ACCOUNTING FORFOREIGN CURRENCT TRANSLATIONS- IAS 21

Introduction

International business transactions and foreign entities require consideration of some accounting of
foreign exchange. Different countries have different currencies and it becomes important that business
transactions be valued using common base. The components, assets, liabilities and equity are made
additive by reducing them to common measure, which is money. International business dealings
complicate the problem of measurement, because transaction values are quoted band settled in a
currency value may change over time depending on the exchange rates movements.

An enterprise may carry out foreign dealings in two ways. It may have transactions dominated in
foreign currency. The sale and purchase of goods in foreign exchange, foreign investment as well as
foreign loans, fall under the category of foreign transactions. The enterprise may have foreign business
such as a foreign branch or a foreign subsidiary. Reporting currency. Similarly, in order to aggregate
the results of a foreign business with those of the reporting entity, then the financial statements of the
foreign business must be translated into the reporting currency.

IAS 21 prescribes how an entity should: account for foreign currency transactions; translate
financial statements of a foreign operation into the entity's functional currency; and. translates
the entity's financial statements into a presentation currency, if different from the entity's
functional currency.

The objective of IAS 21 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. translating entity's results and financial position into a
presentation currency.

Definition of terms:
1. Exchange rate.: The rate at which one currency exchange for another currency.
2. Foreign operations: A subsidiary, Associate, joint venture, or branch of reporting
enterprise, the activities of which are based or conducted in a country of the reporting
enterprise.
3. Presentation currency: currency used in presenting financial statements
4.functional currency: The currency of the primary economic environment in which the entity
operates
5.Exchange difference: the difference resulting from translating the same number of units of
a foreign currency rates
6. closing rate: The spot rate of exchange at the balance sheet date
7. Net investment in foreign entity: The share of the reporting enterprises in the net assets
of a foreign entity.
8.Monetary items: Money held and assets and liabilities to be received or paid in fixed or
determinable amounts of money
9. Fair value: The amount for which an asset could be exchanged or a liability settled
between, knowledgeable, willing parties in an arm’s length transaction.
Foreign Currency Transactions
There are various ways in which foreign currency transactions take place
(1). Importation and exportation: This is where a firm buys and sells goods and services
and the price is denominated in a foreign currency.
(2). Borrowing and lending: The amounts receivable or payable are dominated in a foreign
currency.
(3). Acquisition and disposal of subsidiaries. Assets and liabilities are dominated in foreign
currency

IAS 21 requires a foreign currency transaction to be recorded on initial recognition in the

functional currency by applying to the foreign currency the spot exchange rate between the
functional currency and the foreign currency at the date of transactions. Date of transaction
refers to the date that the transaction first qualifies for recognition.

Where exchange rates are not fluctuating significantly average rate for the period is applied

Transaction gain or loss

When there is a conversion of exchange rate due to transaction, there is one thing that is
evident. Between the date of first recognition and discharge of obligation the spot rate
exchange rate differs. The exchange rate may depreciate or appreciate, and if this happen
therefore, an exchange gains or loss appears. Any exchange gains or loss is charged to profit
or loss account.

The reason for charging to profit or loss instead of its individual item is that most accounts are
closed monthly and adjustments cannot be done in the period when the transaction took
place.

Similarly, the audit of the books of accounts is done yearly and adjustments cannot be done in
the accounting period if the books have been closed.

Illustration 1
Delta Co. Ltd does international business of buying goods from USA. On 1 January 2021 the
firm bought goods worth $ 80,000 and the terms of payment was 90 days from the date of
invoice. The exchange rates were as follows to $1
Ksh.
1.1.2021 100
31.1.2021 104
30.4.2021 110
30.6.2021 115
1.1.2021 bank balance Ksh. 14,000,000

Required
(I) prepare the ledger accounts
(ii) prepare the income statement for six months ending 30th June 2021. opening balance as
at 1.1.2021 was Ksh. 1,340,000.

Solution
Dr. Trade payables Cr.
Ksh. Ksh
30.4.2021 Bank 8,800,000 1.1.2021 Purchases 8,000,000
profit and loss 800,000
8,800,000 8,800,000

Dr. Purchases A/c Cr,

Ksh.
1.1.2021 Trade payables 8,000,000 Balance c/d 8,000,000

Dr. Bank A/c Cr.

Ksh. Ksh.
1.1.2021 Balance b/d 14,000,000 30.4.2021 Trade payables 8,800,000
Balance c/d 5,200,000
14,000,000 14,000,000

Dr. Profit and loss A/c Cr.

Ksh. Ksh.
Trade payables 800,000 Balance b/d 1,340,000
Balance c/d 540,000
1,340,000 1,340,000

Workings: 1st January 2021 $80,000 x 100 = ksh. 8,000,000

30th April 2021: 80,000 x 110 = Ksh. 8,800,000
Loss since Delta will pay more by Ks. 800,000

Illustration 11
Benita co. ltd based in Kenya does international business of tradable goods. In addition, if modifies
some of the goods imported for re-exportation in the same country of origin or to other companies of
the world.
On 3rd March 2020 Benita ltd imported goods worth sh. 640,000 from USA. The terms of payment
were 120 days. After modification of some goods Benita ltd on 1st April exported goods worth sh.
120,000 to Uganda and goods worthy sh. 90,000 to Tanzania. Terms of payment was 30 days

Additional information
1. following are the accounts balances as at 31.3 2020
ksh.
Profit and loss a/c 240,000
bank 600,000

2. Exchange rates to ksh.

DATE 3.3.2020 1.4.2020 30.4.2021 31.5.2020 30.6.2020
US$ 80 89 90 89 86
Tshs. 15 14 12.5 12 10.5
Ush. 26 30 28 29 27

Required
(i) compute gain or loss for relevant accounts.
(ii) Show the ledger Accounts

SOLUTION
USA Transaction Ksh.
1.3.2020 Goods purchased in US$ (640,000/80) =US$ 8,000 640,000
30,.6.2020 payment US$(8,000 x 86) = 688,000
loss 48,000
Uganda Transaction
1.4.2020 (sales 120,000x27 Ushs. 3,240,000
30.4.202 Receipt from Uganda (3240,000/30) ksh. 108,000

Tanzania Transaction
1.4.2020 (sales 90,000 x14) Tsh. 1,260,000
30.4.200 Receipt from Tanzania (1,260,000/12.5) ksh. 100,800

Summary
Sale of goods to Uganda Ksh. 120,000
Receipts from Uganda Ksh. 108,000
Loss Ksh. 12,000

Sale of goods to Tanzania Ksh. 90,000

Receipt from Tanzania Ksh. 100,800
Gain Ksh. 10,800

Net loss (12,000 – 10,800) = 1,200

Ledger Accounts
Dr. Accounts payable Cr.
Date Particulars Ksh. Date Particulars Ksh.
1.3.2020 Purchases 640,000
30.6.2020 Bank 688,000 Profit and loss 48,000
688,000 688,000
Dr. Accounts Receivables Cr.
Date Particulars Ksh. Date Particulars Ksh.
1.4.2020 Sales 120,000 30.4.2020 Bank 108,000
Sales 90,000 Bank 100,800
Profit and loss 1,200
210,000 210,000

Dr. Profit and loss Account Cr.

Date Particulars Ksh. Date Particulars Ksh.
Accounts 48,000 Balance b/d 240,000
payable
Accounts 1,200
receivable

Dr. Bank Account Cr.

Date Particulars Ksh. Date Particulars Ksh.
Balance b/d 600,000 Accounts 688,000
payable
30.4.2020 Accounts 108,000
receivable
Accounts 100,800 Balance c/d 120,800
receivable
808,800 808,800