NAS 21 Effects of Changes in Foreign Ex Rate

NAS 21 THE EFFECTS OF CHANGES IN FOREIGN
EXCHANGE RATES
▪ Objective:
▪ Translating financial statements into presentation
currency
▪ Which exchange rates to use
▪ Reporting effects of exchange rate movements
1
 NAS 21 covers
▪ Transactions in foreign currency
▪ Translation of financial statements of foreign
operations
▪ Consolidation
▪ Proportionate consolidation
▪ Equity method
2
Closing • Spot exchange rate at balance sheet date
rate
• Results from translating one amount from

Exchange
one currency to another at different rates
difference
Exchange
• Ratio of exchange between two currencies
rate
3
• Transaction between knowledgeable, willing parties
Fair
Value
• Currency other than functional currency of entity

Foreign
currency
• Subsidiary, associate, joint venture or branch

Foreign
• Operating in different currency or country from reporting
operation entity
4
• Currency in primary economic environment of operation
Functional
currency
• Parent company and all its subsidiaries

Group
• Units of currency held

Monetary
• Assets and liabilities in fixed determinable amount of
items currency
5
• Interest in net assets of a foreign
Net
investment
entity
• Currency in which financial

Presentation
currency
statements are presented
• Exchange rate for immediate

Spot exchange
rate
delivery
6
• Denomination and settlement • Labour and
currency material costs
• Geographical source of • Denomination
competition and regulation and settlement
of sales prices
Revenue Costs
Receipts Financing
• Currency in • Equity issued

which receipts • Debt issued
are retained
7
• Extension of RE • High or
(import/sell
goods for RE) low
• Autonomous volume
(own cash,
expenses, Transactions
income) with
Autonomy of
activities reporting
entity
Cash Flows Liabilities
• Directly affect • Service own

reporting entity obligations
• Readily available • Settled by
for remittance reporting entity
8
 Choose currency with primary economic
effect of underlying transactions, events &
conditions.
 Do not select functional currency to avoid
restating financial statements according to
NAS 29 Financial Reporting in
Hyperinflationary Economies
9
 Long term
 non-trade receivables and payables
 not likely to be settled in forseeable future
 Treated as part of net investment in foreign
operation
▪ If owed to any group subsidiary by another
10
MONETARY ITEMS NON-MONETARY ITEMS
 Right to receive fixed units  No right to receive fixed

of currency determinable amount of
 Examples: currency
▪ Pensions & employee benefits ▪ Amounts prepaid for goods
▪ Provisions and services
▪ Dividends recognised as ▪ Goodwill
liability ▪ Intangible assets
▪ Equity instruments receivable ▪ Inventories
▪ Assets receivable ▪ Property, plant & equipment
▪ All above to be settled in cash ▪ Provisions to be settled with
or at fixed fair value non-monetary assets
11
Summary of Approach required by
NAS 21
GROUPS SINGLE ENTITY
 Each entity in the group  Translate foreign currency

determines its functional items into functional
currency currency
 Translate results and  If functional currency
position of each entity differs from presentation
included in FS of reporting currency, prepare in
entity into the currency of functional currency and
the reporting entity translate to presentation
currency
12
• At spot rate on the • Monetary items at • On monetary items
date of the closing rate through P&L
transaction • Non-monetary items • On non-monetary
at spot rate on date items where gain or
of transaction loss is recognised
Initial Balance Exchange

recognition sheet date difference
13
 Denominated or requires settlement in a
foreign currency
 Record in functional currency at spot
exchange rate between functional currency
and foreign currency at the date of the
transaction
 The use of an average rate for the week or
month is permitted but not appropriate if the
rate fluctuates significantly
14
Translate monetary items at
closing rate on the balance sheet
date
Translate non-monetary items

measured at historical cost at the
date of the transaction
Translate non-monetary items

measured at fair value at date fair
value was determined
15
 Apply NAS 39 to hedge accounting and NAS 12 income taxes
 Monetary items:
▪ Difference between translation rates at recognition and settlement date
recognised in P&L
▪ If monetary item is part of net investment in foreign operation, recognise in
separate FS of reporting entity or foreign operation as appropriate
▪ In consolidated FS, recognise initially as separate component of equity and in
P&L on disposal of net investment
 If recognition and settlement fall in different accounting periods,
recognise change in each period
 When the gain or loss on a non-monetary item is recognised in equity the
resulting exchange difference is also recognised in equity
 When the gain or loss on a non-monetary item is recognised in P&L,
recognise the exchange difference in P&L
 Apply rules prospectively from date of any change in functional currency
16
 Balance sheet assets and liabilities at closing rates
 Income and expenses at rates at dates of transactions
▪ Average rate for period permitted unless rate fluctuates
significantly
 Resulting exchange differences as a separate
component of equity
 Hyperinflationary economies:
▪ do not adjust comparatives that were presented in prior
year FS when functional currency is that of non-
hyperinflationary economy;
▪ if it is, restate FS before translation
▪ If it ceases to be hyperinflationary, use restated prices at date that
it ceased to be hyperinflationary
17
Elimination of
intragroup balances
• Goodwill • Rate at balance
• Fair value • Equity sheet date of
adjustments • P&L at disposal foreign
operation
Different reporting
Closing rate
periods
18
 Translate goodwill on acquisition at closing rate
 Translate fair value adjustments to carrying
amounts of assets and liabilities at closing rate
 When eliminating intra-group balances and
foreign exchange differences arise, recognise in
equity until disposal of net investment in foreign
operation or otherwise in P&L
 When using different reporting periods within 3
month time limit, use exchange rate at the
balance sheet date of the foreign operation
19
 Recognise deferred foreign exchange
differences held in equity in the P&L on the
date that the gain or loss is recognised
 Recognise proportionate share of exchange
difference on part disposal
▪ But not when the asset is being written down
20
 Exchange differences recognised in profit or loss
 Net differences in separate component of equity
 Reconciliation of net exchange differences in equity at
beginning and end of period
 That the functional and presentation currency are
different and the reason for the change
 Change in functional currency and reasons for change
 Clearly identify additional supplementary information
that does not comply with NFRS
 Disclose currency of supplementary information
 Disclose functional currency and method used to
translate supplementary information
21

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NAS 21 THE EFFECTS OF CHANGES IN FOREIGN

• Results from translating one amount from

• Currency other than functional currency of entity

• Subsidiary, associate, joint venture or branch

• Parent company and all its subsidiaries

• Units of currency held

• Currency in which financial

• Exchange rate for immediate

• Currency in • Equity issued

Cash Flows Liabilities

• Directly affect • Service own

 Right to receive fixed units  No right to receive fixed

 Each entity in the group  Translate foreign currency

Initial Balance Exchange

Translate non-monetary items

Translate non-monetary items

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