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:
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.
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