C22 - FRS 121 Foreign

MFRS 121
THE EFFECTS OF CHANGES

IN FOREIGN EXCHANGE
RATES
Definitions
Closing rate
• It is the spot exchange rate at the end of the reporting period.
Foreign operations
• It is a subsidiary, associate, joint venture or branch of a reporting entity,
the activities of which are based or conducted in a country or currency
other than those of the reporting entity.
Functional currency
• It is the currency of the primary economic environment in which the entity
operates.
Exchange difference
• It is the difference resulting from translating a given number of units of
one currency into another at different exchange rate.
Foreign currency
• It is the currency other than the functional currency of the entity.
Presentation currency
• It is the currency in which the financial statements are presented.
Monetary items
• Monetary items are ‘units of currency held or assets and liabilities to be
received or paid in a fixed or determinable number of units of currency’.
Spot rate
• It is the exchange rate for immediate delivery.
Determining the Functional Currency
The primary factors are:

a. the currency:
i. that mainly influences sales prices for goods and
services (the currency in which the sales prices are
denominated) and;
ii. of the country whose competitive forces and regulations
mainly determine the sales prices of its goods and
services.
b. the currency that mainly influences labour, material and
other costs of providing goods or services (the currency in
which the costs are denominated).
Secondary factors that may provide evidence of an entity’s
functional currency are:
a. the currency in which funds from financing activities (issuing
of debt and equity instruments) are generated.
b. the currency in which receipts from operating activities are
usually retained.
Determining the functional currency of a
foreign operation – to measure whether it is
the same/extension as parent or not
• Level of autonomy. Whether the foreign operations are carried out

as an extension of the parent or the foreign operation operates
with a significant level of autonomy.
• The volume of transactions between the foreign operation and the
parent is high or low.
• Whether the cash flows from the foreign operation’s activities
directly affect the cash flows of the parent and whether the funds
are readily available for remittance to the parent.
• Whether the foreign operation is financed mainly from its own
operation or borrowing rather than by the parent.
Functional Currency is
Indeterminable
Where the functional currency is not easily determinable, management has
to rely on its own judgement to determine the functional currency that
faithfully represents the economic effects of the transactions, events and
conditions. The primary factors will be considered before looking at the other
factors.
An entity would have:

a. Foreign currency transactions
b. Foreign operations
They include:
• Purchases and sales of goods and services where the transactions are
denominated in the foreign currency,
• Borrowings and lending where the receivables and payables are
denominated in the foreign currency, and
• Acquisition and disposal of assets, or incurring or settling liabilities
denominated in a foreign currency.
Foreign Transactions
Initial measurement
The transaction will be recorded in functional currency using the spot rate.
For example
Rose Bhd bought a machine on 1 Jan 14 costing NZ$ 30,000. The exchange
rate on 1 Jan 14 was RM1:NZ$0.25.
The functional and presentation currency in RM
Therefore it would be recorded as follows:-
Machine (30,000/.25) RM120,000

Account Payable RM120,000
.
Subsequent measurement
– All monetary items are retranslated at the closing or reporting date rate.
– Non-monetary items are not retranslated; they are measured at exchange
rate at the date of the transaction.
Jackson Bhd purchased on credit a machine costing S$30,000 on 1 January x3.

On July x3, Jackson Bhd paid S$10,000 as part of settlement. The functional
currency are Ringgit Malaysia. The relevant exchange rates are as follows:-
1.1.x3 --------- RM1:S$0.50
1.7.x3 --------- RM1:S$0.40
31.12.x3 ------RM 1: S$0.42
Answer:-
I Jan x3 Machine (30,000/.50) RM60,000

Account Payable RM60,000
1 July x3 Accounts payable (10,000/.5) RM20,000
Loss on exchange (SOPL) RM5,000
Bank (10,000/0.4) RM25,000
31 Dec x3 Loss on exchange (SOPL) RM7,619
(20,000/0.42 – RM40,000)
Accounts payable RM7,619
Non-Monetary Items At Fair Value In Foreign Currency
• If the asset is a foreign asset and is to be measured at fair value, the
asset has to be translated into the functional currency by using the
exchange rate ruling at the date when the fair value was determined. The
translated ‘fair value’ is compared with the ‘historical cost’ carrying
amount.
Example:-
• Big Abe whose functional currency is Ringgit Malaysia, bought a property
in India for Rs 10 million on Jan x2. On 31 Dec x4, the property was Rs12
million. Big Abe wants to incorporate the fair value for the property.
Ignore depreciation.
• The rate of exchange were:- 1.1.x2 ------- RM1: Rs10
31.12.x4------RM1: Rs12.50
On I Jan property would be measured at RM1 million (Rs10,000/10).

On 31st Dec x4, there is surplus of Rs 2 million should be credited to ARR if
the functional currency is rupees.
However, as the functional currency is in Ringgit Malaysia, the fair value will
be Rs 12 million/12.5 =Rm960,000
Therefore there will be deficit of RM40,000 in SOPL and Property will be
valued at RM960,000 in the SOFP.
Other Non-monetary Items Subjected to Remeasurement
• Some assets’ carrying amounts are determined by comparing two

or more amounts. Example of such an item is inventories where
the carrying amount of inventories is the lower of cost and net
realisable value in accordance with MFRS 102 Inventories.
• MFRS102 – choose the lower of cost and net realisable value.

• To determine the presentation currency/fuctional currency the
cost is translated at the exchange ruling of the cost and the net
realisable value.
• The carrying amount will be which ever is lower.

Functional Currency and
Presentation currency are different
• MFRS 121 allows an entity to have a presentation currency which
is not its functional currency.
• Such an entity has to record the transactions in its functional
currency and then translate the financial statements into Ringgit
Malaysia (presentation currency).
Recognition of Exchange Difference
• The standard requires the exchange difference that arises when

monetary items are settled, and from retranslating monetary
items at the reporting date to be recognised in the income
statement in the period in which they arise.
Foreign Operations
Two types of foreign operations:

a. Foreign operation whose functional currency is that of the parent.
b. Foreign operation has its own functional currency and the parent’s
functional currency may be its presentation currency.
Translation of the Financial Statements
Translating from Local Currency to Functional Currency which is

that of the Parent
Property, plant and equipment Date of purchase

Property, plant and equipment Date of revaluation
at fair value
Cost of inventory Date when the cost was incurred
Net realisable value of the Date on which the realisable value
inventory was determined
Monetary assets and liabilities Closing rate
Revenue and expenses Rates on date of transactions or

average rate for the period
Depreciation charge Same rate as the relevant
property, plant and equipment
Share capital and pre- Historical rate
acquisition reserves
Presentation Currency is Not the
Functional Currency
All assets including goodwill Closing rate
All liabilities Closing rate
Revenue and expenses Rates at the dates of the

transactions or average rate for
the period provided there are no
significant fluctuation in exchange
rates
Goodwill
Goodwill on consolidation is retranslated at each reporting date. The
difference between the carrying value and the current value based on
the reporting date exchange rate is taken to equity.
Disposal of Foreign Operation
• When a foreign operation is disposed of, the cumulative amount of
the difference on exchange will be recognised in the income
statement when the operation is disposed of and the gain or loss
on disposal is recognised. If there is a partial disposal of the
operation, the proportionate share of the cumulative difference on
exchange is recognised in the income statement.
• Write-down of the carrying amount of the foreign operation is not
considered as disposal and so no part of the cumulative difference
on exchange is recognised in the income statement.

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MFRS 121

THE EFFECTS OF CHANGES

The primary factors are:

• Level of autonomy. Whether the foreign operations are carried out

An entity would have:

Machine (30,000/.25) RM120,000

Jackson Bhd purchased on credit a machine costing S$30,000 on 1 January x3.

I Jan x3 Machine (30,000/.50) RM60,000

On I Jan property would be measured at RM1 million (Rs10,000/10).

• Some assets’ carrying amounts are determined by comparing two

• MFRS102 – choose the lower of cost and net realisable value.

• The carrying amount will be which ever is lower.

• The standard requires the exchange difference that arises when

Two types of foreign operations:

Translating from Local Currency to Functional Currency which is

Property, plant and equipment Date of purchase

Revenue and expenses Rates on date of transactions or

All assets including goodwill Closing rate

All liabilities Closing rate

Revenue and expenses Rates at the dates of the

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