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MFRS 121

MFRS 121

The Effects of Changes in Foreign


Exchange Rates
In November 2011 the Malaysian Accounting Standards Board (MASB) issued
MFRS 121 The Effects of Changes in Foreign Exchange Rates. The Standard is
applicable for annual periods beginning on or after 1 January 2012. MFRS 121 is
equivalent to IAS 21 The Effects of Changes in Foreign Exchange Rates as issued and
amended by the International Accounting Standards Board (IASB).

About IAS 21

In April 2001 the IASB adopted IAS 21 The Effects of Changes in Foreign
Exchange Rates, which had originally been issued by the International Accounting
Standards Committee in December 1983. IAS 21 The Effects of Changes in
Foreign Exchange Rates replaced IAS 21 Accounting for the Effects of Changes in
Foreign Exchange Rates (issued in July 1983).

In December 2003 the IASB issued a revised IAS 21 as part of its initial agenda of
technical projects. The revised IAS 21 also incorporated the guidance contained in
three related Interpretations (SIC-11 Foreign Exchange—Capitalisation of Losses
Resulting from Severe Currency Devaluations, SIC-19 Reporting Currency—
Measurement and Presentation of Financial Statements under IAS 21 and IAS 29
and SIC-30 Reporting Currency—Translation from Measurement Currency to
Presentation Currency). The IASB also amended SIC-7 Introduction of the Euro.

The IASB amended IAS 21 in December 2005 to require that some types of
exchange differences arising from a monetary item should be separately recognised
as equity.

Other Standards have made minor consequential amendments to IAS 21. They
include Improvements to IFRSs (issued May 2010), IFRS 10 Consolidated
Financial Statements (issued May 2011), IFRS 11 Joint Arrangements (issued May
2011), IFRS 13 Fair Value Measurement (issued May 2011), Presentation of Items
of Other Comprehensive Income (Amendments to IAS 1) (issued June 2011),
IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9,
IFRS 7 and IAS 39) (issued November 2013), IFRS 9 Financial Instruments
(issued July 2014) and IFRS 16 Leases (issued January 2016).

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CONTENTS from
paragraph
Preface
MALAYSIAN FINANCIAL REPORTING STANDARD 121
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE
RATES
OBJECTIVE 1
SCOPE 3
DEFINITIONS 8
Elaboration on the definitions 9
SUMMARY OF THE APPROACH REQUIRED BY THIS
STANDARD 17
REPORTING FOREIGN CURRENCY TRANSACTIONS IN THE
FUNCTIONAL CURRENCY 20
Initial recognition 20
Reporting at the ends of subsequent reporting periods 23
Recognition of exchange differences 27
Change in functional currency 35
USE OF A PRESENTATION CURRENCY OTHER THAN THE
FUNCTIONAL CURRENCY 38
Translation to the presentation currency 38
Translation of a foreign operation 44
Disposal or partial disposal of a foreign operation 48
TAX EFFECTS OF ALL EXCHANGE DIFFERENCES 50
DISCLOSURE 51
EFFECTIVE DATE AND TRANSITION 58
WITHDRAWAL OF OTHER PRONOUNCEMENTS 61
APPENDIX
Amendments to other pronouncements

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Malaysian Financial Reporting Standard 121 The Effects of Changes in Foreign


Exchange Rates (MFRS 121) is set out in paragraphs 1–62 and the Appendix. All
the paragraphs have equal authority. MFRS 121 should be read in the context of its
objective and the Basis for Conclusions, the Preface to MASB Approved Accounting
Standards and the Conceptual Framework for Financial Reporting. MFRS 108
Accounting Policies, Changes in Accounting Estimates and Errors provides a basis
for selecting and applying accounting policies in the absence of explicit guidance.

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Preface
The MASB is implementing its policy of convergence through adopting International
Financial Reporting Standards (IFRSs) as issued by the IASB for application for annual
periods beginning on or after 1 January 2012. The IASB defines IFRSs as comprising:
(a) International Financial Reporting Standards;
(b) International Accounting Standards;
(c) IFRIC Interpretations; and
(d) SIC Interpretations.

MFRSs equivalent to IFRSs that apply to any reporting period beginning on or after
1 January 2012 are:
(a) Malaysian Financial Reporting Standards; and
(b) IC Interpretations.

First-time application of MFRSs equivalent to IFRSs

Application of this Standard will begin in the first-time adopter’s* first MFRS financial
statements* in the context of adopting MFRSs equivalent to IFRSs. In this case, the
requirements of MFRS 1 First-time Adoption of Malaysian Financial Reporting
Standards must be observed. Application of MFRS 1 is necessary as otherwise such
financial statements will not be able to assert compliance with IFRS.

MFRS 1, the Malaysian equivalent of IFRS 1 First-time Adoption of International


Financial Reporting Standards, requires prior period information, presented as
comparative information, to be restated as if the requirements of MFRSs effective for
the first-time adopter’s first MFRS reporting period have always been applied, except
when MFRS 1 (1) prohibits retrospective application in some aspects or (2) allows the
first-time adopter to use one or more of the exemptions or exceptions contained therein.
This means that, in preparing its first MFRS financial statements, the first-time adopter
shall refer to the provisions contained in MFRS 1 on matters relating to transition and
effective dates instead of the transitional provision and effective date contained in the
respective MFRSs. This differs from previous requirements where an entity accounted
for changes of accounting policies in accordance with the specific transitional
provisions contained in the respective FRSs or in accordance with FRS 108 Accounting
Policies, Changes in Accounting Estimates and Errors when the FRS did not include
specific transitional provisions. In this regard the effective and issuance dates contained
in this Standard are those of the IASB’s and are inapplicable in the MFRS framework
since MFRS 1 requirements will be applied by the first-time adopter.

Comparison and compliance with IAS 21

MFRS 121 is equivalent to IAS 21 The Effects of Changes in Foreign Exchange Rates
as issued and amended by the IASB, including the effective and issuance dates. Entities
that comply with MFRS 121 will simultaneously be in compliance with IAS 21.

* Appendix A of MFRS 1 defines first-time adopter and first MFRS financial statements.

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Malaysian Financial Reporting Standard 121


The Effects of Changes in Foreign Exchange Rates
Objective
1 An entity may carry on foreign activities in two ways. It may have
transactions in foreign currencies or it may have foreign operations. In
addition, an entity may present its financial statements in a foreign currency.
The objective of this Standard is to prescribe how to include foreign currency
transactions and foreign operations in the financial statements of an entity and
how to translate financial statements into a presentation currency.

2 The principal issues are which exchange rate(s) to use and how to report the
effects of changes in exchange rates in the financial statements.

Scope
3 This Standard shall be applied:1
(a) in accounting for transactions and balances in foreign
currencies, except for those derivative transactions and
balances that are within the scope of MFRS 9 Financial
Instruments;
(b) in translating the results and financial position of foreign
operations that are included in the financial statements of the
entity by consolidation or the equity method; and
(c) in translating an entity’s results and financial position into a
presentation currency.

4 MFRS 9 applies to many foreign currency derivatives and, accordingly, these


are excluded from the scope of this Standard. However, those foreign
currency derivatives that are not within the scope of MFRS 9 (eg some
foreign currency derivatives that are embedded in other contracts) are within
the scope of this Standard. In addition, this Standard applies when an entity
translates amounts relating to derivatives from its functional currency to its
presentation currency.

5 This Standard does not apply to hedge accounting for foreign currency items,
including the hedging of a net investment in a foreign operation. MFRS 9
applies to hedge accounting.

6 This Standard applies to the presentation of an entity’s financial statements


in a foreign currency and sets out requirements for the resulting financial
statements to be described as complying with Malaysian Financial Reporting
Standards (MFRSs). For translations of financial information into a foreign
currency that do not meet these requirements, this Standard specifies
information to be disclosed.

1 See also IC Interpretation 107 Introduction of the Euro

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7 This Standard does not apply to the presentation in a statement of cash flows
of the cash flows arising from transactions in a foreign currency, or to the
translation of cash flows of a foreign operation (see MFRS 107 Statement of
Cash Flows).

Definitions
8 The following terms are used in this Standard with the meanings
specified:
Closing rate is the spot exchange rate at the end of the reporting period.
Exchange difference is the difference resulting from translating a given
number of units of one currency into another currency at different
exchange rates.
Exchange rate is the ratio of exchange for two currencies.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the measurement date. (See MFRS 13 Fair Value Measurement.)
Foreign currency is a currency other than the functional currency of the
entity.
Foreign operation is an entity that is a subsidiary, associate, joint
arrangement or branch of a reporting entity, the activities of which are
based or conducted in a country or currency other than those of the
reporting entity.
Functional currency is the currency of the primary economic
environment in which the entity operates.
A group is a parent and all its subsidiaries.
Monetary items are units of currency held and assets and liabilities to be
received or paid in a fixed or determinable number of units of currency.
Net investment in a foreign operation is the amount of the reporting
entity’s interest in the net assets of that operation.
Presentation currency is the currency in which the financial statements
are presented.
Spot exchange rate is the exchange rate for immediate delivery.

Elaboration on the definitions


Functional currency

9 The primary economic environment in which an entity operates is normally


the one in which it primarily generates and expends cash. An entity considers
the following factors in determining its functional currency:
(a) the currency:

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(i) that mainly influences sales prices for goods and services
(this will often be the currency in which sales prices for
its goods and services are denominated and settled); and
(ii) of the country whose competitive forces and regulations
mainly determine the sales prices of its goods and
services.
(b) the currency that mainly influences labour, material and other costs
of providing goods or services (this will often be the currency in
which such costs are denominated and settled).

10 The following factors may also provide evidence of an entity’s functional


currency:
(a) the currency in which funds from financing activities (ie issuing
debt and equity instruments) are generated.
(b) the currency in which receipts from operating activities are usually
retained.

11 The following additional factors are considered in determining the functional


currency of a foreign operation, and whether its functional currency is the
same as that of the reporting entity (the reporting entity, in this context, being
the entity that has the foreign operation as its subsidiary, branch, associate or
joint arrangement):
(a) whether the activities of the foreign operation are carried out as an
extension of the reporting entity, rather than being carried out with
a significant degree of autonomy. An example of the former is when
the foreign operation only sells goods imported from the reporting
entity and remits the proceeds to it. An example of the latter is when
the operation accumulates cash and other monetary items, incurs
expenses, generates income and arranges borrowings, all
substantially in its local currency.
(b) whether transactions with the reporting entity are a high or a low
proportion of the foreign operation’s activities.
(c) whether cash flows from the activities of the foreign operation
directly affect the cash flows of the reporting entity and are readily
available for remittance to it.
(d) whether cash flows from the activities of the foreign operation are
sufficient to service existing and normally expected debt
obligations without funds being made available by the reporting
entity.

12 When the above indicators are mixed and the functional currency is not
obvious, management uses its judgement to determine the functional
currency that most faithfully represents the economic effects of the
underlying transactions, events and conditions. As part of this approach,
management gives priority to the primary indicators in paragraph 9 before
considering the indicators in paragraphs 10 and 11, which are designed to
provide additional supporting evidence to determine an entity’s functional
currency.

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13 An entity’s functional currency reflects the underlying transactions, events


and conditions that are relevant to it. Accordingly, once determined, the
functional currency is not changed unless there is a change in those
underlying transactions, events and conditions.

14 If the functional currency is the currency of a hyperinflationary economy, the


entity’s financial statements are restated in accordance with MFRS 129
Financial Reporting in Hyperinflationary Economies. An entity cannot avoid
restatement in accordance with MFRS 129 by, for example, adopting as its
functional currency a currency other than the functional currency determined
in accordance with this Standard (such as the functional currency of its
parent).

Net investment in a foreign operation

15 An entity may have a monetary item that is receivable from or payable to a


foreign operation. An item for which settlement is neither planned nor likely
to occur in the foreseeable future is, in substance, a part of the entity’s net
investment in that foreign operation, and is accounted for in accordance with
paragraphs 32 and 33. Such monetary items may include long-term
receivables or loans. They do not include trade receivables or trade payables.

15A The entity that has a monetary item receivable from or payable to a foreign
operation described in paragraph 15 may be any subsidiary of the group. For
example, an entity has two subsidiaries, A and B. Subsidiary B is a foreign
operation. Subsidiary A grants a loan to Subsidiary B. Subsidiary A’s loan
receivable from Subsidiary B would be part of the entity’s net investment in
Subsidiary B if settlement of the loan is neither planned nor likely to occur in
the foreseeable future. This would also be true if Subsidiary A were itself a
foreign operation.

Monetary items

16 The essential feature of a monetary item is a right to receive (or an obligation


to deliver) a fixed or determinable number of units of currency. Examples
include: pensions and other employee benefits to be paid in cash; provisions
that are to be settled in cash; lease liabilities; and cash dividends that are
recognised as a liability. Similarly, a contract to receive (or deliver) a variable
number of the entity’s own equity instruments or a variable amount of assets
in which the fair value to be received (or delivered) equals a fixed or
determinable number of units of currency is a monetary item. Conversely, the
essential feature of a non-monetary item is the absence of a right to receive
(or an obligation to deliver) a fixed or determinable number of units of
currency. Examples include: amounts prepaid for goods and services;
goodwill; intangible assets; inventories; property, plant and equipment; right-
of-use assets; and provisions that are to be settled by the delivery of a non-
monetary asset.

Summary of the approach required by this Standard


17 In preparing financial statements, each entity—whether a stand-alone entity,
an entity with foreign operations (such as a parent) or a foreign operation

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(such as a subsidiary or branch)—determines its functional currency in


accordance with paragraphs 9–14. The entity translates foreign currency
items into its functional currency and reports the effects of such translation in
accordance with paragraphs 20–37 and 50.

18 Many reporting entities comprise a number of individual entities (eg a group


is made up of a parent and one or more subsidiaries). Various types of entities,
whether members of a group or otherwise, may have investments in
associates or joint arrangements. They may also have branches. It is necessary
for the results and financial position of each individual entity included in the
reporting entity to be translated into the currency in which the reporting entity
presents its financial statements. This Standard permits the presentation
currency of a reporting entity to be any currency (or currencies). The results
and financial position of any individual entity within the reporting entity
whose functional currency differs from the presentation currency are
translated in accordance with paragraphs 38–50.

19 This Standard also permits a stand-alone entity preparing financial statements


or an entity preparing separate financial statements in accordance with
MFRS 127 Separate Financial Statements to present its financial statements
in any currency (or currencies). If the entity’s presentation currency differs
from its functional currency, its results and financial position are also
translated into the presentation currency in accordance with paragraphs
38–50.

Reporting foreign currency transactions in the functional currency


Initial recognition
20 A foreign currency transaction is a transaction that is denominated or requires
settlement in a foreign currency, including transactions arising when an
entity:
(a) buys or sells goods or services whose price is denominated in a
foreign currency;
(b) borrows or lends funds when the amounts payable or receivable are
denominated in a foreign currency; or
(c) otherwise acquires or disposes of assets, or incurs or settles
liabilities, denominated in a foreign currency.

21 A foreign currency transaction shall be recorded, on initial recognition


in the functional currency, by applying to the foreign currency amount
the spot exchange rate between the functional currency and the foreign
currency at the date of the transaction.

22 The date of a transaction is the date on which the transaction first qualifies
for recognition in accordance with MFRSs. For practical reasons, a rate that
approximates the actual rate at the date of the transaction is often used, for
example, an average rate for a week or a month might be used for all
transactions in each foreign currency occurring during that period. However,

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if exchange rates fluctuate significantly, the use of the average rate for a
period is inappropriate.

Reporting at the ends of subsequent reporting periods


23 At the end of each reporting period:
(a) foreign currency monetary items shall be translated using the
closing rate;
(b) non-monetary items that are measured in terms of historical
cost in a foreign currency shall be translated using the exchange
rate at the date of the transaction; and
(c) non-monetary items that are measured at fair value in a foreign
currency shall be translated using the exchange rates at the date
when the fair value was measured.

24 The carrying amount of an item is determined in conjunction with other


relevant Standards. For example, property, plant and equipment may be
measured in terms of fair value or historical cost in accordance with
MFRS 116 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 this Standard.

25 The carrying amount of some items is determined by comparing two or more


amounts. For example, the carrying amount of inventories is the lower of cost
and net realisable value in accordance with MFRS 102 Inventories. Similarly,
in accordance with MFRS 136 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. When such 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 realisable value 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).

The effect of this comparison may be that an impairment loss is recognised


in the functional currency but would not be recognised in the foreign
currency, or vice versa.

26 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.

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Recognition of exchange differences


27 As noted in paragraphs 3(a) and 5, MFRS 9 applies to hedge accounting for
foreign currency items. The application of hedge accounting requires an
entity to account for some exchange differences differently from the
treatment of exchange differences required by this Standard. For example,
MFRS 9 requires that exchange differences on monetary items that qualify as
hedging instruments in a cash flow hedge are recognised initially in other
comprehensive income to the extent that the hedge is effective.

28 Exchange differences arising on the settlement of monetary items or on


translating monetary items at rates different from those at which they
were translated on initial recognition during the period or in previous
financial statements shall be recognised in profit or loss in the period in
which they arise, except as described in paragraph 32.

29 When monetary items arise from a foreign currency transaction and there is
a change in the exchange rate between the transaction date and the date of
settlement, an exchange difference results. When the transaction is settled
within the same accounting period as that in which it occurred, all the
exchange difference is recognised in that period. However, when the
transaction is settled in a subsequent accounting period, the exchange
difference recognised in each period up to the date of settlement is determined
by the change in exchange rates during each period.

30 When a gain or loss on a non-monetary item is recognised in other


comprehensive income, any exchange component of that gain or loss
shall be recognised in other comprehensive income. Conversely, when a
gain or loss on a non-monetary item is recognised in profit or loss, any
exchange component of that gain or loss shall be recognised in profit or
loss.

31 Other MFRSs require some gains and losses to be recognised in other


comprehensive income. For example, MFRS 116 requires some gains and
losses arising on a revaluation of property, plant and equipment to be
recognised in other comprehensive income. When such an asset is measured
in a foreign currency, paragraph 23(c) of this Standard requires the revalued
amount to be translated using the rate at the date the value is determined,
resulting in an exchange difference that is also recognised in other
comprehensive income.

32 Exchange differences arising on a monetary item that forms part of a


reporting entity’s net investment in a foreign operation (see paragraph
15) shall be recognised in profit or loss in the separate financial
statements of the reporting entity or the individual financial statements
of the foreign operation, as appropriate. In the financial statements that
include the foreign operation and the reporting entity (eg consolidated
financial statements when the foreign operation is a subsidiary), such
exchange differences shall be recognised initially in other comprehensive
income and reclassified from equity to profit or loss on disposal of the
net investment in accordance with paragraph 48.

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33 When a monetary item forms part of a reporting entity’s net investment in a


foreign operation and is denominated in the functional currency of the
reporting entity, an exchange difference arises in the foreign operation’s
individual financial statements in accordance with paragraph 28. If such an
item is denominated in the functional currency of the foreign operation, an
exchange difference arises in the reporting entity’s separate financial
statements in accordance with paragraph 28. If such an item is denominated
in a currency other than the functional currency of either the reporting entity
or the foreign operation, an exchange difference arises in the reporting
entity’s separate financial statements and in the foreign operation’s individual
financial statements in accordance with paragraph 28. Such exchange
differences are recognised in other comprehensive income in the financial
statements that include the foreign operation and the reporting entity (ie
financial statements in which the foreign operation is consolidated or
accounted for using the equity method).

34 When an entity keeps its books and records in a currency other than its
functional currency, at the time the entity prepares its financial statements all
amounts are translated into the functional currency in accordance with
paragraphs 20–26. This produces the same amounts in the functional currency
as would have occurred had the items been recorded initially in the functional
currency. For example, monetary items are translated into the functional
currency using the closing rate, and non-monetary items that are measured on
a historical cost basis are translated using the exchange rate at the date of the
transaction that resulted in their recognition.

Change in functional currency


35 When there is a change in an entity’s functional currency, the entity shall
apply the translation procedures applicable to the new functional
currency prospectively from the date of the change.

36 As noted in paragraph 13, the functional currency of an entity reflects the


underlying transactions, events and conditions that are relevant to the entity.
Accordingly, once the functional currency is determined, it can be changed
only if there is a change to those underlying transactions, events and
conditions. For example, a change in the currency that mainly influences the
sales prices of goods and services may lead to a change in an entity’s
functional currency.

37 The effect of a change in functional currency is accounted for prospectively.


In other words, an entity translates all items into the new functional currency
using the exchange rate at the date of the change. The resulting translated
amounts for non-monetary items are treated as their historical cost. Exchange
differences arising from the translation of a foreign operation previously
recognised in other comprehensive income in accordance with paragraphs 32
and 39(c) are not reclassified from equity to profit or loss until the disposal
of the operation.

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Use of a presentation currency other than the functional currency


Translation to the presentation currency
38 An entity may present its financial statements in any currency (or currencies).
If the presentation currency differs from the entity’s functional currency, it
translates its results and financial position into the presentation currency. For
example, when a group contains individual entities with different functional
currencies, the results and financial position of each entity are expressed in a
common currency so that consolidated financial statements may be presented.

39 The results and financial position of an entity whose functional currency


is not the currency of a hyperinflationary economy shall be translated
into a different presentation currency using the following procedures:
(a) assets and liabilities for each statement of financial position
presented (ie including comparatives) shall be translated at the
closing rate at the date of that statement of financial position;
(b) income and expenses for each statement presenting profit or
loss and other comprehensive income (ie including
comparatives) shall be translated at exchange rates at the dates
of the transactions; and
(c) all resulting exchange differences shall be recognised in other
comprehensive income.

40 For practical reasons, a rate that approximates the exchange rates at the dates
of the transactions, for example an average rate for the period, is often used
to translate income and expense items. However, if exchange rates fluctuate
significantly, the use of the average rate for a period is inappropriate.

41 The exchange differences referred to in paragraph 39(c) result from:


(a) translating income and expenses at the exchange rates at the dates
of the transactions and assets and liabilities at the closing rate.
(b) translating the opening net assets at a closing rate that differs from
the previous closing rate.

These exchange differences are not recognised in profit or loss because the
changes in exchange rates have little or no direct effect on the present and
future cash flows from operations. 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.

42 The results and financial position of an entity whose functional currency


is the currency of a hyperinflationary economy shall be translated into a
different presentation currency using the following procedures:

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(a) all amounts (ie assets, liabilities, equity items, income and
expenses, including comparatives) shall be translated at the
closing rate at the date of the most recent statement of financial
position, except that
(b) when amounts are translated into the currency of a non-
hyperinflationary economy, comparative amounts shall be
those that were presented as current year amounts in the
relevant prior year financial statements (ie not adjusted for
subsequent changes in the price level or subsequent changes in
exchange rates).

43 When an entity’s functional currency is the currency of a


hyperinflationary economy, the entity shall restate its financial
statements in accordance with MFRS 129 before applying the translation
method set out in paragraph 42, except for comparative amounts that
are translated into a currency of a non-hyperinflationary economy (see
paragraph 42(b)). When the economy ceases to be hyperinflationary and
the entity no longer restates its financial statements in accordance with
MFRS 129, it shall use as the historical costs for translation into the
presentation currency the amounts restated to the price level at the date
the entity ceased restating its financial statements.

Translation of a foreign operation


44 Paragraphs 45–47, in addition to paragraphs 38–43, apply when the results
and financial position of a foreign operation are translated into a presentation
currency so that the foreign operation can be included in the financial
statements of the reporting entity by consolidation or the equity method.

45 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 intragroup balances and intragroup transactions of
a subsidiary (see MFRS 10 Consolidated Financial Statements). However, an
intragroup monetary asset (or liability), whether short-term or long-term,
cannot be eliminated against the corresponding intragroup liability (or asset)
without showing the results of currency fluctuations in the consolidated
financial statements. This is because the monetary item represents a
commitment to convert one currency into another and exposes the reporting
entity to a gain or loss through currency fluctuations. Accordingly, in the
consolidated financial statements of the reporting entity, such an exchange
difference is recognised in profit or loss or, 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.

46 When the financial statements of a foreign operation are as of a date different


from that of the reporting entity, the foreign operation often prepares
additional statements as of the same date as the reporting entity’s financial
statements. When this is not done, MFRS 10 allows the use of a different date
provided that the difference is no greater than three months and adjustments
are made for the effects of any significant transactions or other events that
occur between the different dates. In such a case, the assets and liabilities of

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the foreign operation are translated at the exchange rate at the end of the
reporting period of the foreign operation. Adjustments are made for
significant changes in exchange rates up to the end of the reporting period of
the reporting entity in accordance with MFRS 10. The same approach is used
in applying the equity method to associates and joint ventures in accordance
with MFRS 128 (as amended in 2011).

47 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 that foreign operation shall be treated as
assets and liabilities of the foreign operation. Thus they shall be
expressed in the functional currency of the foreign operation and shall
be translated at the closing rate in accordance with paragraphs 39 and
42.

Disposal or partial disposal of a foreign operation


48 On the disposal of a foreign operation, the cumulative amount of the
exchange differences relating to that foreign operation, recognised in
other comprehensive income and accumulated in the separate
component of equity, shall be reclassified from equity to profit or loss (as
a reclassification adjustment) when the gain or loss on disposal is
recognised (see MFRS 101 Presentation of Financial Statements (IAS 1
Presentation of Financial Statements as revised by IASB in 2007)).

48A In addition to the disposal of an entity’s entire interest in a foreign operation,


the following partial disposals are accounted for as disposals:
(a) when the partial disposal involves the loss of control of a subsidiary
that includes a foreign operation, regardless of whether the entity
retains a non-controlling interest in its former subsidiary after the
partial disposal; and
(b) when the retained interest after the partial disposal of an interest in
a joint arrangement or a partial disposal of an interest in an associate
that includes a foreign operation is a financial asset that includes a
foreign operation.

48B On disposal of a subsidiary that includes a foreign operation, the cumulative


amount of the exchange differences relating to that foreign operation that
have been attributed to the non-controlling interests shall be derecognised,
but shall not be reclassified to profit or loss.

48C 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.

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48D A partial disposal of an entity’s interest in a foreign operation is any reduction


in an entity’s ownership interest in a foreign operation, except those
reductions in paragraph 48A that are accounted for as disposals.

49 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.

Tax effects of all exchange differences


50 Gains and losses on foreign currency transactions and exchange differences
arising on translating the results and financial position of an entity (including
a foreign operation) into a different currency may have tax effects. MFRS 112
Income Taxes applies to these tax effects.

Disclosure
51 In paragraphs 53 and 55–57 references to ‘functional currency’ apply,
in the case of a group, to the functional currency of the parent.

52 An entity shall disclose:


(a) the amount of exchange differences recognised in profit or loss
except for those arising on financial instruments measured at
fair value through profit or loss in accordance with MFRS 9;
and
(b) net exchange differences recognised in other comprehensive
income and accumulated in a separate component of equity,
and a reconciliation of the amount of such exchange differences
at the beginning and end of the period.

53 When the presentation currency is different from the functional


currency, that fact shall be stated, together with disclosure of the
functional currency and the reason for using a different presentation
currency.

54 When there is a change in the functional currency of either the reporting


entity or a significant foreign operation, that fact and the reason for the
change in functional currency shall be disclosed.

55 When an entity presents its financial statements in a currency that is


different from its functional currency, it shall describe the financial
statements as complying with MFRSs only if they comply with all the
requirements of MFRSs including the translation method set out in
paragraphs 39 and 42.

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56 An entity sometimes presents its financial statements or other financial


information in a currency that is not its functional currency without meeting
the requirements of paragraph 55. For example, an entity may convert into
another currency only selected items from its financial statements. Or, an
entity whose functional currency is not the currency of a hyperinflationary
economy may convert the financial statements into another currency by
translating all items at the most recent closing rate. Such conversions are not
in accordance with MFRSs and the disclosures set out in paragraph 57 are
required.

57 When an entity displays its financial statements or other financial


information in a currency that is different from either its functional
currency or its presentation currency and the requirements of
paragraph 55 are not met, it shall:
(a) clearly identify the information as supplementary information
to distinguish it from the information that complies with
MFRSs;
(b) disclose the currency in which the supplementary information
is displayed; and
(c) disclose the entity’s functional currency and the method of
translation used to determine the supplementary information.

Effective date and transition


58 An entity shall apply this Standard for annual periods beginning on or after
1 January 2005. Earlier application is encouraged. If an entity applies this
Standard for a period beginning before 1 January 2005, it shall disclose that
fact.

58A Net Investment in a Foreign Operation (Amendment to MFRS 121) [Net


Investment in a Foreign Operation (Amendment to IAS 21) issued by IASB
in December 2005] added paragraph 15A and amended paragraph 33. An
entity shall apply those amendments for annual periods beginning on or after
1 January 2006. Earlier application is encouraged.

59 An entity shall apply paragraph 47 prospectively to all acquisitions occurring


after the beginning of the financial reporting period in which this Standard is
first applied. Retrospective application of paragraph 47 to earlier acquisitions
is permitted. For an acquisition of a foreign operation treated prospectively
but which occurred before the date on which this Standard is first applied, the
entity shall not restate prior years and accordingly may, when appropriate,
treat goodwill and fair value adjustments arising on that acquisition as assets
and liabilities of the entity rather than as assets and liabilities of the foreign
operation. Therefore, those goodwill and fair value adjustments either are
already expressed in the entity’s functional currency or are non-monetary
foreign currency items, which are reported using the exchange rate at the date
of the acquisition.

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60 All other changes resulting from the application of this Standard shall be
accounted for in accordance with the requirements of MFRS 108 Accounting
Policies, Changes in Accounting Estimates and Errors.

60A MFRS 101 (IAS 1 as revised by IASB in 2007) amended the terminology
used throughout MFRSs. In addition it amended paragraphs 27, 30–33, 37,
39, 41, 45, 48 and 52. An entity shall apply those amendments for annual
periods beginning on or after 1 January 2009. If an entity applies MFRS 101
(IAS 1 revised by IASB in 2007) for an earlier period, the amendments shall
be applied for that earlier period.

60B MFRS 127 (IAS 27 as amended by IASB in 2008) added paragraphs 48A–
48D and amended paragraph 49. An entity shall apply those amendments
prospectively for annual periods beginning on or after 1 July 2009. If an entity
applies MFRS 127 (IAS 27 amended by IASB in 2008) for an earlier period,
the amendments shall be applied for that earlier period.

60C [Deleted by IASB]

60D Paragraph 60B was amended by Improvements to MFRSs (Improvements to


IFRSs issued by IASB in May 2010). An entity shall apply that amendment
for annual periods beginning on or after 1 July 2010. Earlier application is
permitted.

60E [Deleted by IASB]

60F MFRS 10 and MFRS 11 Joint Arrangements (IFRS 10 and IFRS 11 Joint
Arrangements issued by IASB in May 2011) amended paragraphs 3(b), 8, 11,
18, 19, 33, 44–46 and 48A. An entity shall apply those amendments when it
applies MFRS 10 and MFRS 11.

60G MFRS 13 (IFRS 13 Fair Value Measurement issued by IASB in May 2011)
amended the definition of fair value in paragraph 8 and amended
paragraph 23. An entity shall apply those amendments when it applies
MFRS 13.

60H Presentation of Items of Other Comprehensive Income (Amendments to


MFRS 101) [Presentation of Items of Other Comprehensive Income
(Amendments to IAS 1) issued by IASB in June 2011] amended paragraph
39. An entity shall apply that amendment when it applies MFRS 101 (IAS 1
as amended by IASB in June 2011).

60I [Deleted by IASB]

60J MFRS 9 (IFRS 9 as issued by IASB in July 2014) amended paragraphs 3, 4,


5, 27 and 52 and deleted paragraphs 60C, 60E and 60I. An entity shall apply
those amendments when it applies MFRS 9.

60K MFRS 16 Leases (IFRS 16 Leases issued by IASB in January 2016) amended
paragraph 16. An entity shall apply that amendment when it applies
MFRS 16.

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Withdrawal of other pronouncements


61 [Deleted by MASB]

62 [Deleted by MASB]

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Appendix
Amendments to other pronouncements
The amendments contained in this appendix have been incorporated into the relevant
pronouncements published in this volume.

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Deleted IAS 21 text


Deleted IAS 21 text is produced for information only and does not form part of
MFRS 121.

Paragraph 61

This Standard supersedes IAS 21 The Effects of Changes in Foreign Exchange Rates
(revised in 1993).

Paragraph 62

This Standard supersedes the following Interpretations:


(a) SIC-11 Foreign Exchange—Capitalisation of Losses Resulting from Severe
Currency Devaluations;
(b) SIC-19 Reporting Currency—Measurement and Presentation of Financial
Statements under IAS 21 and IAS 29; and
(c) SIC-30 Reporting Currency—Translation from Measurement Currency to
Presentation Currency.

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