Ias 21 Effects of Changes in Foreign Exchange Rates
Ias 21 Effects of Changes in Foreign Exchange Rates
Ias 21 Effects of Changes in Foreign Exchange Rates
Exchange difference
It is the difference in an entity’s FS resulting from translating a given number of units of one
currency at different exchange rates.
Closing rate
It is the spot exchange rate, that is, the rate at which a transaction is or could be undertaken at
the SFP date.
Functional currency
It is the currency of the primary economic environment in which the entity operates.
Foreign currency
It is a currency other than the functional currency of the entity.
Presentation currency
It is the currency in which the financial statements are presented.
An entity may select any presentation currency but a functional currency cannot be selected
and an entity will have to use a specific currency as its functional currency provided certain
criteria are met.
Subsequent recognition
The subsequent measurement step is more complicated because monetary items and non-
monetary items require different accounting treatments.
Monetary items are defined by IAS21 as “money held, and assets and liabilities to be received
or paid, in a fixed or determinable number of units of currency”. Examples include cash,
accounts receivable and accounts payable.
At year-end report foreign currency monetary items using the closing rate
Non-monetary items are characterised by the “absence of the right to receive, or obligation to
deliver, a fixed or determinable number of units of currency”. Examples include inventories,
plant and equipment, and investments in equity instruments.
At year end.
Report non-monetary items (e.g. non-current assets, inventories) which are carried at
historical cost in a foreign currency using the exchange rate at the date of the transaction
(historical rate)
Report non-monetary items which are carried at fair value in a foreign currency using the
exchange rates that existed when the values were measured.
If you cannot make a definitive conclusion based on these, you will need to consider the
following secondary factors:
These factors will normally need to be considered when the primary factors do not point to a
single currency, that is, when the “sales” factor shows “US Dollars” to be the functional
currency while the “cost” factor indicates “South African Rands”.
Procedure
Translation of the foreign subsidiary’s SFP
Translate all the assets and liabilities using the closing rate (SFP date exchange rate)
Calculate the foreign exchange gain or loss to be recorded as other comprehensive income as
follows:
Closing net assets translated at closing rate x xx
Less: opening net assets translated at opening rate (xxx)
: retained profits for the year translated at (xxx)
xxx
Less/ add foreign exchange gain / loss on goodwill xxx
xxx
Calculation of goodwill
Calculate goodwill by translating the equity acquired and purchase consideration by using
the ruling exchange rate on the date of acquisition.
If there is impairment loss this should be deducted from goodwill before is retranslated.
Impairment loss should be translated using the average rate.
Re-translate the goodwill from the date of acquisition to the SFP date to calculate the
foreign exchange gain or loss on acquisition.
Consolidated SFP
Prepare the consolidated SFP by adding P Ltd’s asset and liabilities with the translated figures of
S Ltd
REQUIREMENT:
Prepare the Consolidated Statement of Financial Position for the Acoff group as at 31 March
2016 in accordance with International Financial Reporting Standards.
Statements of Profit or Loss and Other Comprehensive Income for year ended 31 July 2017
Allen Plc Corrib Plc Neagh Plc
€ million € million GB£ million
Revenue 225 240 60
Cost of sales (130) (123) (18)
Gross profit 95 117 42
Operating expenses (27) (75) (18)
Finance costs (12) (21) (2.4)
Other income 8
Investment income 14 - -
Profit before taxation 78 21 21.6
Taxation (10) (3) (4)
Profit for the year 68 18 17.6
Other comprehensive income (items that will not be reclassified to profit or loss):
Gains on revaluation of property 24 6 -
Total comprehensive income for the year 92 24 17.6
The following additional information is provided:
(i) Allen purchased a 70% holding in the equity of Corrib on 1 December 2016. The
purchase price was €200 million paid in cash. Goodwill arising on acquisition was
calculated at €30 million, using the fair value method. On 31 July 2017, impairment
losses amounting to €10 million had been incurred. No accounting entry was made to
reflect the impairment.
(ii) Allen purchased a 60% holding in Neagh on 1 August 2016, for an immediate cash
payment of £80 million. On that date, the fair values of the identifiable net assets of
Neagh totalled £100 million, which was the same as their carrying values in the books of
Neagh. The 40% non-controlling interest had a fair value of £50 million on 1 August
2016. No impairment of goodwill had occurred by 31 July 2017. The directors of Allen
wish to use the fair value method for all acquisitions.
(iii) On 1 December 2016, the fair value of certain plant & equipment held by Corrib was €3
million more than its carrying value. This plant & equipment had a useful economic life
of 5 years from the date of acquisition. The revised values have not been incorporated
Required
Prepare a consolidated Statement of Profit or Loss and Other Comprehensive Income for the
Allen Group for year ended 31 July 2017 in accordance with IFRS. Your answer should show
clearly the amount of any exchange gains or losses recognised during the period.