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DEFINITIONS DEFINITIONS
 Exchange rate  Foreign currency transaction
Is the ratio of exchange for two currencies. Is a transaction that is denominated and/or requires settlement in a foreign
currency.
 Spot exchange rate .

Is the exchange rate for immediate delivery.  Presentation currency

Is the currency in which the financial statements are presented.
THE EFFECTS OF  Closing rate
Is the exchange rate at the reporting period.  Monetary items
CHANGES IN FOREIGN  Exchange difference Are units of currency held and assets and liabilities to be received or paid in a
fixed or determinable number of units of currency.
Is the difference resulting from translating a given number of units of one
EXCHANGE RATES (IAS 21) currency into another currency at different exchange rates.  Transaction date
 Fair value The date on which the risks and rewards of ownership transfer.
MODULE 14 Is the amount for which an asset could be exchanged or a liability settled
between knowledgeable willing parties in an arms length transaction.
 Settlement date
The date upon which a foreign debtor or creditor pays or is paid.
 Foreign currency
 Translation date
Is a currency other than the functional currency.
The date on which the balance in foreign currency is converted into local
 Functional currency
currency (transaction date, settlement date and reporting date.
1 Is the currency of the primary economic environment in which the entity 2 3
operates.

IAS 21 Overview Foreign Currency Transactions Foreign Currency Transactions

 Businesses enter into transactions with foreign entities. These transactions  The types of foreign currency transactions that can be entered into are
 What does IAS 21 cover? involving incomes, expenses, assets and liabilities may be denominated in numerous. Examples of these types of transactions are:
 Transactions in foreign currencies foreign currencies.
• Borrowing or lending money
– Sales / purchases denominated in foreign currencies • Purchasing or selling inventory
 Financial statements are prepared in one currency only, all foreign currency
– Foreign loans amounts must be converted into the currency used for the financial statements • Purchasing or selling depreciable assets
 Foreign operations (presentation currency).
– Covered later in year  The dates involved with foreign currency transactions are very important
 There is often a considerable time lag between the date that a foreign debtor because exchange rates differ from day to day. The following dates are
• Foreign subsidiaries, joint ventures, associates, branches
or creditor is created and the date upon which that debtor pays or creditor is significant when recording the foreign currency transaction:
❸ Presenting AFS in a foreign currency paid. This results in exchange differences because exchange rates fluctuate on • Transaction date
– Later in year a daily basis. • Settlement date
 An exchange rate is the price of one currency in another currency. • Translation date
 What does IAS 21 not cover?
Example:  The transaction is recognised on transaction date, which is the date the
– “Hedge accounting” as defined
• If we have two currencies, a local currency (LC) and a foreign currency (FC), definition and recognition criteria are met.
• Covered by IFRS 9
we would quote the exchange rate directly as FC1:LC4.This means that to
purchase one unit of FC, we would have to pay 4 units of LC.  The order date occurs before the transaction date. The order date is normally
not relevant but when dealing with hedging with a forward exchange contract
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• We can also quote the same exchange rate indirectly as LC1:FC0.25. This 5 it may become relevant (see later slides) 6
means that 1 unit of LC would purchase 0.25 units of FC.

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Transaction Date Recognition and Measurement

 The first thing that must be determined in a foreign currency transaction is
Settlement and Reporting Date
the transaction date. The date on which the transaction must be recognised is Initial Recognition and Measurement
established with reference to the relevant IFRS that applies to that type of  Settlement date
transaction. The settlement date is the date on which:  The foreign currency transaction is initially recognised on transaction date.

 The transaction date is normally the date the risks and rewards of ownership • A foreign creditor is fully or partially paid; or  The foreign currency transaction is measured by multiplying the foreign
is transferred to the purchaser. • Full or partial payment is received from a foreign debtor. currency amount by the spot exchange rate (between foreign currency and
functional currency) on transaction date.
 For imports and exports, there are two common ways of shipping goods  Reporting date
between countries:  We are thus measuring both the monetary and non-monetary items at the spot
It is possible for a foreign currency transaction to spread over more than one exchange rate.
• Free on Board (F.O.B)
financial year. Where such a transaction is spread over more than one
As soon as the entity shipping the goods has delivered the goods to the port financial year, at least one year-end occurs between the transaction date and
of departure and they have been loaded onto the ship, the risks of the settlement date. The year-end/s falling between transaction and settlement Subsequent Measurement : Monetary Items
remaining voyage transfers to the entity that will be receiving the goods and date is known as the reporting (translation) date.
the transaction date will be the date that the goods were loaded onto the ship  Monetary items are defines as ‘units of currency held and assets and
in the originating country. liabilities to be received or paid in a fixed or determinable number of units of
currency’.
• Costs Insurance Freight (C.I.F)
 As the exchange rate changes, the measurement of amounts owing to or
The entity shipping the goods retains the risks of the voyage until the goods
receivable from a foreign entity changes.
arrive in the receiving port and the transaction date will be the date that the 7 8 9
goods are offloaded at that destination harbour.

Recognition and Measurement Recognition and Measurement

Recognition and Measurement
Subsequent Measurement : Non-Monetary Items
Subsequent Measurement : Monetary Items (continued)  Local currency denominated non-monetary items: • The reason that an exchange rate can affect such items is because:
• They could have been purchased using foreign currency, in which case they  the cost or carrying amount is translated at the spot rate on transaction date; and
 Monetary items are translated to the latest exchange rates: are converted into the local currency at the spot rate on transaction date and  The net realisable value or recoverable amount is translated at the spot rate on the
• On each subsequent reporting period are thereafter denominated in the local currency (called the functional reporting date.
If the monetary item is not settled by the end of the reporting period, then an currency).
 Foreign Loans
exchange difference is likely to be recognised. This is because the item was • These items are not affected by subsequent changes in exchange rate. • The granting of loans to foreign entities or the receipt of a loan in a foreign currency
originally measured at the spot rate on transaction date and must be restated Example: from a foreign lender.
to the spot rate on the reporting date (closing rate). • Interest receivable or interest payable must be calculated based on the outstanding
If plant is purchased where the purchase is denominated in a foreign
currency, this is converted into the local currency on transaction date and the foreign currency amount and then translated into the local currency at the average rate
• On settlement date over the period that the interest was earned or incurred.
plant is then measured in terms of IAS 16 without any subsequent
The amount paid or received is based on the spot rate on settlement date. If translations. • The calculations should be done as follows:
the spot rate on transaction/reporting date is different to the spot rate on  Calculate the loan amortisation table in the foreign currency;
settlement date, an exchange difference will arise.  Foreign currency denominated non-monetary items:  Journalise the payment at the spot rate;
• They could be owned by a foreign branch or foreign operation of the entity  Journalise the interest at the average rate; and
 Exchange Differences (latter needs to be consolidated) in which case they are denominated in  Calculate the difference between the carrying amount of the loan and the value of
• The exchange differences on monetary items are recognised in profit or loss foreign currency in the books of the branch, these will have to be converted the balance owing at spot rate at year end and recognise the difference as a
in the period in which they arise, except for when it relates to a consolidated into the local currency. foreign exchange gain or loss.
foreign operation. 10 • This may be affected by a change in the exchange rate. This occurs when the11 12
measurement of the item depends on the comparison of two or more amounts.

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Presentation and Functional Presentation and Functional Presentation and Disclosure

Currencies Currencies
 IAS 21 allows an entity to present its financial statements in whichever The following disclosures are required by IAS 21.51 - .57:
currency it chooses to, this is then known as the presentation currency.  Using a presentation currency other than the functional currency:
 The amount of the exchange differences recognised in profit and loss
 IAS 21 requires that an entity’s transactions and balances be measured in that • If an entity chooses to disclose financial statements in a currency other than its
entity’s functional currency, thus entities must establish their functional functional currency, it will have to translate all of its items from the functional  The net exchange differences recognised in other comprehensive income and
currencies. currency to the presentation currency at year end. a reconciliation thereof.
• A foreign currency translation reserve is created because the exchange differences
 An entity’s functional and presentation currency is often the same currency,  Change in functional currency, state fact and reason for change.
arise upon translation because:
but where it is not the same a translation reserve will result.
 Assets and liabilities are translated at one rate, while movements in those assets  Where presentation currency differs from presentation currency state reasons
 Determining the functional currency: and liabilities (represented by income and expenses) are translated at different
and compliance with IFRS.
rates; and
It is the currency of the primary economic environment in which the entity
 Opening balances of net assets are translated at a rate different to the previous  ETC.
operates (IAS 21.9 – .11) closing rate.
 Accounting for a change in functional currency: • As these exchange differences has no effect on future cash flows from operations,
An entity may not change its functional currency unless there is a change in they are not recorded in profit or loss, but rather in other comprehensive income.
the underlying transactions and conditions to the factors listed above.
IAS 21.35 - .37)
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Key Points

 Approach:
 First account for the transaction correctly in foreign currency
 Secondary issue, chose the correct rate to translate the transaction, i.e.
spot, average, closing etc.

 Monetary / non-monetary distinction is NB as determines which assets are

adjusted to closing rate at year end

 Students must be aware that exchange rates can be quoted directly, R/$ or
indirectly $/R, this makes a big difference and needs to be watched very
closely.

 Also look at whether you are accounting from buyer or seller’s point of view,
will change direction of forex gains.

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