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Summary IAS 21 Foreign exchange
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Summary of IAS 21 for third year BAcc course
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IAS 21: FOREIGN EXCHANGE (TRANSACTIONS):IAS 21
A company can engage in different foreign activities.
Ito IAS 21, Foreign activities →
(1) transactions in a foreign currency (buying and selling)
SA company buying/selling in dollars, Euros or Pounds.
(2) may have a foreign operation (Sub or Ass) [Group Statements]
Also the rules of presentation of FSs in a foreign currency will be specifically discuses
Two issues:
1] What is the exchange rate that need to be used for the transaction?
2] Treatment of effect of change in exchange rate? (E.g. when paying a creditor where the rate differs from
the transaction date)
SCOPE (.03-.07)
DEFINITIONS (.08)
− Closing rate: At year-end
− Exchange difference: Between two dates
− Exchange rate: E.g. 1 Euro = R16,07
− Functional currency: E.g. SA Co, = ZAR; Co. in London = British Pound
− Monetary items: Cash & immediately convertible into cash = debtors, creditors and loans
− Spot exchange rate: On specific date
ELABORATION ON DEFINITIONS (.09-.16)
− Primary factors: .09
− Secondary factors: .10
o (b): In which currency is your bank account?
SUMMARY OF THE APPROACH REQUIRED BY THIS STANDARD (.17-.19)
− .19: E.g. for foreign investors
REPORTING FOREIGN CURRENCY TRANSACTIONS IN THE FUNCTIONAL CURRENCY (.20-.37)
Three date:
[1] Transaction date: Date the risk of the purchase transferred (Shipment terms: FOB; CIF → DATE OF
SHIPMENT)
E.g. Dt Inventory (SFP) (AT SPOT RATE)
Ct Creditors (SFP) (AT SPOT RATE) A
[2] Year-end
Remeasure monetary item at closing rate = spot rate at the end of the year
E.g. Dt Exchange difference (P/L)
Ct Creditors (SFP) B
[3] Settlement date (date of payment to a creditor or from a debtor)
Remeasure monetary item at spot rate on settlement date
To ensure correct value for settlement of creditor.
E.g. Dt Exchange difference (P/L)
Ct Creditors (SFP) C
Settle the creditor:
E.g. Dt Creditor (SFP) (A + B + C)
Ct Bank (SFP)
Initial recognition:
− [1]
− .22: E.g. interest
1
, Reporting at the end of subsequent reporting periods:
− [2]
− .23: (a) E.g. debtors, creditors and loans
− .24: (b) Non-monetary item (Inventory, PPE or goodwill) is left as is – no translation – say at initial
spot rate at transaction date
Recognition of exchange differences:
− [3]
− .28: Exchange differences arising from settlement (payment)/ translation of monetary items (@ year
end)
− .30: Exchange differences that is part of a profit or loss on non-monetary items
o Recognize where the P/L is recognized (either profit or loss or other comprehensive income)
o E..g sale of asset (PPE item)
▪ PPE @ CP → P/L
▪ PPE @ FV (REV) → OCI
CLASS EXAMPLE 1: Basic transactions – settlement within one year [BEFORE YEAR END]
On 1 February 2009 SA Ltd placed an order IRREVELANT with a distributer in Frankfurt for FC2 000 000.
The goods were shipped f.o.b. on 1 March 2009. Transaction date - risk transfers. Payment should take place
on 31 May 2009.
Applicable exchange rates are as follows:
01/02/2009 R2,30 = FC1 ,00
01/03/2009 R2,40 = FC1 ,00
31/05/2009 R2,45 = FC1 ,00
SA Ltd uses a perpetual inventory system and has a reporting date of 30 June. Assume all the inventories
were still unsold at the 2009 year end. In 2010 all the inventories were sold.
Journals for the year ended 30 June 2009 R R
1 March 2009
Dr Inventories (SFP) (2 000 000 x 2,40) 4 800 000
Cr Creditor (SFP) 4 800 000
Recognise the transaction at spot rate on transaction date.
31 May 2009 – Settlement date
Rate is higher – will have to pay more to creditor.
Dr Exchange difference loss (P/L) 100 000
Cr Creditor (SFP) (2 000 000 x (2,45 - 2,40)) 100 000
Remeasure the monetary item (creditor) – translate at spot rate at settlement date. Difference is the
exchange differences. Recognise an exchange rate difference loss in P/L.
Dr Creditor (SFP) (4 800 000+ 100 000) 4 900 000
Cr Bank (SFP) (2 000 000 x 2,45) 4 900 000
Settlement at spot rate on payment date.
Journals for the year ended 30 June 2010
Dr Cost of Sales (P/L) 4 800 000
Cr Inventories (SFP) 4 800 000
Dr Debtors (SFP) XXXX
Cr Sales (P/L) XXXX
CLASS EXAMPLE 2 : Basic transactions – settlement after year end
SA Ltd placed an order with a distributor in Frankfurt for FC2 000 000 on 1 February 2009. The goods were
shipped f.o.b. on 1 March 2009. Payment should take place on 31 July 2009.
2
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