IFRS

1. ,
IAS 21
The Effects of Changes in
Foreign Exchange Rates

2. Overview
 OBJECTIVE
 SCOPE
 DEFINITIONS
 Elaboration on the definitions
 REPORTING FOREIGN CURRENCY TRANSACTIONS IN THE
FUNCTIONAL
CURRENCY
 Initial recognition
 Reporting at the ends of subsequent reporting periods
 Recognition of exchange differences
 Change in functional currency
 USE OF A PRESENTATION CURRENCY OTHER THAN THE
FUNCTIONALCURRENCY
 Translation to the presentation currency
 DISCLOSURE

3. Objective
to prescribe how to include foreign currency transactions and
foreign operations in the financial statements.
to determine which exchange rate(s) to use and
how to translate financial statements into a presentation
currency.
how to report the effects of changes in exchange rates in the
financial statements.

4. Scope
.
For all IAS 21 issues and except
for Financial instruments (IFRS
9) Linked to Income tax (IAS 12),
Financial reporting in hyper
inflationary economics (IAS 29) ,
Business combination and
consolidation IFRS 3 & IFRS 10
Scope

5. Definitions
. CLOSING
RATE
Is the spot exchange rate at the end of
the Reporting period.
Exchange
difference
is the difference resulting from translating a given
number of units of one currency into another.
.
Exchange
rate
is the ratio of exchange for two
currencies.
.

6. Continued
.
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
.

7. Continued
.
is part of an entity, the activities of which are
conducted in a country or currency other than
those of the reporting entity.
Foreign
operation
is a currency other than the functional
currency of the entity.
Foreign
currency
is the exchange rate for immediate
delivery.
Spot
exchange
rate

8. Elaboration on the definitions
 Factors to be consider during determining Functional Currency:-
sales prices for goods
and services are
denominated and
settled
The currency of
competitive forces and
regulations
the currency that
mainly influences
labor, material and
other costs
•.

9. Continued
 factors that provide evidence of an entity’s functional currency:
the currency in which funds from financing
activities (ie issuing debt and equity
instruments) are generated
currency in which receipts from operating
activities are usually retained.

10. Continued
Note:-
 When the above indicators are mixed and the functional
currency is not obvious, management uses its judgment to
determine the functional currency that most faithfully represents
the economic effects of the underlying transactions, events and
conditions
 once determined, the functional currency is not changed unless
there is a change in those underlying transactions, events and
conditions.

11. Reporting Foreign Currency
Transactions
In The Functional Currency
Initial recognition
A foreign currency transaction shall be
recorded, on the functional currency,
by applying the spot exchange rate
between the functional currency and
the foreign currency at the date of the
transaction.

12. Example
Suppose ethio telecom buys a large consignment of goods from a supplier in Egypt. The order is placed
on 1 April and the agreed price is 124,250 Egypt Dollar. At the time of delivery the rate of foreign
exchange was Birr 1.00 to 3.50 Egypt Dollar.
Required
Show the initial recognition
What will the entries be if the exchange rate is 3.55 when payment is made on may 1?.
Answer
initial recognition- ethio telecom will recognize the purchase using its functional currency (Birr) by
applying the spot exchange rate when the purchase was made (Birr 1.00 to 3.50 Egypt Dollar)
DEBIT Inventory account (124,250 ÷ 3.5) 35,500
CREDIT Payables account $35,500
When ethio telecom comes to pay the supplier, it needs to obtain some foreign currency. By this time,
however, if the rate of exchange has altered to 3.55 to 1, the cost of raising €124,250 would be (÷ 3.55)
35,000. The company would need to spend only 35,000 to settle a debt for inventories 'costing' 35,500.
Since it would be administratively difficult to alter the value of the inventories in the company's books of
account, it is more appropriate to record a profit on conversion of 500.
DEBIT Payables account 35,500
CREDIT Cash 35,000
CREDIT Profit on conversion 500

13. Continued
Reporting at the ends of subsequent reporting periods
 At the end of each reporting period:
foreign currency monetary items shall be
translated using the closing rate; currency at the
date of the transaction.
non-monetary items (measured in historical cost)
shall be translated using the rate at the date of
the transaction; and
.
non-monetary items (measured at fair value)
shall be translated using the rates at the date
when the fair value was measured.

14. Example 2
Ethio telecom, whose year end is 31 December, buys some goods from Company Alash of
Sudan on 30 September. The invoice value is 40,000 Sudanese Dollar and is due for
settlement in equal instalments on 30 November and 31 January. The exchange rate moved as
follows.
Sudanese Dollar to Ethiopian Birr
30 September 1.60 1.00
30 November 1.80 1.00
31 December 1.90 1.00
31 January 1.85 1.00
Required
• State the accounting entries in the books of ethio telecom.

15. Continued
Recognition of exchange differences
 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.
 Exchange differences arising on monetary Items shall be recognized in profit or loss.
Change in functional currency
 The effect of a change in functional currency is accounted for prospectively

16. Use Of A Presentation Currency Other
Than The Functional currency
Translation to the presentation currency
 Procedures to translate functional currency to presentation currency in
(a) assets and liabilities shall be translated using the closing rate
(b) income and expenses shall be translated using exchange rates at the dates of the
transactions; and
(c) all resulting exchange differences shall be recognized in other comprehensive income.

17. Disclosure
The following will be disclosed
(a) The functional currency
(b) amount of exchange differences recognized in p/L and OCI
(c) the reason for using a different presentation currency.

18. Thank You

19. Questions and
Discussion

20. Case Study 1
 Facts
ethio telecom buys inventory from a foreign supplier for $4
million. The functional currency of ethio telecom is the birr.
The date of the order was March 31, 2016, the date of
shipping was April 7, 2016, the date of the invoice was April
8, 2016, the date the goods were received was April 15,
2016, and the date the invoice was paid was May 31, 2016.
 Required
What is the date of the transaction for the purpose of
recording the purchase of inventory?

21. Case Study 2
 Facts
ethio telecom purchases equipment from a foreign supplier for $ 6
million on March 31, 2016, when the exchange rate was $ 1 = 27 birr.
ethio telecom also sells goods to a foreign customer for $ 3.5 million on
April 30, 2016, when the exchange rate was $1 = 28 birr. At ethio
telecom’s year-end of June 30, 2016, the amounts have not been paid.
The closing exchange rate was $ 1= 30 birr. ethio telecom’s functional
currency is the birr.
 Required
Calculate the exchange differences that would be recorded in profit or
loss for the period ending June 30, 2016.