Financial

Accounting-2
Lecture 10 – The
effect of changes in
ForEx rates
 Agenda:
• IAS 21 “The Effects of
Changes in Foreign
Exchange rate”

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 Application of IAS 21
An entity may carry on foreign
activities in two ways:
1. It may have transactions in foreign
currencies or
2. It may have foreign operations.

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 The main problems of
accounting transactions in
1. Inforeign currency
what way transactions in foreign
currency can be presented in financial
statements;
2. Which exchange rate should we use;
3. How to recognize the effects of
changes in foreign exchange rate on
financial statements.

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 IAS 21 shall be applied:
• In accounting for transactions and
balances in foreign currencies,
• In translating the results and financial
position of foreign operations that are
included in the financial statements of
the entity by consolidation; and
• In translating an entity’s results and
financial position into a presentation
currency.
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 Currency of statements
• 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.
– This currency might not be the same
as the functional currency.

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 Foreign operation
• 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.

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 Currency of statements
• The company can select any
presentation currency.
• Foreign currency is a currency other
than the functional currency of the
entity.

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 Reporting foreign currency
transactions in the functional
•currency
A foreign currency transaction is a
transaction that is denominated or
requires settlement in a foreign
currency, including transactions arising
when an entity:
• Buys or sells goods or services whose
price is denominated in a foreign
currency;
• Borrows or lends funds when the
amounts payable or receivable are
denominated in a foreign currency; 9
 Reporting foreign currency
transactions in the functional
currency
Initial stage:
A foreign currency transaction shall be
recorded, on initial recognition in the
functional currency, by applying to the
foreign currency amount the spot
exchange rate between the functional
currency and the foreign currency at the
date of the transaction.

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 Initial recognition of operations in
foreign currency
• By applying to the foreign currency
amount the spot exchange rate
between the functional currency and
the foreign currency at the date of the
transaction.
• Spot exchange rate is the exchange
rate for immediate delivery.
• Date of the transaction -­‐ the date on
which the transaction first qualifies for
recognition. 11
 Reporting at subsequent
balance sheet dates
At each balance sheet date:
• Foreign currency monetary items
shall be translated using the closing
rate;
• Non-­‐monetary items that are measured
in terms of historical cost in a foreign
currency shall be translated using the
exchange rate at the date of transaction;
• Non-­‐monetary items that are
measured at fair value in a foreign
currency shall be translated using the
exchange rates at the date when the fair
value was determined. 12
 Monetary items
• Monetary items are units of currency
held and assets and liabilities to be
received or paid in a fixed or
determinable number of units of
currency.
• Cash in foreign currency or local bank –
foreign currency;
• Accounts receivable;
• Accounts payable.
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 Monetary items
The essential feature of a monetary item is
a right to receive (or an obligation to
deliver) a fixed or determinable number of
units of currency.

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 Non-­‐monetary items
The essential feature of a non-­‐monetary
the
itemabsence
is of a right to receive
obligation
(or an to deliver) a fixed or
determinable number of units of
currency.
Examples include:
• Amounts prepaid for goods and
services;
• Goodwill;
• Intangible assets;
• Inventories;
• Property, plant and equipment;
• Provisions that are to be settled 15
 Recognition of exchange
differences
Exchange differences arising on the
settlement of monetary items or on
translating monetary items at rates
different from those at which they were
translated on initial recognition during the
period or in previous financial statements
shall be recognized in the profit or loss in
the period in which they arise.

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How to translate financial
statements into a Presentation
Currency
All assets and liabilities for each statement of financial position
presented (including comparatives) using the closing rate at the date of
that statement of financial position.

All income and expenses and other comprehensive income items

Armadillo Industries sells goods to a

Dr AR USD 100,000
Cr Sales USD 100,000
Later, when the customer pays Armadillo, the
exchange rate has changed, resulting in a
payment in pounds that translates to a $95,000
sale. Thus, the foreign exchange rate change
related to the transaction has created a $5,000
loss for Armadillo, which it records with the
following entry:

Dr Cash USD95,000
CR Foreign currency exchange loss USD
5,000
Cr AR USD 100,000
 Homework Assignment
Read:
• IAS 21
Solve:
• Exercises provided below

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Marino company which is based in
Kazakhstan, sells products to client
from the USA for USD 10,000 with
option to pay during 90 days. At time
of selling the FX rate was 125 tenge for
1 USD.
Let’s assume that the financial year
end in 60 days after sale and at that
time FX rate was 128 tenge for USD
The client from the USA has repaid its
debt on time and at repayment date
The American production company has made following
transactions with foreign currency.
December 10, 2014 the company has opened account in Japan
Bank for 250,000 yens. At that time the FX rate was USD
1=110 yens
December 15, 2014 the company has purchased Japanese
equipment for 500,000 yens. 100,000 yens were paid from
current account of the company, the rest of the amount the
company will pay in 30 days. At that time the FX rate was USD
1=100 yens.
January 15, 2015 the American company has fully repaid the
outstanding balance of the equipment. At that time the FX rate
was USD 1=85 yens
FX rate on December 31, 2014 was USD 1=90 yens.