IAS 21

Multinational
Accounting: Foreign
Currency Transactions
and Translations
 Definition of Terms
Exchange rate: the ratio of one currency interms of
another currency
Spot exchange rate: exchange rate at spot of transaction
Closing rate. Exchange rate on date of reporting
Exchange differences: differences between two exchange
rates of currencies
Functional currency: currency of major transactional
activities(itis the currency of the primary economic
environment in which the entity operates. It is the currency of
the environment in which an entity primarily generates and
receives cash.
Foreign currency: currency other than functional
currency.
 Definition of Terms
 Presentation(Reporting) currency: currency in
which company records its transactions & prepares
financial statements.
Foreign currency Transactions: transactions
involving foreign currency
Local currency unit is the legal tender in the
country or jurisdiction where an affiliated
subsidiary is located.
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.
 Recognition of Foreign currency Transactions
 Initial recognition: use spot exchange rate
 Subsequent recognition:
 Translate
 Monetary items: use closing rate e.g. A/P, A/R
 Non-monetary items: rate at transaction date if item

valued at historical cost e.g. PPEs

 Non-monetary items: rate on the date of valuation if

item carried at revalued amount

 Recognize gain/loss on asset/liability translation in P & L

 Impairment test. How?

 Recognition of Foreign currency
Transactions

 Impairment Test How?

 Measure nonmonetary assets at the
lower of either:
 Carrying amount x historical rate
 Net realizable/recoverable amount x
closing rate at end of the period.
 Recognition of exchange differences

 Exchange differences on transactions or translation are

recognized in the period they arise as either profit and loss or
OCI.
 Recognition in profit or loss:
 Exchange differences arising on the settlement of monetary
items (receivables, payables, loans, cash in a foreign
currency) or
 on translating an entity's monetary items at rates different
from those at which they were:
 translated initially, or
 reported in previous financial statements,
 Accumulated OCI on disposal of the foreign operation
 Recognition of exchange differences…
Recognition in OCI:
Exchange difference arising from;

 Foreign exchange component of gain or loss on non

monetary items recognized as OCI
Monetary items held as net investment in a foreign
operation when reported in consolidated financial
statement
Translation when presentation currency is not
entity’s functional currency.
Understand how to make
calculations using
foreign currency
exchange rates.
 Foreign Currency Exchange Rates
 The foreign exchange rate is the price at which the
foreign currency can be acquired.
 Foreign currency exchange rates between
currencies are established based on the supply and
demand for them.
 Some countries maintain an official fixed rate of
currency exchange e.g. Ethiopia [NBE]
 Foreign Currency Exchange Rates
 The relative value of one currency to another may be
expressed in two different ways: either directly or
indirectly.
Direct Exchange Rate
 Direct Exchange Rate (DER) is the number of local
currency units (LCUs) needed to acquire one foreign
currency unit (FCU)
■ From the viewpoint of a Ethiopian entity, the direct
exchange rate is
LCU (Ethiopian Birr)
DER =
1 FCU
 Cont.…
Indirect Exchange Rate
 Indirect Exchange Rate (IER) is the reciprocal of the
direct exchange rate
■ From the viewpoint of a Ethiopian entity, the
indirect exchange rate is
1 FCU
IER =
LCU (Ethiopian Birr)
 Cont.…
Spot and Forward Rates
 IAS 21 refers to the use of both spot rates and current rates for
measuring the currency used in international transactions.
■ The spot rate is the exchange rate at which a foreign currency
can be purchased or sold today.
■ The current rate is defined simply as the spot rate on the entity’s
balance sheet date.
■ The forward (future) rate is the exchange rate today at which
foreign currency can be purchased or sold sometime in the future.
 Because many international business transactions take some
time to be completed, the ability to lock in a price today at
which foreign currency can be purchased or sold at some
future date has definite advantages.
 Cont.…
■ The forward rate on a given date is not the same as the
spot rate on the same date.
■ Expectations about the relative value of currencies are
built into the forward rate.
 Spread:
 The difference between the forward rate and the spot
rate on a given date.
 Premium - Forward rate > Spot rate
 Discount - Forward rate < Spot rate
 Gives information about the perceived strengths or
weaknesses of currencies
 Foreign Currency Transactions
 These foreign currency transactions include the following:
1. Purchases or sales of goods or services (imports or exports), the
prices of which are stated in a foreign currency.
2. Loans payable or receivable in a foreign currency.
3. Purchase or sale of foreign currency forward exchange contracts.
4. Purchase or sale of foreign currency units.
 One party in a foreign exchange transaction must exchange its
own currency for another country’s currency.
 Transactions denominated in a foreign currency must be
translated into the currency the reporting company uses.
 Cont.…
 Additionally, at each balance sheet date account balances
denominated in a currency other than the entity’s reporting
currency must be adjusted to reflect changes in exchange rates
during the period since the last balance sheet date or since the
foreign currency transaction date if it occurred during the
period.
 This adjustment restates the foreign currency–denominated
accounts to their local currency as of the balance sheet date.
 The adjustment in local currency values is a foreign currency
transaction gain or loss for the entity when exchange rates
have changed.
 Cont.…
Foreign currency import and export transactions
 Payables and receivables that arise from transactions with foreign-
based entities and that are denominated in a foreign currency
must be measured and recorded by the Ethiopian entity, for
example, in the currency used for its accounting records- the
Ethiopian Birr.
 The relevant exchange rate for settlement of a transaction
denominated in a foreign currency is the spot exchange rate on the
date of settlement.
 At the time the transaction is settled, payables or receivables
denominated in foreign currency units must be adjusted to their
current Ethiopian Birr- equivalent value.
 If financial statements are prepared before the foreign currency
payables or receivables are settled, their account balances must be
adjusted to their Ethiopian Birr–equivalent values as of the
balance sheet date, using the current rate on the balance sheet
date.
 Cont.…
Foreign currency import and export transactions
 An overview of the required accounting for an import or export
transaction denominated in a foreign currency, assuming the
company does not use forward contracts, is as follows:
 Transaction date:
 Record the credit purchase or sale transaction at the local
currency using the spot direct exchange rate on this date.
 Balance sheet date:
 Adjust the payable or receivable to its local currency, end‐of‐
period value using the current direct exchange rate
 Recognize any exchange gain or loss for the change in rates
between the transaction and balance sheet dates.
 Cont.…
 Settlement date:
 Adjust the foreign currency payable or receivable for any
changes in the exchange rate between the balance sheet date
and the settlement date, recording any exchange gain or loss
as required.
 Record the settlement of the foreign currency payable or
receivable
 Cont.…
Illustration of Foreign Purchase Transaction
The following information describes the transaction:
1. On October 1, 20X1, Peerless Products, a U.S. company, acquired
goods on account from Tokyo Industries, a Japanese company, for
$14,000, or 2,000,000 yen.
2. Peerless Products prepared financial statements at its year end of
December 31, 20X1.
3. Settlement of the payable was made on April 1, 20X2.
The direct spot exchange rates of the U.S. dollar–equivalent
value of 1 yen were as follows:
Comparative U.S. Company Journal Entries for Foreign Purchase
Transaction Denominated in Dollars versus Foreign Currency Units
Comparative U.S. Company Journal Entries for Foreign Purchase
Transaction Denominated in Dollars versus Foreign Currency Units