IFRS- International Financial Reporting Standard The Global Accounting Language

 IAS 21 refers to International Accounting Standard (Effects of change in Foreign Exchange rate). It explains how to account for foreign currency transactions and operations in financial statements, and also how to translate financial statements into a presentation currency.

It was reissued in December 2003.

There are 3 types of currency linked with the Foreign Exchange Rates:

At each subsequent balance sheet date:

• Foreign currency monetary amounts should be reported using the closing rate 
• Non-monetary items carried at historical cost should be reported using the exchange rate at the date of the transaction
• Non-monetary items carried at fair value should be reported. At the rate that existed when the fair values were determined

Exchange difference arises when monetary items are settled other than the rates where they are initially recognized and are reported as profit or loss during the period.

·        The difference in the value of the foreign currency, when converted to the local currency of the seller, is called the exchange rate.

·        If the value of the home currency increases after the conversion, the seller of the goods will have made a foreign currency gain.

·        However, if the value of the home currency declines after the conversion, the seller will have incurred a foreign exchange loss.

·        If it is impossible to calculate the current exchange rate at the exact time when the transaction is recognized, the next available exchange rate can be used to calculate the conversion.

There are 2 types of gains/losses:

·        Realized gains/losses are the gains or losses on transactions that have been completed. It will be shown in income statement.

·        Unrealized gains/losses are the gains or losses that the seller expects to earn when the invoice is settled, but the customer has failed to pay the amount during by the close of accounting period. These are recorded in the Balance Sheet under the owner’s equity part.

Journal entry required as below:

Reporting foreign currency transactions in the functional currency

Initial recognition: 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

·        otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency

The date of a transaction is the date on which the transaction first qualifies for recognition in accordance with IFRSs. For practical reasons, a rate that approximates the actual rate at the date of the transaction is often used, for example, an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate.

Reporting at the ends of subsequent reporting periods

At the end of each reporting period:

·        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 the 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 measured.

When several exchange rates are available, the rate used is that at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred at the measurement date. If exchangeability between two currencies is temporarily lacking, the rate used is the first subsequent rate at which exchanges could be made.

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 profit or loss in the period in which they arise.

·        When monetary items arise from a foreign currency transaction and there is a change in the exchange rate between the transaction date and the date of settlement, an exchange difference results. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognized in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognized in each period up to the date of settlement is determined by the change in exchange rates during each period.

·        When a gain or loss on a non-monetary item is recognized in other comprehensive income, any exchange component of that gain or loss shall be recognized in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognized in profit or loss, any exchange component of that gain or loss shall be recognized in profit or loss.

·        Monetary items are translated into the functional currency using the closing rate, and non-monetary items that are measured on a historical cost basis are translated using the exchange rate at the date of the transaction that resulted in their recognition.

Change in functional currency

·        When there is a change in an entity’s functional currency, the entity shall apply the translation procedures applicable to the new functional currency prospectively from the date of the change.

·        The effect of a change in functional currency is accounted for prospectively.

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation. Thus, they shall be expressed in the functional currency of the foreign operation and shall be translated at the closing rate.

Gains and losses on foreign currency transactions and exchange differences arising on translating the results and financial position of an entity (including a foreign operation) into a different currency may have tax effects.

Disclosure:

·        An entity shall disclose:

(a)  The amount of exchange differences recognized in profit or loss except for those arising on financial instruments measured at fair value through profit or loss in accordance with IFRS 9.

(b) Net exchange differences recognized in other comprehensive income and accumulated in a separate component of equity, and a reconciliation of the amount of such exchange differences at the beginning and end of the period.

·        When there is a change in the functional currency of either the reporting entity or a significant foreign operation, that fact and the reason for the change in functional currency shall be disclosed.