IAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

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IAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

  1. 1. IAS 21 The Effects of Changes in Foreign Exchange Rates CA. Nirmal Ghorawat B. Com(Hons), ACA
  2. 2. OBJECTIVE <ul><li>To prescribe </li></ul><ul><ul><li>How to Include </li></ul></ul><ul><ul><ul><li>Foreign Currency Transactions and </li></ul></ul></ul><ul><ul><ul><li>Foreign Operations </li></ul></ul></ul><ul><ul><li>in the Financial Statements of the entity and </li></ul></ul><ul><ul><li>How to Translate Financial Statements into a presentation currency. </li></ul></ul>
  3. 3. SCOPE
  4. 4. FUNCTIONAL CURRENCY <ul><li>Currency of the ‘ PRIMARY ECONOMIC ENVIRONMENT ’ in which the Entity operates. </li></ul><ul><li>Primary Economic Environment is normally the one in which the Entity PRIMARILY GENERATES AND EXPENDS CASH . </li></ul>
  5. 5. FUNCTIONAL CURRENCY <ul><li>PRIMARY INDICATORS </li></ul><ul><ul><li>The Currency that determines the Sales prices of its goods and services and Operating Costs. </li></ul></ul>
  6. 6. EXAMPLE 1 <ul><li>Q What is the Functional Currency? </li></ul><ul><li>Facts Entity A is incorporated in UAE (Dinar). (Capital) </li></ul><ul><li>It has a Branch in Singapore (Singapore Dollar) from where it sells Computers. </li></ul><ul><li>All Sales are denominated in CHD (100%). </li></ul><ul><li>Goods sold are imported from China (Yuan) (50%) </li></ul><ul><li>Labour & Operating Cost in CHD (40%) </li></ul><ul><li>Head Office & Corporate Expenses (Dinar) (5%) </li></ul><ul><li>Borrowing Costs & Profits (Dinar) (5%) </li></ul><ul><li>A SINGAPORE DOLLAR (CHD) </li></ul>
  7. 7. FUNCTIONAL CURRENCY <ul><li>SECONDARY INDICATORS </li></ul><ul><ul><li>Currency of Generation of Funds from Financing Activities – Issue of Debt and Equity Instruments. </li></ul></ul><ul><ul><li>Currency of Retention of Receipts from Operating Activities </li></ul></ul>
  8. 8. EXAMPLE 2 <ul><li>Q What is the Functional Currency? </li></ul><ul><li>Facts Entity A is incorporated in UAE (Dinar). ( Capital ) </li></ul><ul><li>It has a Branch in Singapore (Singapore Dollar) & in Malaysia (Malaysian Rupiah) from where it sells Computers. </li></ul><ul><li>Sales - CHD (40%), MRU (20%), Exports-USD (40%) </li></ul><ul><li>Goods sold are imported from China (Yuan) (30%) & India (INR) (20%) </li></ul><ul><li>Operating Cost in CHD (32%), MRU (08%) </li></ul><ul><li>Head Office & Corporate Expenses (Dinar) (5%) </li></ul><ul><li>Borrowing Costs & Profits (Dinar) (5%) </li></ul><ul><li>A UAE DINAR </li></ul>
  9. 9. FUNCTIONAL CURRENCY OF FOREIGN OPERATIONS <ul><li>ADDITIONAL INDICATORS </li></ul><ul><ul><li>Autonomy – Activities of Foreign Operation are Extension of the Reporting Entity or carried with a Significant Degree of Autonomy. </li></ul></ul><ul><ul><li>Volume of Transactions with the Reporting Entity </li></ul></ul><ul><ul><li>Impact of Cash Flows of Foreign Operation on the Reporting Entity. </li></ul></ul><ul><ul><li>Ability to service Debt Obligations without resort to Reporting Entity. </li></ul></ul>
  10. 10. EXAMPLE 3 <ul><li>Q What is the Functional Currency? </li></ul><ul><li>Treasury – Invests surplus money received from Subsidiaries in European Bond Markets & is a PE in Mauritius. </li></ul><ul><li>A USD (UNITED STATES DOLLAR) </li></ul>
  11. 11. EXAMPLE 4 <ul><li>Q What is the Functional Currency? </li></ul><ul><li>A USD (UNITED STATES DOLLAR) </li></ul>
  12. 12. FUNCTIONAL CURRENCY ENTITY Primary Economic Environment Sales Operating Costs Capital Borrowed Funds PRIMARY SECONDARY ADDITIONAL INDICATORS (IN CASE OF FOREIGN OPERATION)
  13. 13. FUNCTIONAL CURRENCY <ul><li>When Indicators are mixed and Functional Currency is not obvious, MANAGEMENT uses its JUDGEMENT. </li></ul>
  14. 14. CHANGE IN FUNCTIONAL CURRENCY <ul><li>FUNCTIONAL CURRENCY is </li></ul><ul><li>Used CONSISTENTLY </li></ul><ul><li>NOT Changed unless there is a Change in Underlying Transactions, Events and Conditions ( primary economic environment) </li></ul><ul><li>If Changed, then apply TRANSLATION procedures PROSPECTIVELY . </li></ul>
  15. 15. DEFINITIONS Foreign Currency Currency other than ‘functional currency’. Spot Exchange Rate The ‘exchange rate’ for immediate delivery. Monetary items units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency
  16. 16. INITIAL RECOGNITION <ul><li>Of FOREIGN CURRENCY TRANSACTION </li></ul><ul><li>In FUNCTIONAL CURRENCY </li></ul><ul><li>By applying SPOT EXCHANGE RATE </li></ul><ul><li>(b/w Functional Currency & Foreign Currency) </li></ul><ul><li>At the Date of Transaction </li></ul><ul><li>Average Rate is permitted, if the exchange rates don’t fluctuate significantly. </li></ul>
  17. 17. SUBSEQUENT MEASUREMENT # Exchange differences arising on monetary items that form part of a reporting entity’s net investment in foreign operation shall be recognized, in consolidated financial statements initially as a separate component of equity and recognized in profit or loss on Disposal of the net investment. Items Translation Rate Recognition of Exchange Differences on Settlement or Translation Monetary Items Closing Rate on Balance Sheet Date To Profit or Loss # Non-Monetary Items at Historical Cost Rate as at Date of Transaction Equity : If Gain or Loss is recognized in Equity. PL : If Gain or Loss is recognized in PL. Non-Monetary Items at Fair Value Rate as at Date of Fair Value Determination
  18. 18. EXAMPLE 5 - TRANSLATION Items of BS Monetary or Non-Monetary P&L, Equity or None Rate Loans & Receivable M P & L Closing Rate Available for Sale (AFS) Equity Investment NM at FV Equity (OCI) Rate as at Date of Determination of Fair Value PPE (Fixed Assets) NM at Cost Equity Rate as at Date of Purchase Investment Property at FV NM at FV P & L Rate as at Date of Determination of Fair Value Prepaid Expenses NM NA Rate as at Date of Transaction Deferred Revenue NM NA Rate as at Date of Transaction
  19. 19. TRANSLATION TO PRESENTATION CURRENCY * * Except that of an entity whose functional currency is the currency of a hyperinflationary economy. # Average Rate is permitted, if the exchange rates don’t fluctuate significantly. Items Translation Rate Recognition of Exchange Difference Assets and Liabilities (including Comparatives) Closing Rate on Balance Sheet Date As a Separate Component of Equity. Income and Expenses (including Comparatives) Exchange Rate at the date of the transaction # Equity (including Comparatives) Historic Rate or Closing Rate (Management Policy)
  20. 20. SUMMARY
  21. 21. DISCLOSURES <ul><li>The amount of Exchange Differences recognised in P&L except for those arising on Financial Instruments measured at Fair Value through P & L (IAS 39); </li></ul><ul><li>Net exchange differences classified as a separate component of equity, and a reconciliation of the amount of such exchange differences at the beginning and end of the period. </li></ul>
  22. 22. DISCLOSURES <ul><li>Presentation Currency is Not Functional Currency – the said Fact, disclosure of Functional Currency, reason for using a different presentation currency. </li></ul><ul><li>Change in the Functional Currency of the Reporting Entity or a Significant foreign operation – the said Fact and the reason for the change in the Functional Currency. </li></ul>

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