Sheet 2A

~TK- oF
IAS 21 & Foreign Currency : 1 2
IFRS 10
LIAS 21: SCOPE & DEFINITIONS Ho
SCOPE
IAS 21 shall be applied:
(a) in accounting for transactions and balances in foreign currencies, except for derivate
transactions under the scope of IAS 39/IFRS 9;
(b) in translating the results and financial position of foreign operations: in the
consolidation process; and
(c) in translating an entity's results and financial position into a presentation currency.

DEFINITIONS
Closing rate is the spot exchange rate at the SFP date
Exchange is the difference resulting from translating.a*given.number of units of
difference one currency into another currency at different exchange rate.
Exchange rate is the ratio of exchange for two currencies.
The price that would be received to-sell an asset or paid to transfer a
Fair value liability in orderly transaction between market participants at the
measurement date.
Foreign currency | is a currency other than the functional currency of the entity.
is an entity that is a subsidiary, associate, joint venture or branch of a
Foreign operation | reporting entity, the activities of which are based or conducted in a
country or currency other.than those of the reporting entity.
Functional is the currency of the:primary economic environment in which the
currency entity operates.
are units of currency held and assets and liabilities to be received or
Monetary items
paid in a fixed or determinable number of units of currency.
Net investment in | is the amount of the reporting entity's interest in the net assets of that
a foreign operation.
operation :
Presentation “| is the currency in which the financial statements are presented.
currency
Spot exchange. is the exchange rate for immediate delivery.
rate

| DETERMINING FUNCTIONAL CURRENCY i

Each entity.whether an individual company, a parent of a group, or an operation within a
group (such as a subsidiary, associate or branch) should determine its functional currency
and measure its results and financial position in that currency. The functional currency is the
currency of the primary economic environment in which the entity operates and it is normally
the currency in which the entity primarily generates and expends cash.

Where an entity is registered in a particular national jurisdiction and the majority of its
transactions take place there, that jurisdiction's currency will be the entity's functional
currency. In-practice, many entities operate internationally, with group entities or business
divisions located worldwide. In such circumstances, management will be required to make a
reasoned judgment in respect of each entity/division, based on the available facts. Where
the functional currency of an entity is not cbvious, an explanation of why a particular
currency was identified as being its functional currency would aid users' understanding of the
business operations of the entity.

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Indicators
Under IAS 21, the management of a company needs to determine the
functional currency of the company by assessing various indicators of the
of
functional
economic environment in which the company operates. IAS 21 provides
primary and secondary indicators for use in the determination of an entity's
currency
functional currency, as summarised below.
. The currency that mainly influences sales prices for goods and services
(often the currency in which prices are denominated and settled); ~
* The currency of the country whose competitive forces and regulations
Primary
indicators
mainly determine the sales prices of its goods and services; and
. The currency that mainly influences labour, material and other costs of
providing goods or services (often the currency in which prices are
denominated and settled).
* The currency in which funds from financing activities (raising loans and
Secondary issuing equity) are generated; and gies ie,
indicators . The currency in which receipts from operating activities are usually
retained.
In addition to the five indicators mentioned above, four*additional.factors are
considered in determining the functional currency of a foreign'operation and
whether its functional currency is the same as that,of the reporting entity.
. Whether the foreign operation carries out its business as though it were
an extension of the reporting entity rather than with a significant degree
Functional of autonomy.
currency of ® Whether transactions with the parent are a:high or a low proportion of
foreign the foreign operation's activities...
operations « Whether cash flows from the activities of the foreign operation directly
affect the cash flows of the. parent and are readily available fo)
remittance to it.
« Whether cash flows from the activities of the foreign operation are
sufficient to service existing and normally expected debt obligations
without funds being made available by the reporting entity.
ACCOUNTING (INDIVIDUAL '‘COMPANY)
REPORTING FOREIGN. CURRENCY TRANSACTIONS _|
Apply the: spot,exchange rate to foreign currency amount at the date of
pia Be an transaction. For practical reasons, an average rate over a period may be
used if it approximates the actual rate at the date of transaction.
Ateach SFP date foreign currency item shall be translated as follows:
. Items Translation
Monetary items Using the closing rate
Subsequent Non-monetary items measured | Using the exchange rate at the date
recognition at historical cost of the transaction
Non-monetary items measured ee = . oe ae ean
at fair value determined

Exchange difference arising | To be recognised in:

on:
Settlement of monetary items P&L in the period
Recognition Translation of monetary items at P&L in the period
of exchange different rates
differences Gain or loss on non-monetary Directly in equity
items recognised in equity
Gain or loss on non-monetary Directly in P&L
items recognised in P&L

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 Class Notes

There is one exception to the above rules, that is, exchange differences
arising on monetary items that form part of the reporting entity's net
investment in foreign operation are recognised in the group financial
statements within a separate component of equity (re-classifiable). They
are recognised in P&L on disposal of net investment.

The exchange difference arising on monetary items that form part of the
reporting entity's net investment in foreign operation is recognised in P&L in
the entity's separate financial statements.

Change in | When there is a change in an entity's functional currency, the entity shall
functional apply the translation procedures applicable to the new functional currency
currency prospectively form the date of the change.

[QUESTION 07
An entity purchases equipment fom a foreign supplier for €6 million on. March 31, 2006,
when the exchange rate was €2=$1. The entity also sells goods to foreign customer for €3.5
million on April 30, 2006, when the exchange rate was €1.75=$1. At the entity’s year end of
May 31, 2006, the amounts have not been paid. The closing exchange:rate was €1.5=$1.
The entity's functional currency is the $.

Required: ‘ 7
Calculate the exchange differences that would be recorded in profit or loss for the period
ending May 31, 20067 .

[QUESTION 04
P Limited has foreign subsidiary whose:functional currency is the euro. The functional
currency of the entity is the $. On January 1,:2006'when the exchange rate was $1=€1.5 the
entity loans the subsidiary $3 million. At December 31, 2006, the loan has not been repaid
and is regarded as part of the net.investmentin the foreign subsidiary, as settlement of the’
loan is not planned or likely to occur, in the foreseeable future. The exchange rate at
December 31, 2006 is $1=€2,,and the average rate for the year was $1=€1.75

Required:
Explain how this loan would be treated in subsidiary's and group financial statements?

[ USE OF PRESENTATION CURRENCY | |

USE OF PRESENTATION CURRENCY OTHER THAN THE FUNCTIONAL CURRENCY
Ifthe financial statements of the entity are not in the functional currency of a |-
hyperinflationary economy, then they are translated into the presentation
}"currency using the following procedure:
Assets and liabilities (including any | Translated at closing rate
goodwill arising on the acquisition
and any fair value adjustment)
Translation Income and expenses (including | Translated at spot exchange rates
to ; comparatives) at the date of transaction (Average
presentation rates may be used if they
currency approximate the actual rates)
All resulting exchange differences Shall be recognised as a separate
component of equity.
In case of a hyperinflationary economy, all amounts are translated at the
closing rate except that the comparative amounts are shown as presented in
the previous period.
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(QUES
an opening share capital of $2
K Limited commenced business on January 1, 2006 with
million. The income statement and closing balance sheet follow:
SPL&OCI for the year ended December 31, 2006
$m
Revenue - 32
4| Cost of sales (10)
Gross profit 22
Distribution costs (8)
Administrative expenses (2)
Profit before tax 12
Tax expense (4)
Profit for period 8

Statement of financial position as at December 31, 2006 - $m ‘

Share capital ~ 2
Retained earnings . 8
~ 410
Trade payables 4
Total equity and liabilities 14

Freehold land (acquired December 31,2006) = .#**"», 8

Inventories ay, 4
Trade receivables ; 2
Total assets ~s 14

The functional currency is the $, but the-entity-wishes to present its financial statements
using the Euro as its presentation currency. The entity translates the opening share capital
at the closing rate. The exchange rates in the period were:
$1=
January 01,2006 |. | €1.0
December 31,2006... ~ : €2.0
Average rate €1.5

Required: 8
Translate the financial:statements from the functional currency to presentation currency?

GROUP ACCOUNTS’
_ | When preparing group accounts, it is normal to deal with entities that utilise
Translation, | different currencies. The financial statements should be translated into the
presentation currency of parent.
Any goodwill and fair value adjustments are treated as assets and liabilities
Goodwill* of the foreign entity and therefore are retranslated at each SFP date at the
closing spot rate.
Exchange differences on intra-group items are recognised in P&L unless the
Intra group | difference arises on retranslation of net investment in a foreign operation
items when it is classified in other comprehensive income [re-classifiable]
(becomes part of equity).
Dividends paid in a foreign currency by a subsidiary to its parent company
may lead to exchange differences in the parent's financial statements and
Dividends in
such differences will not be eliminated on consolidation but recognised
P&L.

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 Class Notes

DISPOSAL OF FOREIGN OPERATION

When a foreign operation is disposed of, the cumulative amount of the exchange differences
in equity relating to that foreign operation shall be recognised in P&L when the gain or loss
on disposal is recognised.

QUESTION 04
H Limited has a 100% owned foreign subsidiary, which it carries at its original cost of $2 [5
million. It sells the subsidiary on March 31, 2007, for €5 million. As of March 31, 2007, the
balance on the exchange reserve was $300,000 credit. The functional currency of the entity
is the $, and the exchange rate on March 31, 2007 is $1=€2. The net asset value of the
subsidiary at the date of disposal was $2.4 million.

Required:
Discuss the treatment of the disposal of the foreign subsidiary?

[FOREIGN SUBSIDIARY (CONSOLIDATED FS STAGE) |

countries whose presentation
A parent may own subsidiary or subsidiaries in foreign
situation, before
currency may also differ from parent entity's presentation currency: In:this
tion currency
consolidation, subsidiary financial statements should be translated to presenta
of parent entity.

(STATEMENT OF FINANCIAL POSITION _ i

Translate all subsidiary figures at closing rate except as explained below:
W1 | No change
sition-date
Take subsidiary’s share capital.and pre-acquisition reserves at Acqui
w2 Exchange-rate.
Convert the total to closing-rate and transfer the gain/loss to W4 Exchange Reserve
Column.
Calculate goodwill by taking investment (and FV of NCI) and W2 at Acquisition-date
W3 Exchange-rate.
Convert the total to closing-rate and transfer the gain/loss to W4 (full goodwill) or W6
(partial goodwill) Exchange Reserve Column.
years’ profit from RE
Ww4 Transfer the exchange gain effect of current year and previous
column to ER column.
te Exchange-rate.
W5 | Calculate NChin.normal way but take W2 at Acquisition-da
W6 | No change

INCOME ii
| STATEMENT OF COMPREHENSIVE
All items of subsidiary’s income and expenses are translated at actual
Exchange rate (average) rate.
The exchange gain (loss) is presented in OCI (for changed during the
year only).

The gain (loss) is calculated as aggregate of:

Exgianige Gall W2 at closing rate — W2 at opening rate

W3 at closing rate —- W3 at opening rate
W4 current profit at closing rate —- W4 current profit at average rate
W4 previous profits at closing rate — W4 previous profits at opening rate

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[QUESTION 09
Domestic is an entity that owns 80% of the ordinary shares of its foreign subsidiary
Overseas that has Dinar as its functional currency. The subsidiary was acquired on 1
January 2011 when its reported reserves were 6,000 Dinars.

At the date of the acquisition the fair value of the net assets of the subsidiary was 20,000
Dinars. This included a fair value adjustment in respect of land (still owned)of 4,000 Dinars
that the subsidiary has not incorporated into its accounting records and still owns. Domestic
wishes the presentation currency of the group accounts to be §, It values the non-controlling
interest using the proportion of net assets method.

Statements of financial position as at December 31, 2011

Domestic Overseas
$ . ~Dinars»
Investment in Overseas . 3,818
Assets 9,500 40,000
13,318 “40,000

Share capital 5,000 10,000

Retained earnings 6,000 8,200
Liabilities 2,318 21,800
13,318 40,000

Statement of PL and OCI for the year ended December 31, 2011
Domestic Overseas
$ Dinars
Revenue 8,000 5,200
Costs (2,500) (2,600)
Profit before tax i 5,500 2,600
Tax (2,000) (400)
Profit for the year 3,500 2,200

Neither entity recognized any other.comprehensive income in their individual accounts in the
period. <

Relevant exchange rates (Dinars to $1) are:

~ Date Exchange rate (Dinars to $1)
01 January,2011 %», 5.5
31 December 2011 5.0
Weighted average for year 5.2

Required: © ="
Prepare-the.consolidated statement of financial position and consolidated SPL&OCI.

QUESTION 06
The draft financial statements of Hardees, a public limited company, and its subsidiary,
Subway are set out below:

Statements of financial position Hardees Subway

- at 31 December 2005 $000 | €000
Non-current assets
Property, plant and equipment 2,870 4,860
Investment in Subway 840 -
3,710 4,860

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