IAS 21
FOREIGN OPERATIONS
FinAcc
Term 4 Alexandra Shtein
, IAS 21: THE EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES
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
Reporting foreign exchange transactions
Initial recognition: All foreign transactions must initially be measured in the functional currency at the spot rate (or
average rate) on transaction date.
Subsequent measurement Must be measured at the closing rate and exchange differences recognised in P/L
(monetary items):
Subsequent measurement at spot rate on transaction date
(non-monetary items measured at
historical cost):
Monetary items
(paragraph 23)
definition as per paragraph 8:
- Units of currency held and assets & liabilities received or paid in fixed or determinable number of units of currency.
- Fixed number of units of currency to pay, par 16 shows examples
- usually loans and debtors / creditors
ð Translate monetary items @ closing rate
ð remeasurement at end of reporting period
Non-monetary items
• Subsequent measurement (non-monetary items measured at fair value): at spot rate on the date that fair value was determined
E.g. Inventory:
If there was a write-down to net realisable value (NRV) at YE
ð compare historical cost of inventory and NRV at YE (at YE spot rate)
E.g. PPE:
Impairment test at year end
ð compare carrying amount with recoverable amount as at YE (based on YE spot rate)
If a gain or loss (due to FV adjustment or revaluation) is recognised on non-monetary items in OCI, the exchange difference portion of this
is included in OCI.
ð However, if the gain or loss is recognised in P/L, the exchange difference will ALSO be recognised in P/L. (par.30)
EXAMPLE:
Lexi Ltd. buys property in New York on 31 March 2020 for $100 000 and the functional currency is Rand.
Payment only occurs on 20th June 2020.
Year end = 30 May 2020.
Applicable exchange rates are as follows: Date USD = 1
31/03/2020 17.88
30/05/2020 18.27
have a creditor at year-end
transaction date = 31 March
reporting date = 30 May
monetary item = creditor
,INTIAL RECOGNITION: transaction date
convert foreign currency units to functional currency using the exchange rate on the transaction date
$100 000 x 17,88 = R 1 788 000
Exchange difference (par 8)
ON REPORTING DATE: Difference resulting from translating a given number of units
convert foreign currency units to functional currency using the closing rate of one currency into another currency at different exchange
$100 000 x 18,27 = R 1 827 000 rates
è if it arises from the settlement / translation of
monetary items: recognize in P/L
DR – Exchange difference (P/L) 39 000
CR – Creditors (SFP) 39 000
monetary items always undergo re-measurement on the reporting date
EXAMPLE:
SA Ltd. placed an order for inventory with a distributor in Frankfurt for FC2 000 000 on 1 February 2014. The goods were shipped f.o.b. on 1 March 2014.
Payment should take place on 31 July 2014.
Applicable exchange rates are as follows:
01/02/2014 R2,30 = FC1 ,00
01/03/2014 R2,40 = FC1 ,00
30/06/2014 R2,50 = FC1 ,00
31/07/2014 R2,62 = FC1 ,00
SA Ltd. uses a perpetual inventory system and has a reporting date of 30 June. Assume all the inventories remained unsold at the 2014 year end. In 2015 all
the inventories were sold.
The functional and presentation currency for SA Ltd. is South African Rand.
Journals for the year ended 30 June 2014
1 March 2014
DR - Inventories (SFP) 4 800 000
(2 000 000 x 2,40)
CR - Creditor (SFP) 4 800 000
30 June 2014
DR - Exchange differences (P/L) 200 000
CR - Creditor (SFP) 200 000
(2 000 000 x (2,50 – 2,40))
Journals for the year ended 30 June 2015
31 July 2014
DR - Exchange differences (P/L) 240 000
CR - Creditor (SFP) 240 000
(2 000 000 x (2,62 – 2,50))
DR - Creditor (SFP) 5 240 000
CR - Bank (SFP) 5 240 000
(2 000 000 x 2,62)
DR - Cost of sales (P/L) 4 800 000
CR - Inventories (SFP) 4 800 000
DR - Debtors (SFP) XXX
CR - Sales (P/L) XXX
, CLASS EXAMPLES: STELLENBOSCH UNIVERSITY
Basic transactions – settlement within one year
On 1 February 2014 SA Ltd. placed an order for inventory with a distributer in Frankfurt for FC 2 000 000.
The goods were shipped FOB on 1 March 2014. Payment should take place on 31 May 2014.
è remember FOB: is when we record the inventory
Applicable exchange rates are as follows:
01/02/2014 R2,30 = FC1 ,00 Order date (do not use this)
01/03/2014 R2,40 = FC1 ,00 transaction date
31/05/2014 R2,45 = FC1 ,00 payment date
SA Ltd. uses a perpetual inventory system and has a reporting date (YE) of 30 June. Assume all the inventories were still unsold at the 2014 year end. In 2015
all the inventories were sold.
The functional and presentation currency for SA Ltd. is South African Rand
.
SOLUTION:
Journals for the year ended 30 June 2014
1 March 2014
TRANSACTION DATE: record at the spot rate on the transaction date
= (2 000 000 x 2,40)
DR - Inventory (SFP) 4 800 000 inventory = non-monetary item at historical cost
CR - Creditors (SFP) 4 800 000 creditors = monetary item
31 May 2014
PAYMENT DATE: record at the spot rate on the payment date creditors = monetary item - so have to remeasure it
= (2 000 000 x 2,45) measure at the spot rate on settlement date
EXCHANGE RATE DIFFERENCE: record at the spot rate on the transaction date EXCHANGE RATE DIFFERENCE:
= (2 000 000 x (2,45-2,40) occurs when a monetary item is settled
Dr - Creditors (SFP) 4 900 000
CR - Bank (SFP) 4 900 000
DR - Exchange difference (P/L) 100 000
CR - Creditors (SFP) 100 000
Journals for the year ended 30 June 2015
inventory = non-monetary item - so there is no re-
DR - Cost of Sales (P/L) 4 800 000
measurement
CR - Inventories (SFP) 4 800 000
(measured at the transaction date rate at year end)
DR – Debtors (SFP) selling price
CR – Sales (P/L) selling price
FOREIGN OPERATIONS
FinAcc
Term 4 Alexandra Shtein
, IAS 21: THE EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES
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
Reporting foreign exchange transactions
Initial recognition: All foreign transactions must initially be measured in the functional currency at the spot rate (or
average rate) on transaction date.
Subsequent measurement Must be measured at the closing rate and exchange differences recognised in P/L
(monetary items):
Subsequent measurement at spot rate on transaction date
(non-monetary items measured at
historical cost):
Monetary items
(paragraph 23)
definition as per paragraph 8:
- Units of currency held and assets & liabilities received or paid in fixed or determinable number of units of currency.
- Fixed number of units of currency to pay, par 16 shows examples
- usually loans and debtors / creditors
ð Translate monetary items @ closing rate
ð remeasurement at end of reporting period
Non-monetary items
• Subsequent measurement (non-monetary items measured at fair value): at spot rate on the date that fair value was determined
E.g. Inventory:
If there was a write-down to net realisable value (NRV) at YE
ð compare historical cost of inventory and NRV at YE (at YE spot rate)
E.g. PPE:
Impairment test at year end
ð compare carrying amount with recoverable amount as at YE (based on YE spot rate)
If a gain or loss (due to FV adjustment or revaluation) is recognised on non-monetary items in OCI, the exchange difference portion of this
is included in OCI.
ð However, if the gain or loss is recognised in P/L, the exchange difference will ALSO be recognised in P/L. (par.30)
EXAMPLE:
Lexi Ltd. buys property in New York on 31 March 2020 for $100 000 and the functional currency is Rand.
Payment only occurs on 20th June 2020.
Year end = 30 May 2020.
Applicable exchange rates are as follows: Date USD = 1
31/03/2020 17.88
30/05/2020 18.27
have a creditor at year-end
transaction date = 31 March
reporting date = 30 May
monetary item = creditor
,INTIAL RECOGNITION: transaction date
convert foreign currency units to functional currency using the exchange rate on the transaction date
$100 000 x 17,88 = R 1 788 000
Exchange difference (par 8)
ON REPORTING DATE: Difference resulting from translating a given number of units
convert foreign currency units to functional currency using the closing rate of one currency into another currency at different exchange
$100 000 x 18,27 = R 1 827 000 rates
è if it arises from the settlement / translation of
monetary items: recognize in P/L
DR – Exchange difference (P/L) 39 000
CR – Creditors (SFP) 39 000
monetary items always undergo re-measurement on the reporting date
EXAMPLE:
SA Ltd. placed an order for inventory with a distributor in Frankfurt for FC2 000 000 on 1 February 2014. The goods were shipped f.o.b. on 1 March 2014.
Payment should take place on 31 July 2014.
Applicable exchange rates are as follows:
01/02/2014 R2,30 = FC1 ,00
01/03/2014 R2,40 = FC1 ,00
30/06/2014 R2,50 = FC1 ,00
31/07/2014 R2,62 = FC1 ,00
SA Ltd. uses a perpetual inventory system and has a reporting date of 30 June. Assume all the inventories remained unsold at the 2014 year end. In 2015 all
the inventories were sold.
The functional and presentation currency for SA Ltd. is South African Rand.
Journals for the year ended 30 June 2014
1 March 2014
DR - Inventories (SFP) 4 800 000
(2 000 000 x 2,40)
CR - Creditor (SFP) 4 800 000
30 June 2014
DR - Exchange differences (P/L) 200 000
CR - Creditor (SFP) 200 000
(2 000 000 x (2,50 – 2,40))
Journals for the year ended 30 June 2015
31 July 2014
DR - Exchange differences (P/L) 240 000
CR - Creditor (SFP) 240 000
(2 000 000 x (2,62 – 2,50))
DR - Creditor (SFP) 5 240 000
CR - Bank (SFP) 5 240 000
(2 000 000 x 2,62)
DR - Cost of sales (P/L) 4 800 000
CR - Inventories (SFP) 4 800 000
DR - Debtors (SFP) XXX
CR - Sales (P/L) XXX
, CLASS EXAMPLES: STELLENBOSCH UNIVERSITY
Basic transactions – settlement within one year
On 1 February 2014 SA Ltd. placed an order for inventory with a distributer in Frankfurt for FC 2 000 000.
The goods were shipped FOB on 1 March 2014. Payment should take place on 31 May 2014.
è remember FOB: is when we record the inventory
Applicable exchange rates are as follows:
01/02/2014 R2,30 = FC1 ,00 Order date (do not use this)
01/03/2014 R2,40 = FC1 ,00 transaction date
31/05/2014 R2,45 = FC1 ,00 payment date
SA Ltd. uses a perpetual inventory system and has a reporting date (YE) of 30 June. Assume all the inventories were still unsold at the 2014 year end. In 2015
all the inventories were sold.
The functional and presentation currency for SA Ltd. is South African Rand
.
SOLUTION:
Journals for the year ended 30 June 2014
1 March 2014
TRANSACTION DATE: record at the spot rate on the transaction date
= (2 000 000 x 2,40)
DR - Inventory (SFP) 4 800 000 inventory = non-monetary item at historical cost
CR - Creditors (SFP) 4 800 000 creditors = monetary item
31 May 2014
PAYMENT DATE: record at the spot rate on the payment date creditors = monetary item - so have to remeasure it
= (2 000 000 x 2,45) measure at the spot rate on settlement date
EXCHANGE RATE DIFFERENCE: record at the spot rate on the transaction date EXCHANGE RATE DIFFERENCE:
= (2 000 000 x (2,45-2,40) occurs when a monetary item is settled
Dr - Creditors (SFP) 4 900 000
CR - Bank (SFP) 4 900 000
DR - Exchange difference (P/L) 100 000
CR - Creditors (SFP) 100 000
Journals for the year ended 30 June 2015
inventory = non-monetary item - so there is no re-
DR - Cost of Sales (P/L) 4 800 000
measurement
CR - Inventories (SFP) 4 800 000
(measured at the transaction date rate at year end)
DR – Debtors (SFP) selling price
CR – Sales (P/L) selling price
