,IAS 21
The effects of changes in foreign exchange rates
2 PARTS:
1) transactions in a foreign currency
2) foreign operations – linked to group statements
EXCLUDE THESE PARAGRAPHS:
• Par 14 – hyper inflation
• Par 27 – hedge accounting
• Par 35 – 37 – change in FC (done in Hons)
• Par 42 – 43 – hyper inflation
• Par 48 – 49 – sale of FO (done in Hons)
• Par 50 – Tax effect (done in FA 379)
• Par 54 – disclosure in Hons
o QUESTIONS TO ASK:
- How do we account for the purchase transaction denominated in USD in our records (ZAR)?
- How will the accounting differ when purchase on credit?
è Each entity determines its Functional currency (FC), translate and account foreign currency items in FC of
the entity
o DEFINITIONS:
every entity determines its FC (functional currency), the entity then translates and accounts in this foreign currency
• Functional currency (FC): (paragraph 8)
Currency of primary economic environment in which the entity operates
• Foreign currency: (paragraph 8)
A currency other than the functional currency of the entity
• Functional Currency:
è Management first looks at paragraph 9 considerations, then paragraph 10
Consider (Paragraph 9):
- The currency which mainly influence sales prices (normally the denomination of the SP’s currency)
- The currency of the country whose competitive forces / laws are the main determinant in selling prices
- The currency that mainly influences the labour and material / overhead costs etc
Additional factors (Paragraph 10):
- currency in which any financing is generated
- currency in which operating activity receipts are most likely kept
When these factors are both present / mixed, management will utilize judgement to determine the
functional currency which will best represent the economic effects of the underlying transactions
events and conditions (par. 12)
PARAGRAPH 13:
The functional currency is determined to reflect the underlying transactions, events and conditions. Once it is
determined, it is not changed unless the underlying transactions, events and conditions change
, o Recording financial currency transactions in functional currencies
• Spot exchange rate (paragraph 8)
- The exchange rate at a specific time (for immediate delivery)
• Exchange rate (paragraph 8)
- Ratio of exchange for two currencies
• Initial recognition
(paragraph 21)
è Translate foreign currency to functional currency at the spot rate on the transaction date
Spot rate (paragraph 22) Transaction date (paragraph 22)
spot rate may be the average rate. If - Date on which transaction qualifies for
exchange rate fluctuates significantly recognition in accordance with IFRS
it is not appropriate
• Reporting at the end of subsequent reporting periods (paragraph 23)
At the end of each reporting period the following items must be translated: (par 23)
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