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    The Effect of Changes in Foreign Exchange Rates

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    hantumarang
    IAS 21 provides guidance on accounting for foreign currency transactions and foreign operations in financial statements. It addresses how to determine a functional currency, translate financial statements, and recognize exchange differences. The standard requires entities to determine functional currency considering primary and secondary factors, and translate monetary and non-monetary items using different exchange rates. Entities must disclose information such as functional currency and exchange differences in the statement of comprehensive income or equity. Auditors obtain evidence such as invoices and exchange rate confirmations to verify compliance with IAS 21.

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    The Effect of Changes in Foreign Exchange Rates

    Uploaded by

    hantumarang
    520 views11 pages
    IAS 21 provides guidance on accounting for foreign currency transactions and foreign operations in financial statements. It addresses how to determine a functional currency, translate financial statements, and recognize exchange differences. The standard requires entities to determine functional currency considering primary and secondary factors, and translate monetary and non-monetary items using different exchange rates. Entities must disclose information such as functional currency and exchange differences in the statement of comprehensive income or equity. Auditors obtain evidence such as invoices and exchange rate confirmations to verify compliance with IAS 21.

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    IAS 21 - Presentation

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    IAS 21 provides guidance on accounting for foreign currency transactions and foreign operations in financial statements. It addresses how to determine a functional currency, translate financial statements, and recognize exchange differences. The standard requires entities to determine functional currency considering primary and secondary factors, and translate monetary and non-monetary items using different exchange rates. Entities must disclose information such as functional currency and exchange differences in the statement of comprehensive income or equity. Auditors obtain evidence such as invoices and exchange rate confirmations to verify compliance with IAS 21.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    520 views11 pages

    The Effect of Changes in Foreign Exchange Rates

    Uploaded by

    hantumarang
    IAS 21 provides guidance on accounting for foreign currency transactions and foreign operations in financial statements. It addresses how to determine a functional currency, translate financial statements, and recognize exchange differences. The standard requires entities to determine functional currency considering primary and secondary factors, and translate monetary and non-monetary items using different exchange rates. Entities must disclose information such as functional currency and exchange differences in the statement of comprehensive income or equity. Auditors obtain evidence such as invoices and exchange rate confirmations to verify compliance with IAS 21.

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    IAS 21

    The Effect of Changes in


    Foreign Exchange Rates
    IAS 21

    Individual Company Stage Consolidation FS Stage


    Foreign currency transaction Foreign operation
    • Initial recognition
    • Subsequent
    measurement Temporal Net investment
    • Recognition of exchange method method
    difference
    Definition

    Functional Currency Currency of the primary environment in which the


    entity operates

    Presentation Currency Currency in which the FS is presented

    Closing Rate Exchange rate at reporting year end date

    Spot Exchange Rate 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
    Determining the Functional
    Currency
    PRIMARY FACTORS SECONDARY FACTORS OTHER FACTORS
    a) The currency : Currency in which : a)Level of autonomy in foreign
    i. mainly influences SP for a) Funds from financing operation
    goods and services activities are generated b)Volume of transactions
    ii. of the country whose b) Receipts from operating c)Cash flow from foreign
    competitive forces activities are retained activities directly affect cash
    mainly determine the SP flow of parent
    of goods and services d)Foreign operation financed by
    b) The currency that mainly own operation or by the parent
    influences labour,
    material, and other costs
    of providing goods and
    services
    Initial Reporting at
    recognition subsequent year end
    Foreign currency transaction Exchange
    initially recorded in its functional Foreign currency items
    Rate
    currency
    Monetary Items Closing rate
    Exchange rate : Non-monetary items
    •Spot rate carried at historical cost
    Historical rate
    •Average rate (If do not fluctuate in foreign currency
    significantly) (NCA, Inventory)
    Non-monetary items Exchange rate
    carried at fair value in when value is
    foreign currency determined
    Recognition of Exchange Difference

    ‘The difference resulting from translating a given number of units of one currency
    into another currency at different exchange rates’

    Settlement of monetary items


    E.g.: Receivables, payables, loans PnL in the period
    Translating an entity’s monetary items at they arise
    rates different from initially recorded
    Gain or loss on a non-monetary item and
    any related exchange differences Equity
    E.g.: Revaluation of PPE
    Foreign Operation

    Temporal method Net investment method


    • Same functional currency as • Different functional currency
    reporting entity (parent) from the reporting entity

    • Extension of reporting entity • Foreign operation normally


    operate in semi-autonomous
    way
    Translating the Financial Statement

    Method Net investment


    Items Temporal method
    method
    PPE Date of purchase Closing rate
    PPE (revalued) Date of revaluation Closing rate
    Date when the cost
    Cost of inventory Closing rate
    was incurred
    Monetary assets and liabilities Closing rate Closing rate
    Revenue and expenses Actual / average rate Actual / average rate
    Depreciation charged Same as relevant PPE Average rate
    Share capital and pre-acquisition
    Historical rate Historical rate
    profit
    Goodwill on consolidation - Closing rate
    Treated as equity
    Difference on translation Profit or loss Recognised in PnL on
    disposal of NI
    Disclosure

    • Functional currency of parent


    • Difference on exchange
    I. Amount recognised in the SOCI
    II. Amount classified as a component of equity and the movement in the
    equity component
    • If the functional currency is different from the presentation currency, that fact
    should be state together with the reason and disclosure of the functional
    currency
    • In the case of change in the functional currency, the reason of the change
    should be stated
    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 differences
    Thank You

    Masyi Roslan

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