lOMoAR cPSD| 49511909
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, lOMoAR cPSD| 49511909
A GENERAL
7.1 INTRODUCTION
An entity may have transactions in foreign currencies and/or foreign operations.
When an entity undertakes transactions denominated in foreign currencies, for example,
buying or selling goods overseas denominated in foreign currencies, then the results of these
transactions are translated into the presentation currency (Rands) for incorporation into the
financial statements of the entity.
The entity can be conducting business through foreign operations, for example, establishing
a foreign branch to handle the marketing and selling of its products overseas. The results of
the foreign operations (branch) will be accounted for in the functional currency (rands). (IAS
21.1)
7.2 WORK EXCLUDED
IAS 21 distinguishes between the accounting treatment for foreign transactions and foreign
operations. The following aspects fall outside the scope of this module:
– foreign operations (IAS 21.11–15 and .44–49)
7.3 OBJECTIVES
The principal issues in accounting for foreign currency transactions are:
- which exchange rate to use, and
- how to report the effects of changes in exchange rates in the financial statements. IAS 21.1–
2.
7.4 DEFINITIONS – IAS 21.8
Functional currency – the currency of the primary economic environment in which the entity
operates.
Presentation currency – the currency in which the financial statements are presented.
Foreign currency – a currency other than the functional currency of the entity.
Exchange rate – the ratio of exchange for two currencies.
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, lOMoAR cPSD| 49511909
FAC3702/103
Exchange difference – the difference resulting from translating a given number of units of one
currency into another currency at different exchange rates.
Spot exchange rate – the exchange rate for immediate delivery.
Closing rate – the spot exchange rate at the end of the reporting period.
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, for example, bank accounts, fixed
deposits, trade receivables, loans, trade payables, etc.
Non-monetary items – the essential feature is the absence of a right to receive (or an
obligation to deliver) a fixed or determinable number of units of currency, for example
inventories and property, plant and equipment.
Fair value – the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
7.5 ELABORATION ON THE DEFINITIONS
Functional currency
The primary economic environment in which an entity operates is normally the one in which it
primarily generates and expends cash.
In determining the functional currency of an entity, they need to consider the following factors:
• the currency that mainly influences sales prices for goods and services and the currency
of the country whose competitive forces and regulations mainly determine the sales
price of its goods and services;
EXAMPLE:
Sales prices of goods and services are denominated and settled in this currency.
and
• the currency that mainly influences labour, material and other costs of providing goods
or services.
EXAMPLE:
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, lOMoAR cPSD| 49511909
The costs are denominated and settled in this currency.
The following additional supporting evidence may also provide evidence of an entity's
functional currency:
• the currency in which funds from financing activities are generated, and • the
currency in which receipts from operating activities are usually retained.
If the functional currency is not obvious because the above indicators are mixed,
management must use it's judgement to determine the functional currency that most
faithfully represents the economic effects of the underlying transactions, events and
conditions.
The primary indicators need to be given priority before considering the additional supporting
evidence to determine an entity's functional currency. (IAS 21.12)
Once the functional currency of an entity is determined, it is not changed unless there is a
change in the underlying transactions, events and conditions that are relevant to the
functional currency and reflected by it. (IAS 21.13)
If the entity's functional currency is that of a hyper inflationary economy, the entity's financial
statements
are restated in accordance with IAS 29 Hyper inflationary economies. (IAS 21.14) Monetary
items
The essential feature of a monetary item is a right to receive (or obligation to deliver) a fixed or
determinable number of units of currency.
Examples:
• pensions and other employee benefits to be paid in cash;
• provisions that are to be settled in cash; and • cash dividends that are recognised as a
liability.
Similarly, a contract to receive (or deliver) a variable number of the entity's own equity
instruments or a variable amount of assets in which the fair value to be received (or delivered)
equals a fixed or determinable number of units of currency, is a monetary item.
Non-monetary item
The essential feature of a non-monetary item is the absence of a right to receive (or an obligation
to deliver) a fixed and determinable number of units of currency, for example:
4
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Downloaded by Vincent master
()
, lOMoAR cPSD| 49511909
A GENERAL
7.1 INTRODUCTION
An entity may have transactions in foreign currencies and/or foreign operations.
When an entity undertakes transactions denominated in foreign currencies, for example,
buying or selling goods overseas denominated in foreign currencies, then the results of these
transactions are translated into the presentation currency (Rands) for incorporation into the
financial statements of the entity.
The entity can be conducting business through foreign operations, for example, establishing
a foreign branch to handle the marketing and selling of its products overseas. The results of
the foreign operations (branch) will be accounted for in the functional currency (rands). (IAS
21.1)
7.2 WORK EXCLUDED
IAS 21 distinguishes between the accounting treatment for foreign transactions and foreign
operations. The following aspects fall outside the scope of this module:
– foreign operations (IAS 21.11–15 and .44–49)
7.3 OBJECTIVES
The principal issues in accounting for foreign currency transactions are:
- which exchange rate to use, and
- how to report the effects of changes in exchange rates in the financial statements. IAS 21.1–
2.
7.4 DEFINITIONS – IAS 21.8
Functional currency – the currency of the primary economic environment in which the entity
operates.
Presentation currency – the currency in which the financial statements are presented.
Foreign currency – a currency other than the functional currency of the entity.
Exchange rate – the ratio of exchange for two currencies.
2
Downloaded by Vincent master ()
, lOMoAR cPSD| 49511909
FAC3702/103
Exchange difference – the difference resulting from translating a given number of units of one
currency into another currency at different exchange rates.
Spot exchange rate – the exchange rate for immediate delivery.
Closing rate – the spot exchange rate at the end of the reporting period.
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, for example, bank accounts, fixed
deposits, trade receivables, loans, trade payables, etc.
Non-monetary items – the essential feature is the absence of a right to receive (or an
obligation to deliver) a fixed or determinable number of units of currency, for example
inventories and property, plant and equipment.
Fair value – the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
7.5 ELABORATION ON THE DEFINITIONS
Functional currency
The primary economic environment in which an entity operates is normally the one in which it
primarily generates and expends cash.
In determining the functional currency of an entity, they need to consider the following factors:
• the currency that mainly influences sales prices for goods and services and the currency
of the country whose competitive forces and regulations mainly determine the sales
price of its goods and services;
EXAMPLE:
Sales prices of goods and services are denominated and settled in this currency.
and
• the currency that mainly influences labour, material and other costs of providing goods
or services.
EXAMPLE:
3
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, lOMoAR cPSD| 49511909
The costs are denominated and settled in this currency.
The following additional supporting evidence may also provide evidence of an entity's
functional currency:
• the currency in which funds from financing activities are generated, and • the
currency in which receipts from operating activities are usually retained.
If the functional currency is not obvious because the above indicators are mixed,
management must use it's judgement to determine the functional currency that most
faithfully represents the economic effects of the underlying transactions, events and
conditions.
The primary indicators need to be given priority before considering the additional supporting
evidence to determine an entity's functional currency. (IAS 21.12)
Once the functional currency of an entity is determined, it is not changed unless there is a
change in the underlying transactions, events and conditions that are relevant to the
functional currency and reflected by it. (IAS 21.13)
If the entity's functional currency is that of a hyper inflationary economy, the entity's financial
statements
are restated in accordance with IAS 29 Hyper inflationary economies. (IAS 21.14) Monetary
items
The essential feature of a monetary item is a right to receive (or obligation to deliver) a fixed or
determinable number of units of currency.
Examples:
• pensions and other employee benefits to be paid in cash;
• provisions that are to be settled in cash; and • cash dividends that are recognised as a
liability.
Similarly, a contract to receive (or deliver) a variable number of the entity's own equity
instruments or a variable amount of assets in which the fair value to be received (or delivered)
equals a fixed or determinable number of units of currency, is a monetary item.
Non-monetary item
The essential feature of a non-monetary item is the absence of a right to receive (or an obligation
to deliver) a fixed and determinable number of units of currency, for example:
4
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