1. ICAN IFRS Certification
Training Programme
Module II
25 September 2012
Abuja

2. IAS 21
The Effects of Changes in Foreign
Exchange Rates
ICAN’S IFRS Certification Training – IAS 21 2

3. CONTENTS
3
• OVERVIEW OF IAS 21 & DEFINITION OF TERMS
• SCENARIO 1: FUNCTIONAL AND PRESENTATION CURRENCIES
• SCENARIO 2: INTRODUCING FOREIGN CURRENCY TRANSACTIONS
AND TRANSLATIONS
• SCENARIO 3: ACCOUNTING 4 FOREIGN CURRENCY TRANSACTIONS
• SCENARIO 4: FOREIGN OPERATIONS
• DISCLOSURE REQUIREMENTS

4. OVERVIEW OF IAS 21
4
Introduction
IAS 21 is the International Financial Reporting Standard
that deals with the effects of changes in foreign
exchange rates.
It prescribes:
how to include foreign currency transactions and
foreign operations in the financial statements of an entity
and
how to translate financial statements into a
presentation currency.
.
ICAN’S IFRS Certification Training – IAS 21

5. OVERVIEW OF IAS 21 (CONT’D)
5
The
Significance
of foreign
activities
These includes:
Accessing new markets and developing economies of
scale
Taking advantage of competitive benefits in different
locations such as goods/raw materials, land, etc.
Diminishing risk of concentrating operations in only a
few geographical areas
Accessing new technology or exploiting new
technology in other markets
There is a rising trend to globalisation as a result of
improvements in technology and deregulation. This
means that in general an entity’s foreign activities are
becoming significant, so the impact on the financial
statements is greater.
ICAN’S IFRS Certification Training – IAS 21

6. OVERVIEW OF IAS 21 (CONT’D)
6
The
Benefits of
using IAS
21
The benefits to you and me of knowing how to apply IAS 21
are that it:
reduces the risk of foreign activities being incorrectly
accounted for and the functional currency being determined
incorrectly, which could have a major impact on the financial
statements
 improves client service by enabling you to provide advice
and knowledge in a rapidly expanding area
improves efficiency when dealing with foreign activities
ICAN’S IFRS Certification Training – IAS 21

7. OVERVIEW OF IAS 21 (CONT’D)
What is within the scope of IAS 21?
The standard deals with the following:
 accounting for transactions and balances in foreign currencies, except
for those derivative transactions and balances that are within the
scope of IAS 39 Financial Instruments: Recognition and
Measurement;
 translating the results and financial position of foreign operations that
are included in the financial statements of the entity by consolidation,
proportionate consolidation or the equity method; and
 translating an entity’s results and financial position into a presentation
currency.
ICAN’S IFRS Certification Training – IAS 21 7

8. OVERVIEW OF IAS 21 (CONT’D)
Out-of-scope - it does not apply to investments in
associates held by:
 IAS 39 applies to many foreign currency derivatives and, accordingly,
these are excluded from the scope of this Standard.
 This Standard does not apply to hedge accounting for foreign currency
items, including the hedging of a net investment in a foreign operation.
IAS 39 applies to hedge accounting.
 This Standard does not apply to the presentation in a statement of
cash flows of the cash flows arising from transactions in a foreign
currency, or to the translation of cash flows of a foreign operation (see
IAS 7 Statement of Cash Flows).
ICAN IFRS Certification Training – IAS 21 8

9. TERMINOLOGIES IN USE
Closing
Closing
rate
rate
Exchange
difference
Exchange
difference
is the spot ex is the spot excchhaannggee r raatete a at tt hthee e enndd o of ft hthee r reeppoorrtitningg p peerrioiodd..
is the difference resulting from translating a given number of units
of one currency into another currency at different exchange rates.
is the difference resulting from translating a given number of units
of one currency into another currency at different exchange rates.
Exchange
isis t hthee r raatitoio o of fe exxcchhaannggee f oforr t wtwoo c cuurrrreennccieiess.. Exchange
is the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm’s length
transaction.
is the amount for which an asset could be exchanged, or a liability
settled, between knowledgeable, willing parties in an arm’s length
transaction.
rate
rate
FFaairir v vaaluluee
Foreign
currency
Foreign isis a a c cuurrrreennccyy o oththeerr t hthaann t hthee f ufunncctitoionnaal lc cuurrrreennccyy o of ft hthee e enntittiyty..
currency
Foreign
operation
Foreign
operation
is an entity that is a subsidiary, associate, joint venture or branch
of a reporting entity, the activities of which are based or
conducted in a country or currency other than those of the
reporting entity.
is an entity that is a subsidiary, associate, joint venture or branch
of a reporting entity, the activities of which are based or
conducted in a country or currency other than those of the
reporting entity.
ICAN IFRS Certification Training – IAS 21

10. TERMINOLOGIES IN USE (CONT’D)
Functional
currency
Monetary
Functional
currency
Monetary
items
items
is the currency of the primary economic environment in which
the entity operates.
are units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of
currency.
is the currency of the primary economic environment in which
the entity operates.
are units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of
currency.
Presentatio isis t hthee c cuurrrreennccyy i nin w whhicichh t hthee f ifninaanncciaial ls statatetemmeenntsts a arree p prreesseenntetedd..
n currency
Spot
exchange
rate
Spot
exchange
rate
is is ththee e exxcchhaannggee r raatete f oforr i mimmmeeddiaiatete d deelilviveerryy..
Presentatio
n currency
ICAN IFRS Certification Training – IAS 21

11. TERMINOLOGIES IN USE (CONT’D)
A foreign currency transaction is a transaction that is
denominated or requires settlement in a foreign currency,
including transactions arising when an entity:
buys or sells goods or services whose price is
denominated in a foreign currency;
borrows or lends funds when the amounts payable or
receivable are denominated in a foreign currency; or
otherwise acquires or disposes of assets, or incurs or
settles liabilities, denominated in a foreign currency.
11
Foreign
currency
transaction
Foreign
currency
transaction
ICAN IFRS Certification Training – IAS 21

12. SCENARIO 1 – FUNCTIONAL & PRESENTATION CURRENCIES
FUNCTIONAL CURRENCY
The functional currency of an entity is the currency of the primary
economic environment in which that entity operates. The primary
economic environment in which an entity operates is normally the one in
which it primarily generates and expends cash.
•The functional currency is determined separately for individual entities.
•There is no such thing as a ‘’group functional currency’’.
•The functional currency is determined by applying the factors specified in
IAS 21.
•It cannot be chosen freely by an entity and once determined, it is not
changed unless there is a change in the underlying circumstances.
•Incorrectly determining the functional currency can have a major impact
on the financial statements.
ICAN’S IFRS Certification Training – IAS 21 12

13. Determining the functional currency
The primary and secondary factors
The primary factors must be reviewed together. They give clearer
evidence of an entity's functional currency than the secondary factors.
Consequently, when determining the functional currency, if the primary
factors all suggest one currency is the functional currency, it is not
necessary to assess whether the secondary factors agree.
When evaluating the factors, professional judgement may need to be
applied to the specific circumstances, if the functional currency of an
entity is not clear.
When the entity is a foreign operation, there are additional factors in
IAS 21, Functional Currency section, to consider.
ICAN’S IFRS Certification Training – IAS 21 13

14. Determining the functional currency (Cont’d)
The primary factors
Revenue and operating cash inflows
This factor is related to the entity's sales. An entity considers the
currency:
in which sales prices for its goods and services are denominated and
settled. If the currency that mainly influences sales prices is different,
then this is considered. (e.g. the US dollar is considered for crude oil
sales, even if sales are denominated in a different currency)
of the country whose competitive forces and regulations mainly
determine the sales price of its goods and services. In general this is
viewed as which is the main driver for price changes. (e.g. a local
supermarket's sale price changes are driven by local competition. This is
not true for international airlines.)
ICAN’S IFRS Certification Training – IAS 21 14

15. Determining the functional currency (Cont’d)
The primary factors (Cont’d)
Operating expenses and cash outflows
This factor is related to the entity's operating expenses.
An entity considers the currency in which labour, material and other
costs of providing goods or services are denominated and settled (or the
currency that mainly influences such costs, if different).
In general labour costs would be linked to the currency of the country
in which the entity operates, while materials and other costs would be
driven by the currency of the country in which the suppliers operate.
However, there may be a world-wide or regional supplier market, for
which a specific currency is generally used
ICAN’S IFRS Certification Training – IAS 21 15

16. Determining the functional currency (Cont’d)
The secondary factors
The secondary factors give secondary evidence of the functional currency
of an entity. Click the topics below to discover more about these factors.
Financing activities
An entity considers the currency in which funds from financing activities
(i.e. issuing debt and equity instruments) are generated.
Long-term debt and capital increases are mainly raised in one currency.
(This indicator does not consider funds generated from operating activities
(e.g. trade payables).
ICAN’S IFRS Certification Training – IAS 21 16

17. Determining the functional currency (Cont’d)
The secondary factors (Cont’d)
Retention of operating income
An entity considers the currency in which receipts from
operating activities are usually retained.
This is the currency in which the entity maintains the excess
working capital cash balance (i.e. in general it would be the
local currency or a hard currency such as US dollars or the
Euro).
ICAN’S IFRS Certification Training – IAS 21 17

18. Determining the functional currency (Cont’d)
Additional factors for foreign operations
The following additional factors are considered in determining the
functional currency of a foreign operation:
whether its activities are carried out as an extension of the reporting
entity or with significant autonomy
whether its transactions with the reporting entity are a high or low
proportion of its activities
whether cash flows of the foreign operation directly affect the cash
flows of the reporting entity and are available for remittance to it
whether cash flows of the foreign operation are sufficient to service
debt obligations without assistance from the reporting entity
ICAN’S IFRS Certification Training – IAS 21 18

19. SCENARIO 1 – FUNCTIONAL & PRESENTATION CURRENCIES
PRESENTATION CURRENCY
The currency in which the financial statements are presented is defined as
the presentation currency.
Comparison to the functional currency
Unlike the functional currency, the presentation currency can be any
currency of choice .
 If the presentation currency differs from the functional currency, the
results and financial position have to be translated into the presentation
currency
Presenting the financial statements in a currency other than the functional
currency does not change the way in which the underlying items are
measured. It merely expresses the underlying amounts, which are
measured in the functional currency, in a different currency
ICAN’S IFRS Certification Training – IAS 21 19

20. SCENARIO 1 – FUNCTIONAL & PRESENTATION CURRENCIES
PRESENTATION CURRENCY (CONT’D)
Choice of presentation currency
When a group contains entities with different functional currencies, each entity must
be expressed in a common currency in order to produce group financial statements.
The presentation currency of the group financial statements is often the parent's
functional currency
A corporate group
A corporate group may have extensive operations in many countries and conduct
its business largely in international markets.
It may be difficult to identify an appropriate presentation currency. An international
currency such as US Dollars or Euro may be used. This is often used by entities that
raise capital in international markets to benefit the users of the financial statements
(e.g. international investors or banks)
ICAN’S IFRS Certification Training – IAS 21 20

21. SCENARIO 1 – FUNCTIONAL & PRESENTATION CURRENCIES
PRESENTATION CURRENCY (CONT’D)
Certain country requirements
In some jurisdictions, entities are required to present their
financial statements in the local currency even if this is not the
functional currency
Group entities
An entity may wish to present its financial statements in the
functional currency of the parent if it is different from its own
functional currency.
As noted, it will have to present financial statements in a
common currency to the rest of the group anyway for
consolidation purposes
ICAN’S IFRS Certification Training – IAS 21 21

22. SCENARIO 1 – QUIZZES AND CASE STUDIES
QUIZ 1
Which of the following comments about an entity would suggest that its functional currency
is the same as that of the reporting entity? Select one or more options.
Its activities are carried out as an extension of the reporting entity
Its transactions with the reporting entity are a low proportion of its total activities
Its cash flows directly affect the cash flows of the reporting entity and are available for
remittance to it.
Its activities are carried out with significant autonomy
Its cash flows are not sufficient to service debt obligations without assistance from the
reporting entity
Its transactions with reporting entity are a high proportion of its total activities
ICAN’S IFRS Certification Training – IAS 21 22

23. SCENARIO 2: INTRODUCING FOREIGN CURRENCY
TRANSACTIONS AND TRANSLATIONS
Foreign currency transactions
A foreign currency transaction is one that is denominated or requires settlement in a
foreign currency. For example an entity may:
buy or sell goods or services in a foreign currency
borrow or lend funds when the amounts payable or receivable are in a foreign
currency
acquire or dispose of assets, or incur or settle liabilities, in a foreign currency
Since an entity enters directly into such transactions, it is exposed to the cash flow
effects of changes in the foreign currency. An entity must convert foreign currency
items into its functional currency for recording in its books of account.
Once recorded, exchange differences will arise where currency changes affect the
recorded balances
ICAN’S IFRS Certification Training – IAS 21 23

24. SCENARIO 2: INTRODUCING FOREIGN CURRENCY
TRANSACTIONS AND TRANSLATIONS
Foreign currency translations
Many consolidated groups are comprised of many individual entities with
different functional currencies.
The individual entities will record transactions in their books in the
functional currency. For consolidation purposes, each entity's financial
statements must be translated into the presentation currency of the
consolidated group if it differs from their functional currency.
The translation process is also used for a stand-alone reporting entity
producing financial statements in a presentation currency, which differs
from both its functional currency and the presentation currency of any
group financial statements it is contained in.
24
ICAN IFRS Certification Training – IAS 21

25. SCENARIO 2: INTRODUCING FOREIGN CURRENCY
TRANSACTIONS AND TRANSLATIONS
Distinction between transactions and translations
A foreign currency transaction is entered into directly by an entity. They often
occur on a day-to-day basis. They involve cash flows, and increase or decrease
the net assets of the entity.
A translation of an entity's financial statements is carried out to present them in
a specific presentation currency. It is often done to present the financial
statements of a foreign operation in the functional currency of a parent (if the
foreign operation has a different functional currency). This is done so the foreign
operation can be included in the financial statements of the reporting entity by
consolidation, proportionate consolidation or the equity method.
Consequently, translations are usually carried out at the end of the reporting
period or at interim periods for reporting purposes.
IAS 21 has different treatments for exchange differences arising on transactions
and for those arising on translations.
25
ICAN IFRS Certification Training – IAS 21

26. SCENARIO 2: INTRODUCING FOREIGN CURRENCY
TRANSACTIONS AND TRANSLATIONS
Monetary and Non-monetary items
Under IAS 21 foreign currency monetary items are treated differently to
foreign currency non-monetary items. The essential feature of a monetary
item is the right to receive (or an obligation to deliver) a fixed or
determinable amount of units of currency. A non-monetary item doesn’t
have this right.
Examples of monetary items
trade payables and receivables
debt securities
deferred taxes
pensions and other employee benefits to be paid in cash
provisions to be settled in cash
cash dividends recognised as a liability
26
ICAN IFRS Certification Training – IAS 21

27. SCENARIO 2: INTRODUCING FOREIGN CURRENCY
TRANSACTIONS AND TRANSLATIONS
Monetary and Non-monetary items (Cont’d)
Examples of non-monetary items
amounts prepaid for goods and services (e.g. prepaid rent)
goodwill and other intangible assets (e.g. patents, trademarks, licenses
and formulas)
deferred Income
equity instruments (e.g. securities)
inventories and property plant and equipment
provisions to be settled by the delivery of a non-monetary asset
27
ICAN IFRS Certification Training – IAS 21

28. SCENARIO 3: ACCOUNTING FOR FOREIGN CURRENCY
TRANSACTIONS
Initial recognition of foreign currency transactions
A foreign currency transaction is one denominated or
requiring settlement in a foreign currency.
These transactions are recorded at initial recognition in the
functional currency by applying to the foreign currency
amount the spot exchange rate between:
the functional currency, and
the foreign currency
at the date of the transaction
ICAN’S IFRS Certification Training – IAS 21 28

29. QUIZ
Initial recognition of foreign currency transactions
FACT
An entity (functional currency £) buys inventory for US
$15,000. The spot rate is £1 = US $1.5.
How is the transaction recorded at initial recognition and
what journal entries will be passed?
ICAN’S IFRS Certification Training – IAS 21 29

30. QUIZ SOLUTION
Initial recognition of foreign currency transactions
Note that a spot exchange rate is the exchange rate for
immediate delivery
The transaction is recorded at £10,000 (=15,000/1.5).
The journal entries are:
Debit Inventory £10,000
Credit Cash/ Trade payables £10,000
ICAN’S IFRS Certification Training – IAS 21 30

31. NOTES ON QUIZ SOLUTION
Initial recognition of foreign currency transactions
Note that a spot exchange rate is the exchange rate for
immediate delivery
For practical reasons, a rate that approximates the actual rate at the transaction
date is often used on initial recognition.
This will be an average rate for a period and will be used for all foreign currency
transactions in that period.
However, if exchange rates fluctuate significantly, use of average rates is
inappropriate
It's a common practice for entities with frequent foreign currency transactions to
fix the exchange rate at which transactions are recorded for a period (e.g.
monthly), and to disregard day-to-day rate fluctuations.
However, the actual rate is used if a material difference would arise if average
rates are used (e.g. acquisition of fixed asset, severe devaluation).
ICAN’S IFRS Certification Training – IAS 21 31

32. SCENARIO 3: ACCOUNTING FOR FOREIGN CURRENCY
TRANSACTIONS
Treatment at the end of subsequent reporting periods
The treatment of foreign currency items at the end of the
reporting period depends on whether the item is:
monetary or
non-monetary and carried at historical cost or fair value
At the end of each reporting period, foreign currency
monetary items are translated using the closing rate
ICAN’S IFRS Certification Training – IAS 21 32

33. SCENARIO 3: ACCOUNTING FOR FOREIGN CURRENCY
TRANSACTIONS
Treatment at the end of subsequent reporting periods
Non-monetary items (historical cost)
At the end of each reporting period, non-monetary items that are
measured in terms of historical cost in a foreign currency are
translated using the exchange rate at the date of the transaction.
Non-monetary items (fair value)
At the end of each reporting period, non-monetary items that are
measured at fair value in a foreign currency are translated using
the exchange rates at the date when the value was determined.
ICAN’S IFRS Certification Training – IAS 21 33

34. QUIZ
Reporting at the end of subsequent reporting periods
Example 1:
An entity (functional currency £) has an outstanding trade payable for US
$1,500 which arose from a transaction when the spot exchange rate was £1
= US $1.2 and hence was initially recorded at £1,250. The closing rate is £1
= US $1.5.
Example 2:
An entity (functional currency £) purchased a machine for US $12,000 when
the spot exchange rate was £1 = US $1.2. The closing rate is £1 = US $1.5.
Example 3:
An entity (functional currency £) owns a building. The entity carries buildings
at their revalued amounts. The valuation of the building was done at the end
of the reporting period and the fair value was US $150,000. The building was
purchased for US $100,000 when the spot rate was £1 = US $1.2. The
closing rate is £1 = US $1.5.
ICAN’S IFRS Certification Training – IAS 21 34

35. QUIZ SOLUTION
Reporting at the end of subsequent reporting periods
Note that at the end of each reporting period, foreign currency
monetary items are translated using the closing rate.
Example 1:
In this example, the transaction will be recorded at the closing
rate.
Since the closing rate is £1 = US $1.5, it means that the payable is
therefore £1,000 (=1,500/1.5) at the end of the reporting period.
ICAN’S IFRS Certification Training – IAS 21 35

36. QUIZ SOLUTION
Reporting at the end of subsequent reporting periods
Note that at the end of each reporting period, non-monetary items
that are measured in terms of historical cost in a foreign currency
are translated using the exchange rate at the date of the
transaction.
Example 2:
Therefore in this example, the transaction is recorded using the
exchange rate at the date of the transaction.
The machine is shown as £10,000 (=12,000/1.2) at the end of the
reporting period.
ICAN’S IFRS Certification Training – IAS 21 36

37. QUIZ SOLUTION
Reporting at the end of subsequent reporting periods
Note that at the end of each reporting period, non-monetary items
that are measured at fair value in a foreign currency are
translated using the exchange rates at the date when the value
was determined.
Example 3:
Therefore in this example, the transaction is recorded using the
closing rate of US $1.5 representing the rate used for valuation.
The building is shown as £100,000 (=150,000/1.5) at the end of
the reporting period.
ICAN’S IFRS Certification Training – IAS 21 37

38. RECOGNITION OF EXCHANGE DIFFERENCES
Exchange differences on monetary items
Exchange differences arise from:
the settlement of monetary items at a subsequent date to initial
recognition, and
remeasuring an entity’s monetary items at rates different from those at
which they were initially recorded (either during the reporting period or at
the previous reporting periods)
Such exchange differences must be recognised as income or
expenses in the period in which they arise
ICAN’S IFRS Certification Training – IAS 21 38

39. RECOGNITION OF EXCHANGE DIFFERENCES
Exchange differences on non-monetary items
There are two different treatments for non-monetary items.
When a gain or loss on a non-monetary item is recognised in profit or loss (e.g. the sale
of investments carried at historical cost), any exchange component of that gain or loss is
also recognised in profit or loss.
When a gain or loss on a non-monetary item is recognised directly in other
comprehensive income, any exchange component of that gain or loss is recognised directly
in other comprehensive income.
For example, if buildings are revalued to fair value some gains and losses arising on
revaluation are recognised directly in other comprehensive income (IAS 16: Property, Plant
and Equipment). If the market value of the building is denominated in a foreign currency,
the revalued amount is determined using the exchange rate at the date its value was
determined i.e. 'Reporting at the end of subsequent reporting periods'). This results in an
exchange difference that is also recognised within the gain or loss taken to equity.
ICAN’S IFRS Certification Training – IAS 21 39

40. RECOGNITION OF EXCHANGE DIFFERENCES
Exchange differences on non-monetary items (Cont’d)
A revaluation of a building represents the change in the fair
value of that building in the functional currency, regardless of
how the fair value was derived (whether it is derived from a
market value in a foreign currency or a market value in the
functional currency).
If the market value was determined in the functional currency
there would be no exchange component within the change.
ICAN’S IFRS Certification Training – IAS 21 40

41. QUIZ
Exchange differences on foreign currency transactions
Select the correct answers from the following:
Exchange differences arising on the settlement of monetary items or on re-measuring an
entity’s monetary items at rates different from those at which they were initially measured
at, are recognised in profit or loss/directly in other comprehensive income
.
When a gain or loss on a non-monetary item, whose market value is denominated in a
foreign currency is recognised directly in other comprehensive income, any exchange
component of that gain or loss is recognised in profit or loss/directly in other
comprehensive income
When a gain or loss on a non-monetary item is recognised in profit or loss, any exchange
component of that gain or loss is recognised in profit or loss/directly in other
comprehensive income
ICAN’S IFRS Certification Training – IAS 21 41

42. QUIZ SOLUTION
Exchange differences on foreign currency transactions
Select the correct answers from the following:
Exchange differences arising on the settlement of monetary items or on re-measuring an
entity’s monetary items at rates different from those at which they were initially measured
at, are recognised in profit or loss/directly in other comprehensive income
.
When a gain or loss on a non-monetary item, whose market value is denominated in a
foreign currency is recognised directly in other comprehensive income, any exchange
component of that gain or loss is recognised in profit or loss/directly in other
comprehensive income
When a gain or loss on a non-monetary item is recognised in profit or loss, any exchange
component of that gain or loss is recognised in profit or loss/directly in other
comprehensive income
ICAN’S IFRS Certification Training – IAS 21 42

43. SCENARIO 4: FOREIGN OPERATIONS
Translation to the presentation currency
IAS 21 allows an entity's financial statements to be presented in any currency (or
currencies).
If an entity's presentation currency differs from its functional currency, the entity's results
and financial position must be translated into it.
Each group entity must be expressed in a common currency to present consolidated
financial statements.
In general, the results and financial position of an entity must be translated into a different
presentation currency using the following procedures viz.
Process 1
Process 2
Process 3
ICAN’S IFRS Certification Training – IAS 21 43

44. SCENARIO 4: FOREIGN OPERATIONS
Translation to the presentation currency (cont’d)
Process 1
For each statement of financial position presented (i.e. including comparatives), assets and
liabilities are translated at the closing rate at the date of that statement of financial position
Process 2
For each statement of comprehensive income or separate statement of comprehensive
income presented (i.e. including comparatives), income and expenses are translated at the
exchange rates at the transaction dates (an average rate for a period may be used unless
rates fluctuate significantly).
Process 3
All resulting exchange differences are recognised in other comprehensive income
ICAN’S IFRS Certification Training – IAS 21 44

45. SCENARIO 4: FOREIGN OPERATIONS
Exchange differences arising on translation
Exchange differences are recognised in other comprehensive income.
These exchange differences are not recognised as income or expenses for the period
because the changes in exchange rates have little or no direct effect on the present and
future cash flows from the entity's operations.
If a foreign operation is consolidated but is not wholly owned, accumulated exchange
differences arising from translation and attributable to minority interests are allocated to, and
reported as part of, the minority interest in the consolidated statement of financial position.
ICAN’S IFRS Certification Training – IAS 21 45

46. SCENARIO 4: FOREIGN OPERATIONS
Exchange differences on intragroup transactions
An intragroup monetary item (short- or long-term) cannot be eliminated against the
corresponding intragroup asset/liability without showing exchange differences in the
consolidated financial statements.
The monetary item signifies a commitment to convert currency, so the entity is exposed to
an exchange gain or loss.
In the consolidated financial statements, the exchange differences stay as income or
expenses unless they arise on a monetary item forming part of a reporting entity’s net
investment in a foreign operation.
ICAN’S IFRS Certification Training – IAS 21 46

47. SCENARIO 4: FOREIGN OPERATIONS
Different end of the reporting periods
A foreign operation may have a different end of the reporting period for tax reasons, or if
legislation in its country requires financial statements to be prepared to a specific date.
Usually the foreign operation will prepare additional statements to the same date as the
reporting entity (the investor) for incorporation in the consolidated financial statements.
However, IAS 27: Consolidated and Separate Financial Statements, allows the use of a
different end of the reporting period if the difference is no greater than three months and
adjustments are made for any significant transactions between the different end of the
reporting periods.
If a different end of the reporting period (within three months) is used, the assets and
liabilities of the foreign operation are translated at the exchange rate at its end of the reporting
period. Then adjustments are made for any significant movements in exchange rates up to
the end of the reporting period of the reporting entity.
ICAN’S IFRS Certification Training – IAS 21 47

48. SCENARIO 4: FOREIGN OPERATIONS
Goodwill and fair value transactions
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 a foreign
operation are treated as:
assets and liabilities of the foreign operation
and
translated at the closing rate
ICAN’S IFRS Certification Training – IAS 21 48

49. SCENARIO 4: FOREIGN OPERATIONS
When there is a change in an entity’s functional
currency:
the entity shall apply the translation procedures applicable to the new
functional currency prospectively from the date of the change.
an entity translates all items into the new functional currency using the
exchange rate at the date of the change. The resulting translated
amounts for non-monetary items are treated as their historical cost.
Exchange differences arising from the translation of a foreign operation
previously recognised in other comprehensive income in accordance
with paragraphs 32 and 39(c) are not reclassified from equity to profit or
loss until the disposal of the operation.
ICAN’S IFRS Certification Training – IAS 21 49

50. SCENARIO 4: FOREIGN OPERATIONS
On the disposal or partial disposal of a foreign operation
the cumulative amount of the exchange differences relating to that
foreign operation, recognised in other comprehensive income and
accumulated in the separate component of equity, shall be reclassified
from equity to profit or loss.
in partial disposal of a foreign operation the entity shall reclassify to profit
or loss only the proportionate share of the cumulative amount of the
exchange differences recognised in other comprehensive income.
ICAN’S IFRS Certification Training – IAS 21 50

51. Disclosures
  An An entity entity shall shall disclose:
disclose:
1. the amount of exchange differences recognised in profit or loss except for those
1. the amount of exchange differences recognised in profit or loss except for those
arising on financial instruments measured at fair value through profit or loss in
accordance with IAS 39; and
arising on financial instruments measured at fair value through profit or loss in
accordance with IAS 39; and
2. net exchange differences recognised in other comprehensive income and
2. 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.
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.
51
 When the presentation currency is different from the functional currency, that fact shall
 When the presentation currency is different from the functional currency, that fact shall
be stated, together with disclosure of the functional currency and the reason for using a
different presentation currency.
be stated, together with disclosure of the functional currency and the reason for using a
different presentation currency.
 When there is a change in the functional currency of either the reporting entity or a
 When there is a change in the functional currency of either the reporting entity or a
significant foreign operation, that fact and the reason for the change in functional
currency shall be disclosed.
significant foreign operation, that fact and the reason for the change in functional
currency shall be disclosed.
 When an entity presents its financial statements in a currency that is different from its
 When an entity presents its financial statements in a currency that is different from its
functional currency, it shall describe the financial statements as complying with IFRSs
only if they comply with all the requirements of IFRSs including the translation method
set out in paragraphs 39 and 42.
functional currency, it shall describe the financial statements as complying with IFRSs
only if they comply with all the requirements of IFRSs including the translation method
set out in paragraphs 39 and 42.
ICAN’S IFRS Certification Training – IAS 21

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