This presentations discusses International Accounting Standard on Foreign Transactions (IAS 21). Important definitions, functional currency, initial recognition, subsequent measurement & recognition of exchange difference at initial stage and use of temporal and net investment method at the time of consolidation of financial statements are covered.

1. Unit 6: International Accounting
Standard on Foreign Transactions (IAS
21)

2.  International Accounting Standards on
Foreign Transactions IAS-21
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Professor

3.  Recent political and economic events have
focused on the pressing need for more
uniformity in international accounting
standards
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Mrs. Charu Rastogi, Asst.
Professor

4.  IAS 21: The Effects of Changes in Foreign Exchange
Rates outlines how to account for foreign currency
transactions and operations in financial statements, and also
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
 An entity is required to determine a functional currency (for
each of its operations if necessary) based on the primary
economic environment in which it operates
 It generally records foreign currency transactions using the
spot conversion rate to that functional currency on the date
of the transaction.
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Mrs. Charu Rastogi, Asst.
Professor

5. Functional Currency Currency of the primary environment in which the
entity operates
Presentation Currency Currency in which the Financial Statement (FS) is
presented
Closing Rate Exchange rate at reporting year end date
Spot Exchange Rate Exchange rate for immediate delivery
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.
Monetary Items Units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number
of units of currency
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Mrs. Charu Rastogi, Asst.
Professor

6.  Accounting methods used in translation of currencies:
◦ Current rate method
 All items of income statement and balance sheet are translated at
current rates
◦ Current/non current method
 Current assets and liabilities are translated at current rate and fixed
assets and long term liabilities at historical rate or at the rate at which
they were acquired
◦ Monetary/non monetary method (followed in India)
 Assets and liabilities are classified as monetary (cash, marketable
securities, accounts receivable, etc) or non monetary (owners’ equity,
land)
 All monetary balance sheet accounts are translated at the current
exchange and non monetary items are translated at historical rate or
acquired rate
◦ Temporal method
 This method uses historical rate for items recorded at historical costs;
fixed assets
 Items that are stated at replacement rates, market rates or expected
future value are stated at current rate
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Mrs. Charu Rastogi, Asst.
Professor

7. SECONDARY FACTORS
Currency in which :
a)Funds from financing
activities are
generated
b)Receipts from
operating activities
are retained
PRIMARY FACTORS
a)The currency :
i. mainly influences
SP for goods and
services
ii. of the country
whose competitive
forces mainly
determine the SP
b) that mainly
influences labour,
material, and other
costs of providing
goods and services
OTHER FACTORS
a)Level of autonomy in
foreign operation
b)Volume of
transactions
c)Cash flow from
foreign activities
directly affect cash
flow of parent
d)Foreign operation
financed by own
operation or by the
parent0
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Mrs. Charu Rastogi, Asst.
Professor

8. Individual Company
Stage
Foreign currency transaction
Consolidation FS Stage
Foreign operation
• Initial recognition
• Subsequent
measurement
• Recognition of
exchange difference
Temporal
method
Net
investment
method
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Mrs. Charu Rastogi, Asst.
Professor

9. Reporting at
subsequent year end
Initial
recognition
Foreign currency transaction
initially recorded in its
functional currency
Exchange rate :
• Spot rate
• Average rate (If do not
fluctuate significantly)
Foreign currency
items
Exchange
Rate
Monetary Items Closing rate
Non-monetary
items carried at
historical cost in
foreign currency
(NCA, Inventory)
Historical
rate
Non-monetary
items carried at fair
value in foreign
currency
Exchange
rate when
value is
determined
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Mrs. Charu Rastogi, Asst.
Professor

10. Recognition of Exchange Difference
‘The difference resulting from translating a given number of units of
one currency into another currency at different exchange rates’
Settlement of monetary items
E.g.: Receivables, payables, loans PnL in the
period they
arise
Translating an entity’s monetary
items at rates different from
initially recorded
Gain or loss on a non-monetary
item and any related exchange
differences
E.g.: Revaluation of PPE (Property,
plant & Equipment)
Equity
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Mrs. Charu Rastogi, Asst.
Professor

11. Temporal method Net investment
method
• Same functional currency as
reporting entity (parent)
• Extension of reporting entity
• Different functional currency
from the reporting entity
• Foreign operation normally
operate in semi-autonomous
way
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Mrs. Charu Rastogi, Asst.
Professor

12. Translating the Financial Statement
Temporal method
Net investment
method
Property, Plant and Equipment (PPE) Date of purchase Closing rate
PPE (revalued) Date of revaluation Closing rate
Cost of inventory
Date when the cost was
incurred
Closing rate
Monetary assets and liabilities Closing rate Closing rate
Revenue and expenses Actual / average rate Actual / average rate
Depreciation charged Same as relevant PPE Average rate
Share capital and pre-acquisition profit Historical rate Historical rate
Goodwill on consolidation - Closing rate
Difference on translation Profit or loss
Treated as equity
Recognised in PnL
Items Method
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Mrs. Charu Rastogi, Asst.
Professor

13. • Functional currency of parent
• Difference on exchange
I. Amount recognised in the SOCI (Statement of
Comprehensive Income)
II. Amount classified as a component of equity and the
movement in the equity component
• If the functional currency is different from the presentation
currency, that fact should be state together with the reason and
disclosure of the functional currency
• In the case of change in the functional currency, the reason of
the change should be stated
Disclosure
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Mrs. Charu Rastogi, Asst.
Professor

14. Audit Evidence
• Sales and purchases invoice
• Confirmation of the spot rate and closing rate
• Confirmation from 3rd party (A/c Payables, A/c Receivables)
• Confirmation of the computation of the exchange differences
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Mrs. Charu Rastogi, Asst.
Professor