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Unit 6 International Accounting Standard on Foreign Transactions (IAS 21)


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This presentations discusses International Accounting Standard on Foreign Transactions (IAS 21). Important definitions, functional currency, initial recognition, subsequent measurement & recognition of exchange difference at initial stage and use of temporal and net investment method at the time of consolidation of financial statements are covered.

Published in: Economy & Finance, Business
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Unit 6 International Accounting Standard on Foreign Transactions (IAS 21)

  1. 1. Unit 6: International AccountingStandard on Foreign Transactions (IAS21)
  2. 2.  International Accounting Standards onForeign Transactions IAS-212Mrs. Charu Rastogi, Asst.Professor
  3. 3.  Recent political and economic events havefocused on the pressing need for moreuniformity in international accountingstandards3Mrs. Charu Rastogi, Asst.Professor
  4. 4.  IAS 21: The Effects of Changes in Foreign ExchangeRates outlines how to account for foreign currencytransactions and operations in financial statements, and alsohow to translate financial statements into a presentationcurrency. The principal issues are which exchange rate(s) to use andhow to report the effects of changes in exchange rates in thefinancial statements An entity is required to determine a functional currency (foreach of its operations if necessary) based on the primaryeconomic environment in which it operates It generally records foreign currency transactions using thespot conversion rate to that functional currency on the dateof the transaction.4Mrs. Charu Rastogi, Asst.Professor
  5. 5. Functional Currency Currency of the primary environment in which theentity operatesPresentation Currency Currency in which the Financial Statement (FS) ispresentedClosing Rate Exchange rate at reporting year end dateSpot Exchange Rate Exchange rate for immediate deliveryExchange Difference the difference resulting from translating a givennumber of units of one currency into anothercurrency at different exchange ratesForeign Operation a subsidiary, associate, joint venture, or branchwhose activities are based in a country or currencyother than that of the reporting entity.Monetary Items Units of currency held and assets and liabilities to bereceived or paid in a fixed or determinable numberof units of currency5Mrs. Charu Rastogi, Asst.Professor
  6. 6.  Accounting methods used in translation of currencies:◦ Current rate method All items of income statement and balance sheet are translated atcurrent rates◦ Current/non current method Current assets and liabilities are translated at current rate and fixedassets and long term liabilities at historical rate or at the rate at whichthey were acquired◦ Monetary/non monetary method (followed in India) Assets and liabilities are classified as monetary (cash, marketablesecurities, accounts receivable, etc) or non monetary (owners’ equity,land) All monetary balance sheet accounts are translated at the currentexchange and non monetary items are translated at historical rate oracquired rate◦ Temporal method This method uses historical rate for items recorded at historical costs;fixed assets Items that are stated at replacement rates, market rates or expectedfuture value are stated at current rate6Mrs. Charu Rastogi, Asst.Professor
  7. 7. SECONDARY FACTORSCurrency in which :a)Funds from financingactivities aregeneratedb)Receipts fromoperating activitiesare retainedPRIMARY FACTORSa)The currency :i. mainly influencesSP for goods andservicesii. of the countrywhose competitiveforces mainlydetermine the SPb) that mainlyinfluences labour,material, and othercosts of providinggoods and servicesOTHER FACTORSa)Level of autonomy inforeign operationb)Volume oftransactionsc)Cash flow fromforeign activitiesdirectly affect cashflow of parentd)Foreign operationfinanced by ownoperation or by theparent07Mrs. Charu Rastogi, Asst.Professor
  8. 8. Individual CompanyStageForeign currency transactionConsolidation FS StageForeign operation• Initial recognition• Subsequentmeasurement• Recognition ofexchange differenceTemporalmethodNetinvestmentmethod8Mrs. Charu Rastogi, Asst.Professor
  9. 9. Reporting atsubsequent year endInitialrecognitionForeign currency transactioninitially recorded in itsfunctional currencyExchange rate :• Spot rate• Average rate (If do notfluctuate significantly)Foreign currencyitemsExchangeRateMonetary Items Closing rateNon-monetaryitems carried athistorical cost inforeign currency(NCA, Inventory)HistoricalrateNon-monetaryitems carried at fairvalue in foreigncurrencyExchangerate whenvalue isdetermined9Mrs. Charu Rastogi, Asst.Professor
  10. 10. Recognition of Exchange Difference‘The difference resulting from translating a given number of units ofone currency into another currency at different exchange rates’Settlement of monetary itemsE.g.: Receivables, payables, loans PnL in theperiod theyariseTranslating an entity’s monetaryitems at rates different frominitially recordedGain or loss on a non-monetaryitem and any related exchangedifferencesE.g.: Revaluation of PPE (Property,plant & Equipment)Equity10Mrs. Charu Rastogi, Asst.Professor
  11. 11. Temporal method Net investmentmethod• Same functional currency asreporting entity (parent)• Extension of reporting entity• Different functional currencyfrom the reporting entity• Foreign operation normallyoperate in semi-autonomousway11Mrs. Charu Rastogi, Asst.Professor
  12. 12. Translating the Financial StatementTemporal methodNet investmentmethodProperty, Plant and Equipment (PPE) Date of purchase Closing ratePPE (revalued) Date of revaluation Closing rateCost of inventoryDate when the cost wasincurredClosing rateMonetary assets and liabilities Closing rate Closing rateRevenue and expenses Actual / average rate Actual / average rateDepreciation charged Same as relevant PPE Average rateShare capital and pre-acquisition profit Historical rate Historical rateGoodwill on consolidation - Closing rateDifference on translation Profit or lossTreated as equityRecognised in PnLItems Method12Mrs. Charu Rastogi, Asst.Professor
  13. 13. • Functional currency of parent• Difference on exchangeI. Amount recognised in the SOCI (Statement ofComprehensive Income)II. Amount classified as a component of equity and themovement in the equity component• If the functional currency is different from the presentationcurrency, that fact should be state together with the reason anddisclosure of the functional currency• In the case of change in the functional currency, the reason ofthe change should be statedDisclosure13Mrs. Charu Rastogi, Asst.Professor
  14. 14. Audit Evidence• Sales and purchases invoice• Confirmation of the spot rate and closing rate• Confirmation from 3rd party (A/c Payables, A/c Receivables)• Confirmation of the computation of the exchange differences14Mrs. Charu Rastogi, Asst.Professor
  15. 15. 15Mrs. Charu Rastogi, Asst.Professor