Chapter 13 - Foreign transactions and foreign subsidiaries Flashcards
Starndard dealing with foreign exchange
IAS 21
IAS 21
Governs the fair disclosure of gains and losses
IAS 21 Provisions
> > Objectives and definitions of functional and presentation currencies
> > Accounting for individual transactions in a foreign currency
> > Translating the Financial Statement of a foreign operation
Foreign Currency Activity
Individual foreign currency transaction
»>
Translate via Functional Currency
Foreign Operations >>> Translate via Presentation Currency >>> Consolidate into Group Accounts
Two types of foreign activities
1) individual transactions in foreign currencies
2) Foreign Operations
Individual Transactions in Foreign Currencies
> > Purchase or sales denominated in a foreign currency
> > Borrowing or Lending funds denominated in a foreign currency
> > Acquisitions or disposals denominated in a foreign currency
Foreign Operations in foreign currency
A foreign operation, subsidiary, Associate, joint Venture, or branch conducting activities in a foreign currency
Types of Currencies
1) Functional Currency
2) Foreign Currency
3) Local Currency
4) Presentation Currency
Functional Currency
Currency of the primary economic environment
Foreign Currency
Currency other than the functional currency
Local Currency
Currency of the country in which the foreign entity is located
Presentation Currency
Currency in which the financial statements are presented
Determining the Functional Currency
> Currency that influences selling prices
Currency of the country whose competition and regulation influence prices
Currency of funds used to finance operations
Currency in which receipts are normally kept
Currency that influences direct and operational costs
Determining the Presentation Currency
According to IAS 21, its all up to the company.
Why Functional and Presentation may be different:
> Transparency
Main Investors
Funding
Foreign currency translation rule
IAS 21: Foreign currency transactions must be recorded by translating the foreign currency amount into the entity’s Functional currency based:
1) on when a transaction occurred
2) if any currency gain or loss be recorded if the exchange rate is different when the transaction is paid for
Initial Measurement Rule
Transaction recorded as:
> Spot exchange rate
> An average rate over a period of time
> Contract Rate
Subsequent measurement rule
Retranslation
IAS 21: exchange rate gains or losses made from re-translation of individual transactions be recognized in profit and loss in the period they arise
Subsequent Measurement
Monetary Items
Restated at the rate for the end date of the Financial Statement
Subsequent Measurement
Non-Monetary Items
Items carried at historic cost are not restated
Items carried at fair value are restated at the rate for when the fair value was decided
Translation of Financial statement of a foreign owned subsidiary
Financial Statement of the Subsidiary will be translated into the presentation currency of the parent
Translation of Financial statement of a foreign owned subsidiary
Method
Consolidated SOFP
Goodwill, Assets and Liabilities are translated at the closing rate
Translation of Financial statement of a foreign owned subsidiary
Method
Consolidated Income Statement
Income and expenses are translated at the actual rate or average rate
Re-Translation of Goodwill
Restated from the closing rate of the previous reporting period to the closing rate of the current reporting period
Re-translation of Group retained earnings
Profits are translated at the average rate
Accounting for exchange rate gains and losses
Consolidated Income Statement
Total Exchange rate gains or losses are reported in other comprehensive income
Accounting for exchange rate gains and losses
Consolidated SOFP
The group share of exchange rate gain or loss is reported as a component of equity in a foreign exchange reserve
Foreign exchange reserve
This is an unrealised gain or loss, this will only be realised on its disposal.
The foreign exchange gain/loss is the reclassified as profit/loss
Translation using presentation currency rules
> SOFP - Translate at average rate
Income Statement - Translate at average rate
Calculate the exchange rate difference and treat as a component of equity
