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Foreign Currency
Transactions
IAS 21
Chapter 21
Week 5
Exclude sections 5 – 9 of CH 21
Study Objectives
• What is functional currency
• How do we translate?
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Scope of IAS 21
• IAS 21 para 3 – The standard applies to
• Accounting for transactions and balances in foreign currencies
• Translating results and financial position of foreign operations (not for ACCT3)
• Translating results and financial position into a presentation currency (not for ACCT3)
Functional currency
• IAS 21 para 9 – Functional currency is the currency of the primary economic
environment in which an entity operates. Consider the following (primary) factors:
• Currency that mainly influences sales prices for goods/services
• Currency of the country whose competitive forces and regulations mainly determine the
sales price
• Currency that mainly influences labour, material and other costs of providing goods/services
• IAS 21 para 10 – other factors that can provide evidence of the entity’s functional
currency (secondary factors):
• Currency in which funds from financing activities (debt/equity) are generated
• Currency in which receipts from operating activities are retained
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Approach
• IAS 21 para 17
• Identify functional currency
• Translate currency items into functional currency
• Report effects of translation in accordance with paragraphs 20-37
How to translate
• A foreign currency transaction is a transaction denominated/requiring
settlement in a foreign currency (IAS 21 para 20)
• Record on initial measurement in the foreign currency by applying the spot
exchange rate between the functional and foreign currency on the date of
the transaction (IAS 21 para 21)
• Average rate can be used for income and expenses (IAS 21 para 22)
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• IAS 21 para 23 – At the end of each reporting period (for items in foreign
currency)
• Monetary amounts translated using the closing rate (eg. Loans, debtors, creditors)
• Non-monetary items (eg. PPE) measured at historical cost translated on date of
transaction
• Non-monetary items measured at fair value (eg. IP) translated on date fair value was
measured
• IAS 21 para 28 – Recognise exchange differences in P/L
Notes to remember
• Use timelines to keep track of your exchange rates and exchange rate differences
• For a foreign currency loan, ensure the foreign currency amount is kept track of because
• OB of loan is translated at begin of the year
• Payments (or receipts) are translated on transaction date
• Interest is translated at the average rate
• CB of loan is translated at the end of the year
• All exchange differences go into P/L
• Recap tutorial example 5.25 from Tut 2 – the foreign debentures of African Airways Ltd
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Illustrative examples
• Illustrative example 21.2 pg 6
• Illustrative example 21.3 pg 7-8
• Illustrative example 21.4 pg 8-9
• Illustrative example 21.5 pg 11
• Illustrative example 21.6 pg 11
