IAS 21 EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
Inventory: lower of cost and NRV
EXAMPLE 1: TRANSLATION OF INVENTORIES
"Co A's functional currency is the £ sterling. Co A acquired inventories for $300,000 on
1-Jul-X5 when the exchange rate was $1.5=£1. At 31-Dec-X5, the CA of the inventories
is $300,000 and the NRV has risen to $340,000. The exchange rate at 31-Dec-X5 is $1.8
= £1."
Expressed in $ dollars, the inventory value has gone up, its NRV exceeding its CA. In
sterling £, the CA using the acquisition date rate is £200,000 ($300,.5) and the
net realisable amount using the closing rate is £189,000 ($340,.8).
Inventory is stated at the lower of cost and NRV in the functional currency and the CA
at 31-Dec-X5 is £189,000.
EXAMPLE 2: IMPAIRMENT OF PPE
"An entity, whose functional currency is the £ sterling, acquired on 30-Sept-X4 a non-
depreciable foreign currency asset costing $450,000. The exchange rate on 30-Sept-X4
was £1.5 = £1 and the asset was recorded at the date of purchase at £300,000. There
are indications that the NCA has been impaired during the year.
At 31-Dec-X5, the reporting date, the asset's recoverable amount in foreign currency is
estimated to be $400,000 when £1 = $1.25."
Expressed in foreign currency, the asset has a CA of $450,000 and a recoverable
amount of $400,000 and is therefore impaired. Impairment: CA at acqn rate, RA
at CR
However, when it is expressed in sterling, the asset is not impaired, because its
Recognise exchange g / l on recoverable amount exceeds its CA. In sterling, the CA, using the acqn date rate, is
settlement or at YE £300,000 ($450,.5) and the recoverable amount, using the closing rate, is
£320,000 ($400,.25).
The depreciation of the foreign currency relative to £ sterling has offset the fall in the
value of the asset due to impairment therefore no impairment charge is required.
EXAMPLE 3: FINANCIAL ASSETS
"Co A, whose functional currency is the £ sterling and has a YE 31-Dec-X4, acquired
investments in listed equity instruments for $10m on 30-Sept-X4.
At 31-Dec-X4, the FV of the investments has increased to $14.4m. An irrevocable
election has been made under IFRS 9 to record changes to the value of the
investments in OCI. Exchange rates: 30-Sept-X4: $1 = £1. 31-Dec-X4: £1.20 = £1."
The listed shares are measured at FV on 31-Dec-X4, of $14.4m. This should be
translated using the spot rate at the date of valuation, which is $1.20 = £1 to record a
financial asset of £12m.
The gain of £2m ($14..2 - $10m / 1.0) should be recorded as OCI.
, IMPAIRMENT
EXAMPLE 1: SERVICE CENTRE OS - IMPAIRMENT
"On 1-Apr-X3, Co A set up a service centre in Russia at a cost of R266m. The service centre is
situated at Moscow airport and operates as a repair depot for flights in and out of the airport. The
service centre had an estimated UEL of 6 years at 1-Apr-X3, with zero RV.
In Mar-X4, new regulations were introduced in Russia which prevented extended stays at Moscow
airport for a number of airlines. Therefore, significantly fewer aircraft could be serviced at the
service centre. The Co A FD recognised this regulatory change as an impairment indicator and
carried out an impairment test exercise at 31-Mar-X4 on the service centre.
As a consequence of this exercise, the service centre was determined to have a VIU of R180m and a
FV less COS of R204m at 31-Mar-X4.
The FD therefore calculated an impairment charge of R18m. He translated this at R48 = £1 to give
an impairment charge of £375k in operating costs.
Exchange rates as follows: 1-Apr-X3: R53 = £1, 31-Mar-X4: R48 = £1."
The restrictions imposed by the government would indicate impairment and the directors have
correctly carried out an impairment review.
Financial reporting treatment
Cost R266
Depreciation (R) (R44)
CA R222
Expressed in R, the asset is imapired because the recoverable amount, which is the FV less COS of
R204m (as this is higher than VIU of R180m) , is less than the CA of R222m.
However for the purpose of testing for impairment the CA should be measured at the normal
historic exchange rate, but the recoverable amount should be determined at the closing
exchange rate.
Thus the CA in £s is = £4.189m
The RA in £s is = £4.25m
Therefore no impairment charge is required, as the RA > CA.
Correcting journals (i.e. remove impairment charge):
DR PPE 375 --> Add to PPE
CR COS 375 --> Add to operating costs as -ve
As this is an error and must be adjusted.
Inventory: lower of cost and NRV
EXAMPLE 1: TRANSLATION OF INVENTORIES
"Co A's functional currency is the £ sterling. Co A acquired inventories for $300,000 on
1-Jul-X5 when the exchange rate was $1.5=£1. At 31-Dec-X5, the CA of the inventories
is $300,000 and the NRV has risen to $340,000. The exchange rate at 31-Dec-X5 is $1.8
= £1."
Expressed in $ dollars, the inventory value has gone up, its NRV exceeding its CA. In
sterling £, the CA using the acquisition date rate is £200,000 ($300,.5) and the
net realisable amount using the closing rate is £189,000 ($340,.8).
Inventory is stated at the lower of cost and NRV in the functional currency and the CA
at 31-Dec-X5 is £189,000.
EXAMPLE 2: IMPAIRMENT OF PPE
"An entity, whose functional currency is the £ sterling, acquired on 30-Sept-X4 a non-
depreciable foreign currency asset costing $450,000. The exchange rate on 30-Sept-X4
was £1.5 = £1 and the asset was recorded at the date of purchase at £300,000. There
are indications that the NCA has been impaired during the year.
At 31-Dec-X5, the reporting date, the asset's recoverable amount in foreign currency is
estimated to be $400,000 when £1 = $1.25."
Expressed in foreign currency, the asset has a CA of $450,000 and a recoverable
amount of $400,000 and is therefore impaired. Impairment: CA at acqn rate, RA
at CR
However, when it is expressed in sterling, the asset is not impaired, because its
Recognise exchange g / l on recoverable amount exceeds its CA. In sterling, the CA, using the acqn date rate, is
settlement or at YE £300,000 ($450,.5) and the recoverable amount, using the closing rate, is
£320,000 ($400,.25).
The depreciation of the foreign currency relative to £ sterling has offset the fall in the
value of the asset due to impairment therefore no impairment charge is required.
EXAMPLE 3: FINANCIAL ASSETS
"Co A, whose functional currency is the £ sterling and has a YE 31-Dec-X4, acquired
investments in listed equity instruments for $10m on 30-Sept-X4.
At 31-Dec-X4, the FV of the investments has increased to $14.4m. An irrevocable
election has been made under IFRS 9 to record changes to the value of the
investments in OCI. Exchange rates: 30-Sept-X4: $1 = £1. 31-Dec-X4: £1.20 = £1."
The listed shares are measured at FV on 31-Dec-X4, of $14.4m. This should be
translated using the spot rate at the date of valuation, which is $1.20 = £1 to record a
financial asset of £12m.
The gain of £2m ($14..2 - $10m / 1.0) should be recorded as OCI.
, IMPAIRMENT
EXAMPLE 1: SERVICE CENTRE OS - IMPAIRMENT
"On 1-Apr-X3, Co A set up a service centre in Russia at a cost of R266m. The service centre is
situated at Moscow airport and operates as a repair depot for flights in and out of the airport. The
service centre had an estimated UEL of 6 years at 1-Apr-X3, with zero RV.
In Mar-X4, new regulations were introduced in Russia which prevented extended stays at Moscow
airport for a number of airlines. Therefore, significantly fewer aircraft could be serviced at the
service centre. The Co A FD recognised this regulatory change as an impairment indicator and
carried out an impairment test exercise at 31-Mar-X4 on the service centre.
As a consequence of this exercise, the service centre was determined to have a VIU of R180m and a
FV less COS of R204m at 31-Mar-X4.
The FD therefore calculated an impairment charge of R18m. He translated this at R48 = £1 to give
an impairment charge of £375k in operating costs.
Exchange rates as follows: 1-Apr-X3: R53 = £1, 31-Mar-X4: R48 = £1."
The restrictions imposed by the government would indicate impairment and the directors have
correctly carried out an impairment review.
Financial reporting treatment
Cost R266
Depreciation (R) (R44)
CA R222
Expressed in R, the asset is imapired because the recoverable amount, which is the FV less COS of
R204m (as this is higher than VIU of R180m) , is less than the CA of R222m.
However for the purpose of testing for impairment the CA should be measured at the normal
historic exchange rate, but the recoverable amount should be determined at the closing
exchange rate.
Thus the CA in £s is = £4.189m
The RA in £s is = £4.25m
Therefore no impairment charge is required, as the RA > CA.
Correcting journals (i.e. remove impairment charge):
DR PPE 375 --> Add to PPE
CR COS 375 --> Add to operating costs as -ve
As this is an error and must be adjusted.
