A.J.

SILICON

IAS 21: THE EFFECTS OF FOREIGN

EXCHANGE RATES

GARNET

A.J.SILICON

IAS 21: THE EFFECTS OF FOREIGN

EXCHANGE RATES

YOMI ABIONA
(ACA, ACIT, CISA, Cert. in IFRS ACCA

A.J.SILICON
Agenda

Objective
Key Definitions
Foreign Currency Transactions
Translation from the Functional Currency to the
Presentation Currency
Disposal of Foreign Operations
Disclosure

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Objective
The objective of IAS 21 is to prescribe how to include
foreign currency transactions in the entitys financial
statements
foreign operations in the entitys financial statements
how to translate financial statements into a presentation
currency.
The principal issues are:
which exchange rate(s) to use
and how to report the effects of changes in exchange
rates in the financial statements.

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Key definitions
Functional currency: the currency of the primary economic
environment in which the entity operates. (The term
'functional currency' was used in the 2003 revision of IAS 21
in place of 'measurement currency' but with essentially the
same meaning.)
Presentation currency: the currency in which financial
statements are presented.
Exchange difference: the difference resulting from translating
a given number of units of one currency into another currency
at different exchange rates.
Foreign operation: a subsidiary, associate, joint venture, or
branch whose activities are based in a country or currency
other than that of the reporting entity.

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Foreign currency transactions
A foreign currency transaction should be recorded initially at
the rate of exchange at the date of the transaction (use of
averages is permitted if they are a reasonable approximation of
actual).
At each subsequent balance sheet date: [IAS 21.23]
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

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Exchange difference on cash settlement
Exchange differences arising when monetary items are
settled or when monetary items are translated at rates
different from those at which they were translated when
initially recognized or in previous financial statements are
reported in profit or loss in the period, with one exception.

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Teaser 1
On 7 May 20X6 GARNET Plc, a U.S. based entity sells
goods to a German entity for 48,000 when the rate of
exchange was $1 = 3.2.
On 20 July 20X6 the customer remitted a draft for
48,000 when the rate of exchange was $1 = 3.17.
Required: Show how this transaction would be recorded.

Answer:
Exchange gain of $142 should
be recognized in P&L

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Teaser 2
GARNET Plc has a reporting date of 31 December. On 27
November 20X6. GARNET Plc buys goods from a Swedish
supplier for SwK 324,000.
On 19 December 2006, GARNET Plc pays the Swedish
supplier in full.
Exchange rates were as follows:
27 November 2006 $1:SwK 11.15
19 December 2006 $1 :Swk 10.93
Required:
Show how the expense and liability, together with the
exchange difference arising, should be accounted for in the
financial statements.
Answer:
Exchange loss of $585 should be recognized in P&L
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Teaser 3
GARNET Plc which has a reporting date of 31 December, has the
dollar ($) as its functional currency purchased a plot of land
overseas on 1 March 20X0. The entity paid for the land in the
currency of the Rylands (R). The purchase cost of the land was
R60,000. The value of the land at the reporting date was R80,000.
Rates of exchange were as follows:
1 March 20X0 R8 : $1
31 December 20X0 R10 :$1
Required:
Show how this transaction should be accounted for in the financial
statements for the year ended 31 December 20X0:
if the land is carried at cost
if the land is carried at valuation

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Solutions Teaser 3
As the asset is a non-monetary item, it will not be subject to retranslation at the reporting date.
If the land is carried at cost, the asset remains stated at $ cost
translated at the rate ruling at the date of purchase as follows:

R60,000 divided by 8 = $7,500

Assuming that the asset is revalued then the revalued amount will
be translated to create a gain or loss that is taken directly to
equity.
R80,000 divided by 10 = $8,000.
The difference of $500 is credited to revaluation reserve

Teaser 4

A.J.SILICON

The following transactions were undertaken by GARNET Plc in the accounting

year ended 31 December 20X1.
Date
January 20X1
31 March 20X1
31 March 20X1
30 June 20X1
30 Sept. 20X1
30 Nov. 20X1
Exchange rates
1 January 20X1
31 March 20X1
30 June 20X1
30 September 20X1
30 November 20X1
31 December 20X1

Narrative
Purchase of a non-current asset on credit
Payment for the non-current asset
Purchases on credit
Sales on credit
Payment for purchases
Long-term loan taken out
KR: $
2.0: 1
2.3: 1
2.1: 1
2.0: 1
1.8: 1
1.9: 1

Required:
Prepare journal entries to record the above transactions

Amount K1
100,000
100,000
50,000
95,000
50,000
200,000

Solutions Teaser 4

A.J.SILICON

01-Jan-01

Purchase of NCA

Dr: NCA
Cr: Liability

50,000
50,000

31-Mar-01

Payment

Dr: Liability
Cr: Bank
Cr: Income Statement

50,000
43,478
6,522

31-Mar-01

Purchases on credit

Dr: Inventory
Cr: Payable

21,739
21,739

30-Sep-01

Payment

Dr: Payables
Dr: Income
Cr: Bank

21,739
3,261
25,000

30-Jun-01

Sales on credit

Dr: Receivables
Cr: Revenue

45,238
45,238

30-Nov-01

Long term loan

Dr: Bank
Cr: Liability

111,111
111,111

31-Dec-01

Year end conversion of receivables Dr: Receivables

Cr: Income Statement

4,762
4,762

31-Dec-01

Year end conversion of loan

5,848
5,848

Dr: Liability
Cr: Income Statement

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Exchange difference arising on translation
The results and financial position of an entity are translated
into a different presentation currency using the following
procedures:
Assets and liabilities for each balance sheet presented
(including comparatives) are translated at the closing
rate at the date of that balance sheet.
This would include 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 are treated as part of the assets and liabilities
of the foreign operation

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Translation from functional currency to
presentation currency
Income and expenses for each income statement (including
comparatives) are translated at exchange rates at the dates
of the transactions; and
All resulting exchange differences are recognized in other
comprehensive income.

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Disclosure
The amount of exchange differences recognised in profit or
loss
Net exchange differences recognised 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 the presentation currency is different from the
functional currency, disclose that fact together with the
functional currency and the reason for using a different
presentation currency

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Disclosure
A change in the functional currency of either the reporting
entity or a significant foreign operation and the reason
therefore
When an entity presents its financial statements in a
currency that is different from its functional currency, it
may describe those financial statements as complying with
IFRS only if they comply with all the requirements of each
applicable Standard (including IAS 21) and each
applicable Interpretation.

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