IAS 21 Notes PDF

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Summary

1. Introduction: 2 ways an entity can participate in foreign activities: o Txs in a foreign currency o Foreign operations (branch) Entity can choose to present FS in a foreign currency (e. for IAS 21 apply to: o Hedge Accounting (IFRS 9) o Presentation in SCF 2. Definitions: Foreign Currency Currenc...

Description

1. Introduction: 

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2 ways an entity can participate in foreign activities: o Txs in a foreign currency (import/export) o Foreign operations (branch) Entity can choose to present FS in a foreign currency (e.g. for s/hs) IAS 21 doesn’t apply to: o Hedge Accounting (IFRS 9) o Presentation in SCF

2. Definitions: Foreign Currency Currency other than functional currency of entity.

Functional Currency Currency determined by primary economic environment.

Primary Economic Environment Economic environment in which entity primarily generates & spends its cash. Factors to determine functional currency:     

Currency that influences SPs Currency of country (whose competitive forces + regulations mainly det. SPs) Currency mainly influences labour, material & other costs of g+s Currency in which funds from financing activities are generated Currency in which receipts from operating activities retained

Presentation Currency Currency in which FS presented.

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Foreign Operation Subsidiary, associate, joint venture or branch of reporting entity whose:  

activities take place in another country; or currency is different to that of the entity

3. Foreign Currency Transactions Transaction denominated in a foreign currency or must be settled in a foreign currency.   

Purchase/sell g+s (prices in a foreign currency) Borrows/loans amts payable/receivable in a foreign currency Acquires/disposes of assets OR incurs/settles liabilities (denominated in foreign currency)

3.1 Initial Recognition  

Spot exchange rate @ date of tx: risks & rewards of ownership transferred (point of dispatch by seller) o Free-on-board (FOB): purchaser responsible for shipping + insurance costs o Cost-insurance-freight (CIF): seller responsible for shipping + insurance costs DR xx

Inventories / Machine / Equipment (SFP) Foreign Creditor (SFP)

CR xx

Note: Some cases, more practical to use average rate (e.g. interest) rather than actual rate. If exchange rate fluctuates significantly, use of ave. rate not appropriate. When calc. average rate, ALWAYS use spot to spot rate (NOT last average to spot rate)

3.2 Reporting Date Monetary Items:   

Held in cash, assets to be received or liabilities to be paid (in fixed/determinable amts) E.g.: debtors, creditors, loans received/given, accrued income/expenses @ Rep Date: re-measured using closing rate

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Re-measure only amt being paid (e.g. instalment) again on settlement date – before pmt

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DR xx

Foreign Exchange Difference (P/L) Foreign Creditor (SFP)

CR xx

Note: Always apply int. rate to foreign currency amt 1st then apply forex rate! Non-Monetary Items:    

Not meet definition of monetary item = non-monetary E.g.: inventories, PPE @ Rep Date: remain measured using spot rate on tx date If measured @ fair value, measured using exchange rates used to det. the fair value

Items whose CA determined by comparing 2 or more amts   

IAS 2 Inventories: lower of cost & NRV IAS 36 Impairments: lower of CA & Recoverable Amount (RA) If NRV or RA in a foreign currency, translated @ exchange rate prevailed on date amt determined

3.3 Buy & Sell Rates   

Sell Rate: rate @ which bank sells foreign currency to purchaser Buy Rate: rate @ which bank will purchase foreign currency from user (lower than sell rate) Difference between 2 rates = bank’s compensation

If entity has to pay foreign creditor :. needs to purchase foreign currency from bank – bank sells foreign currency to entity = SELL RATE used If foreign debtor pays entity in foreign currency :. entity needs to sell to bank – bank buys foreign currency from entity = BUY RATE used

3.4 Recognition of Foreign Exchange Differences 

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Arise on: o settlement of monetary items o translating monetary items Recognised in P/L

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3.5 Change in Functional Currency Can only change if there is a change in underlying txs, events & conditions relevant to entity 

Translation procedures applied prospectively

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Apply exchange rates on date of change For non-monetary items – resultant translated amts = historical cost Fact & reason for change disclosed

4. Translation of Financial Statements (2) 4.1 Translation to Presentation Currency  

If functional & presentation currency differ – entity must translate results + fin position to presentation currency Procedure: 1. A & L (incl. comparatives) @ closing rate 2. Income & expenses (incl. comp.) @ average rate  Except Opening + Closing Inventory used to calc. COS 3. Exchange differences recog. in OCI “Foreign Currency Translation Reserve” → “Items that will be reclassified to P or L”

4.2 Translation of a Foreign Operation (FO) Factors to det. FO’s functional currency:    

Whether activities of FO carried out as extension of reporting entity rather than having autonomy Whether txs of rep entity form large/small part of FO Whether CFs from activities of FO influence CFs of rep entity directly + available for remittance to rep entity FO’s CFs adequate to service own debt without funds being made available by rep entity

Translation procedure same as 4.1 $

$

Rate



ZAR

ZAR

Average rate

Income + Exp. A or L

Closing rate

Make sure internal txs eliminated :. Head Office Account should = Branch Account (just insert amts into table above) 4

 

Any differences after = exchange rate differences (FCTR is balancing amt) “FCTR” – if DR balance, put in brackets (xxx) o Movement to OCI in SPLOCI → “Items that will be reclassified to P or L” o Recon in SCE

5. Income Tax Implications For FRK 300 – assume accounting & tax treatment of exchange differences is the same.

6. Disclosure 

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Disclose the following: o Amt of exchange diffs in P/L :. income & expense separately (in PBT note) o Net exch. diffs in OCI on SPLOCI o Recon of net exch. diffs in SCE “FCTR” If Presentation Currency differs from Functional Currency o Disclose this fact + reason why o Can only state FS complies with IFRS if all req (incl. translation method) met o If not met:  ID info as additional  Disclose currency used for additional info  Disclose functional currency + translation method used If entity changes Functional Currency: o Disclose this fact + reason

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