Ias 21 – Foreign Currencies

IAS 21 – Foreign Currencies

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Foreign Currencies
• Objective
• Scope
• Local Currency, Functional Currency & Presentation Currency
• Determination of functional currency
• Change in Functional Currency
• Foreign Currency Transactions
• Recognition of exchange differences
• Translation to presentation currency
• Consolidated financial statements
• Different reporting dates
• Net investment in foreign operations
• Presentation & Disclosure


Objective
• Include foreign currency transactions and foreign operations in an entity’s
financial statements

• Specify which exchange rates to use and how to report the effects of
changes in exchange rates in financial statements

• Translate the financial statements into a presentation currency


Scope
• Accounting for transactions and balances in foreign currencies

• Translating the results and financial position of foreign operations that are
included in the entity’s financial statements by consolidation, proportionate
consolidation or by equity accounting

• Translating an entity’s result and financial position into a presentation currency


Types of Currencies
• Recording of transactions
Local

• Currency of the economic environment in which the
entity operates
Functional

• Reporting Currency
Presentation


Currency Determination

Maintaining books
of accounts
Local
Currency

This may be the
Functional
local currency Currency

Presentation
Currency

Reporting Currency
(Legal requirements /
Consolidation)


Indicators
• Sales & Cash
Inflows
Primary Indicators
Primary

• Expenses &
Cash Outflows
Secondary Indicators Indicators


Indicators
• Financing
Activities
Primary Indicators
Secondary

• Retention of
Operating
Income
Secondary Indicators Indicators


Primary Indicators
• Currency of the economy which determines
the pricing of transactions; denomination of
transactions is not relevant
Sales & cash inflows • Currency of the country whose competitive
forces and regulations mainly determine the
sales prices of goods and services

• Currency that mainly influences the labour,
material and other costs of providing goods
Expenses and Cash Outflows and services


Sales and Cash inflows
• A US company (X) appoints a distributor (Y) in India for distribution of its goods
across India. This is the business model adopted by the X to sell its goods through
distributors who have market penetration and expertise to distribute goods. X sells
goods to Y in USD and maximum price per item is quoted to Y in USD on a weekly
basis. The price of goods tends to decline with time. Therefore, the rebates are
given to Y in USD on the closing inventory on a weekly basis.

• What is the functional currency where Y quotes the price in USD to the eventual
customer? The invoices carry the INR value to arrive at the VAT amount.


Sales and Cash Inflows
• Miracle Inc sells consulting services through Miracle India Pvt.
Ltd, its India subsidiary, to Pinnacle India and invoices to latter
in USD on an hourly basis (US $ 200 per hour).

• What is the functional currency of Miracle India?


Expenses and Cash Outflows
in USD on an hourly basis (US $ 200 per hour or INR 10,000
per hour), depending upon its clientele. Miracle India incurs
all expenditure in INR.



Sales & Cash Inflows and Expenses Outflows

in USD on an hourly basis (US $ 200 per hour). Miracle India
incurs all expenditure in INR, other than the royalty payment
to Miracle Inc made in USD, which is the biggest component
of its expenditure.



Secondary Indicators
• Currency in which funds from
financing activities are generated
Financing Activities (debt / equity)

• Currency in which the receipts of
Retention of operating Income operating activities are usually
retained


Secondary Indicators
Miracle Inc sells consulting services through Miracle India Pvt.
Ltd its India subsidiary to Pinnacle India and invoices to latter
in USD on an hourly basis (US $ 200 per hour or INR 10,000
per hour), depending upon its clientele. Miracle India incurs
all expenditure in INR. Miracle India’s funding is all in USD
through Miracle Inc.

What is the functional currency of Miracle India?


Foreign entity
• Additional indicators:

• Degree of autonomy
• Frequency of transactions with reporting entity
• Cash flow impact on reporting entity
• Financing


Determination of Functional Currency

X ($ functional currency) appoints
Y for funding its eventual
X (Parent)
subsidiaries A (Euro), B (Yen) & C
(INR). The only source of inflow to
Y is funding from X in USD, and Y
Y in turn funds to A, B & C in their
(Intermediate respective currencies. Y charges
Parent)
fee & receives dividends from
subsidiaries and remits these back
A B C to X.
(Subsidiary) (Subsidiary) (Subsidiary)


Determination of Functional Currency

X ($ functional currency) appoints
Y as treasury centre for providing
X (Parent) treasury professional services to
its eventual subsidiaries A (Euro),
B (Yen) & C (INR). Y charges the fee
Y from subsidiaries in Euro, Yen &
(Treasury Centre) INR respectively. Y remits back the
surplus to X. Y’s local expenses are
incurred in GBP.
A B C
(Subsidiary) (Subsidiary) (Subsidiary)


Mixed Indicators

• Management judgment is required


Change in functional currency

• Used consistently, unless significant changes in economic facts, events and
conditions clearly indicate that the functional currency has changed

• Accounted for prospectively


Foreign Currency Transactions

• Foreign currency is a currency which is not the functional currency

• Recorded on the spot exchange rate (date of transaction)

• Average rate is permitted


Subsequent Measurement

Monetary Closing
rate
Items

Fair value
or Non-monetary
historical
cost Items


Non-monetary items

Fair Value • Exchange rate at the date of fair value

• Exchange rate at the date of transaction

Historical • No retranslation on subsequent balance
sheet dates
Cost


Recognition of exchange differences

Profit & Loss Profit & Loss
Account Account

Monetary Non-Monetary Items
Items

Equity


Non-monetary Items

Investment property purchased on
3rd Jan = $ 10 million
Gain / loss (Exchange rate = Rs 50 / USD)
identified
in equity
Value = 500 million
Revalued on 31st Mar = $ 12 million
Exchange gain / (Exchange rate = Rs 40 / USD)
loss in equity Value = 480 million

Revaluation Loss : 20 million


Non-monetary Items

Investment property purchased on
3rd Jan = $ 10 million
Gain / loss
identified (Exchange rate = Rs 50 / USD)
in Profit /
Loss
Value = 500 million
Impaired on 31st Mar = $ 9 million
Exchange gain / (Exchange rate = Rs 60 / USD)
loss in Profit / Loss Value = 540 million

Gain : 40 million


Translation to Presentation Currency

• Assets & liabilities at closing rate

• Income and expenses at transaction date

• All difference should be recognized as a separate component of equity

• Equity may be translated either historic rate or closing rate (management
policy choice)


Resulting exchange difference
• Differences arising from translating the
income statement at exchange rate at the
transactions dates or average date and
assets and liabilities at the closing rate

• Differences arising on the opening net
assets’ retranslation at a closing rate that
differs from previous closing rate


Translation of foreign operations

P&L 08 - LC 08 - FC Rates • Analysis of exchange difference
PBT 100 120 Avg 1.2 Opening Net Assets:
Tax
= (205 x 2) – (205 x 1.5) => 102.5
(20) (24) Op 2.0
Income (Profit):
PAT 80 96 Closing 1.5
= 80 x (1.2 - 1.5) – 96 => 120.0
B Sheet 08 07 08 (FC) 07 (FC)

FA 120 120 180 240 Net Impact = > 17.5

W Cap 205 100 307.5 200

Loan 40 15 60 30

Equity 80 80 160 160

R/ 205 125 267.5 250
Earnings


Different Reporting Dates
• Reporting date must not exceed by 3 months of the reporting entity’s balance
sheet date

• Exchange rate of reporting currency’s balance sheet may be used

• Any significant transaction should be adjusted


Minority Interest

• Exchange difference allocating to Minority on proportional
basis

•


Disposal / partial disposal of a foreign operation

• Such exchange differences are recognised in profit or loss when the gain /
loss on disposal is recognised

• In case of partial disposal, only the proportionate share of the related
accumulated exchange is included in gain / loss


Disclosures
• Amount of exchange differences recognised in profit or loss;

• Net exchange differences classified in a separate component of equity, and
a reconciliation of amount of such exchange differences at the beginning
and end of period


Ias 21 – Foreign Currencies

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