = $ 9 million Exchange gain / (Exchange rate = Rs 60 / USD) loss in Profit / Loss Value = 540 million Gain : 40 million Copyright www.ifrsmc.com 26
    • Translation to Presentation Currency • Assets & liabilities at closing rate • Income and expenses at transaction date • All difference should be recognized as a separate component of equity • Equity may be translated either historic rate or closing rate (management policy choice) Copyright www.ifrsmc.com 27
    • Resulting exchange difference • Differences arising from translating the income statement at exchange rate at the transactions dates or average date and assets and liabilities at the closing rate • Differences arising on the opening net assets’ retranslation at a closing rate that differs from previous closing rate Copyright www.ifrsmc.com 28
    • Translation of foreign operations P&L 08 - LC 08 - FC Rates • Analysis of exchange difference PBT 100 120 Avg 1.2 Opening Net Assets: Tax = (205 x 2) – (205 x 1.5) => 102.5 (20) (24) Op 2.0 Income (Profit): PAT 80 96 Closing 1.5 = 80 x (1.2 - 1.5) – 96 => 120.0 B Sheet 08 07 08 (FC) 07 (FC) FA 120 120 180 240 Net Impact = > 17.5 W Cap 205 100 307.5 200 Loan 40 15 60 30 Equity 80 80 160 160 R/ 205 125 267.5 250 Earnings Copyright www.ifrsmc.com 29
    • Different Reporting Dates • Reporting date must not exceed by 3 months of the reporting entity’s balance sheet date • Exchange rate of reporting currency’s balance sheet may be used • Any significant transaction should be adjusted Copyright www.ifrsmc.com 30
    • Minority Interest • Exchange difference allocating to Minority on proportional basis • Copyright www.ifrsmc.com 31
    • Disposal / partial disposal of a foreign operation • Such exchange differences are recognised in profit or loss when the gain / loss on disposal is recognised • In case of partial disposal, only the proportionate share of the related accumulated exchange is included in gain / loss Copyright www.ifrsmc.com 32
    • Disclosures • Amount of exchange differences recognised in profit or loss; • Net exchange differences classified in a separate component of equity, and a reconciliation of amount of such exchange differences at the beginning and end of period Copyright www.ifrsmc.com 33