6.2.1
Share capital ........................................................................................ 1145
6.2.2
Other equity balances resulting from transactions with
equity holders ...................................................................................... 1145
6.2.3
Other equity balances resulting from income and
expenses being recognised in other comprehensive
income .................................................................................................. 1146
6.3
Exchange differences on intragroup balances .............................................. 1146
6.3.1
Monetary items included as part of the net investment in a
foreign operation – general ............................................................... 1147
6.3.2
Monetary items included as part of the net investment in a
foreign operation – currency of the monetary item ................... 1148
6.3.3
Monetary items included as part of the net investment in a
foreign operation – treatment in the individual financial
statements ............................................................................................ 1150
6.3.4 Monetary
items
transacted by other members of the
group ..................................................................................................... 1150
6.3.5
Monetary items becoming part of the net investment in a
foreign operation ................................................................................ 1150
Foreign
exchange
1107
6.3.6
Monetary items ceasing to be part of the net investment in
a foreign operation ............................................................................. 1152
6.3.7 Dividends
..............................................................................................
1153
6.3.8
Unrealised profits on intragroup transactions ............................... 1153
6.4
Non-coterminous period ends ......................................................................... 1154
6.5
Goodwill and fair value adjustments ............................................................... 1155
6.6
Disposal or partial disposal of a foreign operation ...................................... 1156
6.6.1
Disposals and transactions treated as disposals ............................ 1156
6.6.1.A
Disposals of a foreign operation ................................. 1156
6.6.1.B Transactions
treated as disposals ............................... 1158
6.6.2
Partial disposals ................................................................................... 1159
6.6.2.A
What constitutes a partial disposal? ........................... 1159
6.6.2.B
Partial disposal of a proportionate interest in a
subsidiary ......................................................................... 1160
6.6.2.C Repayment
of a permanent as equity loan by a
subsidiary ......................................................................... 1160
6.6.2.D
Partial disposal of interest in an associate or
joint arrangement ........................................................... 1160
6.6.3
Comparison of the effect of step-by-step and direct
methods of consolidation on accounting for disposals ................ 1161
7 CHANGE OF PRESENTATION CURRENCY ................................................... 1163
8 INTRODUCTION OF THE EURO ................................................................... 1170
9 TAX EFFECTS OF ALL EXCHANGE DIFFERENCES ....................................... 1171
10 DISCLOSURE REQUIREMENTS ..................................................................... 1171
10.1 Exchange differences .......................................................................................... 1171
10.2 Presentation and functional currency ............................................................. 1172
10.3 Convenience translations of financial statements or other financial
information ........................................................................................................... 1172
10.4 Judgements made in applying IAS 21 and related disclosures .................... 1172
11 FUTURE DEVELOPMENTS ........................................................................... 1173
List of examples
Example 15.1:
Factors to be considered when determining the functional
currency ................................................................................................. 1114
Example 15.2:
Functional currency of intermediate holding companies or
finance subsidiaries ............................................................................. 1114
Example 15.3:
Establishing the transaction date (1) ................................................. 1118
Example 15.4:
Establishing the transaction date (2) ................................................ 1119
1108 Chapter 15
Example 15.5:
Reporting an unsettled foreign currency transaction in the
functional currency ............................................................................ 1124
Example 15.6:
Reporting a settled foreign currency transaction in the
functional currency ............................................................................ 1124
Example 15.7:
Deposits or progress payments ........................................................ 1128
Example 15.8:
Change in functional currency......................................................... 1132
Example 15.9:
Translation of a non-hyperinflationary functional
currency to a non-hyperinflationary presentation
currency ................................................................................................ 1136
Example 15.10:
Translation of a hyperinflationary functional currency to a
non-hyperinflationary presentation currency .............................. 1140
Example 15.11:
Calculation of average rate ............................................................... 1142
Example 15.12:
Receivables/payables included as part of net investment in
a foreign operation .............................................................................. 1147
Example 15.13:
Monetary item in functional currency of either the
reporting entity or the foreign operation ...................................... 1149
Example 15.14:
Monetary item becoming part of the net investment in a
foreign operation ................................................................................ 1150
Example 15.15:
Unrealised profits on an intragroup transaction ............................ 1153
Example 15.16:
Translation of goodwill ...................................................................... 1155
Example 15.17:
Disposal of a foreign operation .......................................................
. 1156
Example 15.18:
Disposal of a partially owned foreign subsidiary ......................... 1158
Example 15.19:
Disposal of an indirectly held foreign operation ........................... 1161
Example 15.20:
Change of presentation currency .................................................... 1164
1109
Chapter 15
Foreign exchange
1 INTRODUCTION
1.1 Background
An entity can engage in foreign currency activities in two ways. It may enter directly
into transactions which are denominated in foreign currencies, the results of which need
to be translated into the currency in which the company measures its results and
financial position. Alternatively, it may conduct foreign operations through a foreign
entity, such as a subsidiary, associate, joint arrangement or branch which keeps its
accounting records in terms of its own currency. In this case it will need to translate the
financial statements of the foreign entity for the purposes of inclusion in the
consolidated financial statements.
Before an international standard was developed, there were four distinct methods
which could be used in the translation process:
(a) current rate method – all assets and liabilities are translated at the current rate of
exchange, i.e. the exchange rate at the end of the reporting period;
(b) temporal method – assets and liabilities carried at current prices (e.g. cash,
receivables, payables, and investments at market value) are translated at the
current rate of exchange. Assets and liabilities carried at past prices (e.g. property,
investments at cost, prepayments) are translated at the rate of exchange in effect
at the dates to which the prices pertain;
(c) current/non-current method – all current assets and current liabilities are
translated at the current rate of exchange. Non-current assets and liabilities are
translated at historical rates, i.e. the exchange rate in effect at the time the asset
was acquired or the liability incurred; and
(d) monetary/non-monetary method – monetary assets and liabilities, i.e. items which
represent the right to receive or the obligation to pay a fixed amount of money, are
translated at the current rate of exchange. Non-monetary assets and liabilities are
translated at the historical rate.
There was no consensus internationally on the best theoretical approach to adopt. In
essence, the arguments surround the choice of exchange rates to be used in the translation
process and the subsequent treatment of the exchange differences which arise.
1110 Chapter 15
1.2 Relevant
pronouncements
The principal international standard dealing with this topic is IAS 21 – The Effects of
Changes in Foreign Exchange Rates, the original version of which dates back to 1983.
In December 2003, the IASB issued a revised version of IAS 21 as part of a wide ranging
project to improve its standards and this forms the core of the current standard, although
it has been subject to a number of subsequent amendments.
One interpretation of the earlier version of IAS 21 issued by the SIC remains applicable.
SIC-7 – Introduction of the Euro – deals with the application of IAS 21 to the changeover
from the national currencies of participating Member States of the European Union to the
euro and is covered at 8 below. IFRIC 16 – Hedges of a Net Investment in a Foreign
Operation – is not actually an interpretation of IAS 21, but provides guidance on applying
certain aspects of the standard and is discussed at 6.1.5 and 6.6.3 below.
IFRIC 22 – Foreign Currency Transactions and Advance Consideration – provides
guidance on determining the date of a transaction for the purposes of applying IAS 21
when consideration is paid or received in advance. This interpretation, which was
published in December 2016, is effective for periods commencing on or after
1 January 2018 and is discussed at 5.1.2 below.
2
IAS 21: OBJECTIVE, SCOPE AND DEFINITIONS
2.1
Objective of the standard
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. IAS 21 does not set out what the objective of
foreign currency translation should be, but just states that the objective of the 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’. [IAS 21.1].
It also indicates that the principal issues to be addressed are ‘which exchange rate(s) to
use and how to report the effects of changes in exchange rates in the financial
statements’. [IAS 21.2].
2.2 Scope
IAS 21 should be applied: [IAS 21.3]
(a) in accounting for transactions and balances in foreign currencies, except for those
derivative transactions and balances that are within the scope of IFRS 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.
IFRS 9 applies to many foreign currency derivatives and, accordingly, these are
excluded from the scope of IAS 21. However, those foreign currency derivatives that
are not within the scope of IFRS 9 (e.g. some foreign currency derivatives that are
Foreign
exchange
1111
embedded in other contracts) are within the scope of IAS 21. In addition, IAS 21 applies
when an entity translates amounts relating to derivatives from its functional currency to
its presentation currency. [IAS 21.4].
IAS 21 also does not apply to hedge accounting for foreign currency items, including the
hedging of a net investment in a foreign operation. [IAS 21.5]. This is dealt with in IFRS 9
(or IAS 39 – Financial Instruments: Recognition and Measurement1) which has detailed
rules on hedge accounting that are different from the requirements of IAS 21 (see
Chapter 49). [IAS 21.27].
The requirements of IAS 21 are applicable to financial statements that are described as
complying with International Financial Reporting Standards. They do not apply to
translations of financial information into a foreign currency that do not meet these
requirements, although the standard does specify information to be disclosed in respect
of such ‘convenience translations’ (see 10.3 below). [IAS 21.6].
IAS 21 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. [IAS 21.7]. These are dealt with in IAS 7 – Statement of Cash Flows (see
Chapter 36 at 5.3).
2.3
Definitions of terms
The definitions of terms which are contained in IAS 21 are as follows: [IAS 21.8]
Closing rate is the spot exchange rate at the end of the reporting peri
od.
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.
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.
The terms ‘functional currency’, ‘monetary items’ and ‘net investment in a foreign operation’
are elaborated on further within the standard. These are discussed at 4, 5.4 and 6.3.1 below.
1112 Chapter 15
3
SUMMARY OF THE APPROACH REQUIRED BY IAS 21
Many reporting entities comprise a number of individual entities (e.g. 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 or divisions (see 4.4 below). 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 (if this presentation
currency is different from the individual entity’s functional currency). [IAS 21.18].
In preparing financial statements, the following approach should be followed:
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 219