Different end for reporting periods

• A foreign operation may have a different end of the reporting period for tax reasons, or if legislation in its country requires financial statements to be prepared to a specific date
• Usually the foreign operation will prepare additional statements to the same date as the reporting entity for incorporation in the consolidated financial statements

• IAS 27: Consolidated and Separate Financial Statements, allows the use of a different end of the reporting period if

a)the difference is no greater than three months and
b)adjustments are made for any significant transactions between the different end of the reporting periods

• If a different end of the reporting period being within three months, is used, the assets and liabilities of the foreign operation are translated at

the exchange rate at its end of the reporting period

• Then adjustments are made for any significant movements in exchange rates up to the end of the reporting period of the reporting entity
• For example: if the functional currency of the foreign operation devalues significantly against that of the reporting entity

Goodwill and fair value transactions

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of a foreign operation are treated as:
a)assets and liabilities of the foreign operation
and
b)translated at the closing rate

Disposal of foreign operation

• An entity may dispose or partially dispose of its interest in a foreign operation through sale, liquidation, repayment of share capital or abandonment of all, or part of, that entity
• A write-down of the carrying amount of a foreign operation, either because of its own losses or because of an impairment recognised by the investor, does not constitute a partial disposal
• Accordingly, no part of the foreign exchange gain or loss recognised in other comprehensive income is reclassified to profit or loss at the time of a write-down

Deemed as disposals

The following are accounted for as disposals even if the entity retains an interest in the former subsidiary, associate or jointly controlled entity:
a)the loss of control of a subsidiary that includes a foreign operation
b)the loss of significant influence over an associate that includes a foreign operation
c)the loss of joint control over a jointly controlled entity that includes a foreign operation

Disposal of foreign operation

On the disposal of a foreign operation the cumulative translation amount of exchange differences that:
a)have been recognized in other comprehensive income and accumulated in a separate component of equity, and
b)which relate to that foreign operation

are reclassified from equity to profit or loss when the gain or loss on disposal is recognised

Partial disposal

• On the partial disposal of a subsidiary that includes a foreign operation, the entity shall re-attribute the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income to the non-controlling interests in that foreign operation
• In any other partial disposal of a foreign operation the entity shall reclassify to profit or loss only the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income

Disclosure for exchange differences

• The amount of exchange differences recognized in profit or loss except for those arising on financial instruments measured at ‘fair value through profit or loss’ as per IAS 39
• Net exchange differences recognized in other comprehensive income and classified in a separate component of equity
• A reconciliation of the amount of such exchange differences at the beginning and end of the period

Where in P&L should it be shown

• IAS 21 is silent on where the exchange difference should be presented
• Experts feel that based on other relevant IFRS

–FX differences from trading transactions can be included in the results of operating activities
–FX differences from financing may be included as a component of finance cost/income

You can view the presentation here: IAs 21 - Goodwill etc

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Presentation Currency

• The currency in which the financial statements are presented is defined as the presentation currency
• Unlike the functional currency, the presentation currency can be any currency of choice

Exchange differences -Presentation Currency

• Exchange differences are recognised in other comprehensive income
• These exchange differences are not recognised as income or expenses for the period because the changes in exchange rates have little or no direct effect on the present and future cash flows from the entity’s operations

Exchange differences -Presentation Currency

• The cumulative amount of the exchange differences is presented in a separate component of equity until disposal of the foreign operation
• When the exchange differences relate to a foreign operation that is consolidated but not wholly-owned, accumulated exchange differences arising from translation and attributable to non-controlling interests are allocated to, and recognised as part of, non-controlling interests in the consolidated statement of financial position

Intra-group transactions

• The incorporation of the results and financial position of a foreign operation with those of the reporting entity follows normal consolidation procedures, such as the elimination of intra-group balances and intra-group transactions of a subsidiary (see IAS 27 and IAS 31 Interests in Joint Ventures)
• An intra-group monetary item (short-or long-term) cannot be eliminated against the corresponding intra-group asset/liability without showing exchange differences in the consolidated financial statements
• The monetary item signifies a commitment to convert currency, so the entity is exposed to an exchange gain or loss
• In the consolidated financial statements, the exchange differences stay as income or expenses unless they arise on a monetary item forming part of a reporting entity’s net investment in a foreign operation
• Accordingly, in the consolidated financial statements of the reporting entity, such an exchange difference is recognised in profit or loss
• If it arises from the circumstances described in paragraph 32, it is recognised in other comprehensive income and accumulated in a separate component of equity until the disposal of the foreign operation

Elimination of profits

• IAS 21 is silent on the exchange rate to be taken for eliminating the exchange difference on the intra-group profits
• The US counterpart SFAS 52 requires elimination at the actual rate ruling at the transaction date or at a weighted average rate

You can view the presentation here: IAS 21 - Presentation Currency

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Translation of monetary items

• Foreign currency monetary items are translated at the end of the balance sheet date using the closing rate
• Closing rate is the spot rate at the balance sheet date as per IAS 39
• Translating a monetary item at a contracted rate even it is as per the terms of the contract is not permitted
• This becomes a form of hedging and is covered by IAS 39 with strict guidelines for availing the privileges for hedge accounting

FX Translation process

• FX Translation process is different and distinct from the FX Revaluation process
• FX Revaluation is done entry by entry –which means that for every transaction line item appearing in the books of accounts in foreign currency, there will be a corresponding line item appearing in the functional currency based on the day’s closing FX rate

• FX Translation on the other hand is done at the account level
• The balance in the account represented in foreign currency will be valued at the closing rate on the date of valuation and the difference is treated as foreign exchange difference
• This foreign exchange difference is dealt with as per the requirements of IAS 21

The carrying amount of an item

• The carrying amount of an item is determined in conjunction with other relevant Standards
• Example: Property, plant and equipment may be measured in terms of fair value or historical cost in accordance with IAS 16 Property, Plant and Equipment
• Whether the carrying amount is determined on the basis of historical cost or on the basis of fair value, if the amount is determined in a foreign currency it is then translated into the functional currency in accordance with IAS 21 only

Comparison of two amounts

• The carrying amount of some items is determined by comparing two or more amounts
• Example: The carrying amount of inventories is the lower of cost and net realisable value in accordance with IAS 2 Inventories
• Similarly, in accordance with IAS 36 Impairment of Assets, the carrying amount of an asset for which there is an indication of impairment is the lower of its carrying amount before considering possible impairment losses and its recoverable amount

Carrying amount -non-monetary assets

When an asset is non-monetary and is measured in a foreign currency, the carrying amount is determined by comparing:

• a)the cost or carrying amount, as appropriate, translated at the exchange rate at the date when that amount was determined (ie the rate at the date of the transaction for an item measured in terms of historical cost); and
• b)the net realisablevalue or recoverable amount, as appropriate, translated at the exchange rate at the date when that value was determined (eg the closing rate at the end of the reporting period)

Important note:

The effect of this comparison may be that an impairment loss is recognisedin the foreign currency but would not be recognisedin the functional currency, or vice versa

Example for this note

• A foreign currency asset consisting of $ 100,000 is recorded at the date of purchase at INR 3,500,000 @ exchange rate of Rs.35
• On valuation date the exchange rate is Rs.50 to a US$ and the recoverable amount of the asset is $ 80,000
• The carrying value of the foreign currency asset is Rs. 4,000,000 (recoverable amount in FC X exchange rate at the valuation date)
• The impairment loss of $20,000 in foreign currency is not recognized

Several exchange rates

• When several exchange rates are available, the rate used is that at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred at the
  measurement date
• If exchangeability between two currencies is temporarily lacking, the rate used is the first subsequent rate at which exchanges could be made

EXAMPLES OF SUBSEQUENT MEASUREMENT

Foreign Currency Monetary item

Example –1:

• An entity (functional currency Euro) has an outstanding trade payable for A$1,500 which arose from a transaction when the spot exchange rate was Euro1 = A$1.2 and hence was initially recorded at Euro1,250. The closing rate is Euro1 = A$1.5
• At what amount should the payable be recorded at the end of the reporting period?

Foreign Currency Monetary item

•At the end of each reporting period, foreign currency monetary items are translated using the closing rate
•The payable is therefore Euro1,000 (=1,500/1.5) at the end of the reporting period

Non Monetary item –historical cost

Example –2:

•An entity (functional currency Euro) purchased a machine for A$12,000 when the spot exchange rate was Euro1 = A$1.2. The closing rate is Euro1 = A$1.5
•At what amount should the machine be recorded at the end of the reporting period?

Non Monetary item –historical cost

•At the end of each reporting period, non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction
•The machine is shown as Euro10,000 (=12,000/1.2) at the end of the reporting period

Non Monetary item –Fair value

Example –3:

•An entity (functional currency Euro) owns a building. The entity carries buildings at their revalued amounts. The valuation of the building was done at the end of the reporting period and the fair value was US $150,000. The building was purchased for US $100,000 when the spot rate was Euro1 = US $1.2. The closing rate is Euro1 = US $1.5.
•At what amount should the building be recorded at the end of the reporting period?

Non Monetary item –Fair value

•At the end of each reporting period, non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the value was determined
•The building is shown as Euro100,000 (=150,000/1.5) at the end of the reporting period

You can view the presentation here: IAS 21 - Measurement of Exchange difference

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