SFRS(I)1-21:

ACCOUNTING
FOR THE EFFECTS
OF CHANGES IN
FOREIGN
CURRENCY
EXCHANGE
RATES
LEARNING OBJECTIVES
• Explain the different exchange rate exposures
• Discuss how foreign exchange gains and losses from the
impact of transaction exposures should be shown in the
financial statements.
• Account for the effects of transaction exposures
• Discuss how foreign exchange gains and losses from the
impact of translation exposures should be shown in the
financial statements.
• Account for the effects of translation exposures
SCENARIO
On 15 November 2018, Company A purchased goods from Company B
for US$ 350,000. Company A repaid this amount on 14 January 2019.
Company A’s accounting records are maintained in Singapore Dollars
(“S$”). Exchange rates used are found in the table below.

Date Exchange Rate

15 November 2018 1.38
31 December 2018 1.40
2018 Average rate 1.34
14 January 2019 1.25

How should Company A record this transaction in its books?

INTRODUCTION
• Foreign Exchange Rate is the rate of exchange between 2
different countries
• What causes foreign exchange risks and exposure?
– Fluctuations in foreign exchanges can cause uncertainties
to business, affecting cash flow, demand and supply of
product and raw material purchased.
• What causes the FX rate to fluctuate?
– Strength of economy, interest rates, government policies
etc
• How does this affect us?
– Jobs and stability of economy, buying power
Advanced Financial Accounting I (BA1009) 6
EXCHANGE RATE QUOTATIONS
Price of a currency expressed in another currency
– Direct quote: price of 1 unit of foreign (source) currency in
terms of domestic (functional) currency
• S$1.30/US$- The direct exchange rate for USD rel to SGD
• S$0.41/RM
• S$1.31/AUD
– Indirect quote: 1 unit of domestic (functional) currency in terms
of foreign (source) currency
• S$1/US$0.769- The indirect exchange rate for USD rel to
SGD
• S$1/RM2.44
• S$1/AUD0.771
Advanced Financial Accounting I (BA1009) 7
EXCHANGE RATE EXPOSURES
Exchange rate
Exposures

Operating Accounting
Exposure exposure
When a firm buys/sells goods Accounting exposure
overseas, it is exposed to operating impacts the Profit & loss
risk. statement or financial
-Firm is also exposed to operating position of a firm.
risk with presence of foreign
competitors in its market Transaction Translation
exposure exposure
EXCHANGE RATE EXPOSURES
Accounting
Exposure

Transaction Translation
Exposure Exposure

Arises directly as a Arises from translation of

consequence of firm’s foreign foreign currency financial
currency transactions statements from local currency
(day to day purchases & sales to group’s reporting currency
in foreign currency will affect for consolidation
the FS of company) • (FS are presented in USD;
since company is based in
USD)
• to be translated from SGD-
> USD
ACCOUNTING FOR FOREIGN
CURRENCY TRANSACTIONS
ACCOUNTING FOR FOREIGN
CURRENCY TRANSACTIONS
1. When to account for foreign currency transactions (FX)
2. How much to account for?
3. How to account?
 ACCOUNTING FOR FOREIGN
CURRENCY TRANSACTIONS

Foreign currency
Financial year end
should be recorded at Settlement
or balance sheet
actual exchange rate date
date
on initial recognition

Date of entering transaction Balance sheet date Date of receiving

(Transaction date) making payment
(settlement date)

Question: What amount / exchange rate should we use at each of

the dates stated above?
Advanced Financial Accounting I (BA1009) 12
INITIAL RECOGNITION
SFRS(1) 1-21, para 21:
A foreign currency transaction shall be recorded, on initial
recognition by applying to the foreign currency amount the
spot exchange rate between the functional currency and the
foreign currency at the actual date of the transaction

13 Advanced Financial Accounting I (BA1009)

REPORTING AT BALANCE SHEET DATE

There are 3 types of transactions that needs to be considered

when reporting at subsequent balance sheet dates:
1. Foreign currency monetary items
2. Foreign currency non-monetary items measured in
terms of historical costs
3. Foreign currency non-monetary items measured at fair
value
REPORTING AT BALANCE SHEET DATE

Foreign currency monetary items

• Units of currency held and assets and liabilities to be received
or paid in a fixed or determinable number of units of currency.
• Eg: Cash, AR,AP, debt securities
• Acc receivables, Acc payables
Foreign currency non-monetary items
• Does not have the right to be received or paid in fixed or
determinable unit of currency
• Eg: Fixed assets, prepayments, intangibles, inventory, equity
securities
REPORTING AT BALANCE SHEET DATE

SFRS(I) 1-21 Para 23:

At the end of each reporting period, foreign currency:
a) Monetary items shall be translated using the closing rate
b) 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 (i.e.: historical
rate)
c) 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.
SETTLEMENT DATE
SFRS(I) 1-21 Para 28:

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
recognised in profit or loss in the period in which they arise.
SETTLEMENT DATE
SFRS(I) 1-21 Para 30:
• When a gain or loss on a non-monetary item is recognised
directly in equity, any exchange component of that gain or
loss shall be recognised directly in equity

• Conversely, when a gain or loss on a non-monetary item is

recognised in profit or loss, any exchange component of that
gain or loss shall be recognised in profit or loss.
SCENARIO
Solution:

15 Nov 18 (Initial recognition)

Trade payables:
Dr: Purchases $483,000
Cr: Trade payables $483,000

31 Dec 18 (Balance sheet date)

Dr: Unrealised exchange loss $7,000
Cr: Trade payables $7,000

14 Jan 19 (Settlement date)

Dr: Trade payables $490,000
Cr: Realised exchange gain $52,500
Cr: Cash $437,500
ACCOUNTING FOR FOREIGN CURRENCY
TRANSACTIONS
Transaction Balance sheet Settlement
date date date

Depending on the items: Use

1)Monetary items  Closing exchange
Use actual rate rate on
exchange
2)Non-monetary items at cost settlement
rate
 Historical rate date
3)Non-monetary items at fair
value  Rate on the date that
FV is determined
REPORTING AT BALANCE SHEET
DATE
• There are 3 types of transactions that needs to be considered
when reporting at subsequent balance sheet dates:
1. Foreign currency monetary items
2. Foreign currency non-monetary items measured in terms of historical costs
3. Foreign currency non-monetary items measured at fair value

Monetary item Non- Monetary

Item

measured in terms items measured at fair

Closing rate of historical costs value

Historical rate date when the fair

-exchange rate at the value was determined
date of the transaction
 RECOGNITION OF EXCHANGEWhere does fair
Exchange
Where does
exchange
Types rate use on
DIFFERENCE BS date
differences
value goes?
goes?
Monetary Closing rate P/L
item
Non- Historical No exchange
monetary rate (initial gain/loss

26
item at cost rate)
Non- Exchange P/L e.g. NRV of stock,
monetary rate on which since changes in
item at fair fair value is stock value is taken
value determined to P/L
Equity e.g. Revaluation of
land
Since changes in
value of land is taken
to equity as
revaluation reserve
SUMMARY

Transaction Balance sheet Settlement

date date date

Depending on the items:

Use
1)Monetary items  Closing
Use actual exchange
rate
exchange rate on
2)Non-monetary items at cost
rate settlement
 Historical rate
date
3)Non-monetary items at fair
value  Rate on the date that
FV is determined
SUMMARY
Where does
Exchange rate Where does fair value
Types exchange
use on BS date goes?
differences goes?
Monetary Closing rate P/L
item
Non- Historical rate No exchange
monetary (initial rate) gain/loss
item at cost
Non- Exchange rate P/L e.g. NRV of stock, since
monetary on which fair changes in stock value is
item at fair value is taken to P/L
value determined
Equity e.g. Revaluation of land
Since changes in value
of land is taken to equity
as revaluation reserve
TRANSLATION EXPOSURE
• Translation process involves converting the measuring unit of
the final accounts of foreign operations (like subsidiary,
associates etc) from the foreign currency to reporting currency
• Financial statements of foreign operations, including foreign
subsidiaries, associated companies, joint ventures and branches
are translated.
• Occurs when 2 companies need to combine their financial
statements together, but both of the company’s financial
statements are in different currencies
TRANSLATION EXPOSURE
Income Statement Parent Co. Subsidiary Co. Adjustments Group
S$'000 MYR'000 S$'000
(A) (B) (C) (A)+(B)+(C)

30
Sales 200 100
Cost of Sales (120) (30)

Gross Profit 80 70
Operating expenses (37) (55)
Profit before tax 43 15
Tax (7) (5)
Profit after tax 36 11

Need to convert these

to S$ terms for purpose
of consolidation
TRANSLATION EXPOSURE
• Which exchange rates should be used to translate the balance
sheet and the profit and loss items?
• How should any exchange differences be accounted for in the
financial statements?
TRANSLATION EXPOSURE
• Presentation currency
• Currency in which the financial statements are presented

• Functional currency
• Currency of the primary economic environment in which
the entity operates
• Currency that influences the sales prices of goods and
services and sales price is usually denominated and settled
in that currency
• Companies need to designate a currency as its functional
currency
 TRANSLATION EXPOSURE
Translation Note: For the purpose of this
module, we will only be focusing on
Exposure “Non-hyperinflationary economy”

Hyperinflationary Non-hyperinflationary
economy economy
All items (asset, • Assets & liabilities : closing rate
liabilities, equity items, • Dividends: transaction rate
• Share capital & pre-acquisition reserve:
income and expenses) are
historical rate
translated at closing rate
• Income tax expense: closing rate
• Income and expenses: exchange rates at date
of transactions / average rate
• All exchange differences shall be recognized
as a separate component of equity (foreign
currency translation reserve)
TRANSLATION EXPOSURE
Post acquisition profit and reserves
• Each year’s profit and loss is translated at the average rate
for that particular year
• Each increase / decrease in other reserves (eg: revaluation
reserve) is translated at the date of revaluation
ILLUSTRATION 1