1. MY FOREIGN EXCHANGE REVISION KIT
IAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
2/11/2017 1

2. Hello Rocky Friend,
This is an important lesson in your advanced accounting class and should be enjoyed to
the fullest, don’t you think so???
IAS 21
The standard helps us with 2 issues, and I mean just 2.
• The issue with which exchange rate at all do you use? and the 2nd is
• The issue with how you, my dear friend, would report the exchange difference in the
FS.
That’s all you need to know
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3. The 2 issues we talked about just now interestingly, also manifests in 2 ways.
Ils sont;
1. When the entity makes a foreign transaction, eg. Buying or selling items in foreign
currency, borrowing or paying debts owed in foreign currencies and
2. When the entity has a foreign operation, like a branch or subsidiary or associate,
etc.
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4. FOREIGN TRANSACTIONS
Monetary Items eg.
Consumables, cash, bank,
receivables, stock
Initial Recognition
Transaction Rate
(spot rate then)
Subsequent Measurement
Closing Rate
Exchange difference goes
to…………
P & L
Non-monetary Items eg.
Fixed assets, long term loans
and debentures!
Initial Recognition
Transaction Rate
(spot rate then)
Subsequent Measurement
Historical Rate
If asset is revalued, use
rate at revaluation date
No translation
differences
But conversion
differences upon
payment in future
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5. Currency Translation and Currency Conversion.
How different are they????
I’m glad you asked! Here you are Rocky,
Currency Conversion deals with taking cash (functional currency) and converting to
foreign currency to make a payment (both monetary and the non……)
eg. what is done at the forex bureau is conversion!
Currency Translation. Here, there is no nonsense of forex bureau, just translating the
balances (both monetary and non….) in our books to another currency!
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6. A quick test!
Changing currency to make a payment is………………….. Converting a balance at year end
is………………………. (Check previous slide if still in limbo!)
And just to add up, there won’t be exchange differences in the translation of non-
monetary items because their initial measurement is the same as their subsequent
measurement!!! What did I say?….IM=SM for translation
But there would be exchange differences when there is conversion……………
And the exchange difference goes to wherever the gain or loss on the asset goes………if
P & L, so be it, if OCI, well, what can we say!
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7. Well done dear!
That’s all for the first manifestation, FOREIGN TRANSACTIONS.
The second is much simpler……………………
Take a deep breath and let’s try this one!
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8. FOREIGN OPERATIONS
Here, the guiding principle on which rate to use is based on the relationship of head
office with branch, or parent with subsidiaries.
Foreign operation, branch or subsidiary, can be what I call, either a Mommy’s boy or a
Daddy’s boy.
Mommy’s boy means son goes wherever mommy goes and is an integral part.
Boy or son is an integral part, an extension of Mama. NB!!!
Aha! If he is Daddy’s boy, he is on his own, independent, autonomous, quasi-
autonomous (exclusive for good fathers……..LOL!)
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9. DEPENDENT (in further detail)
Mommy’s boy means dependent, integral…..remember???
Mom, Head Office, wants to know everything about the son (branch) with details of
birthdays, etc. so historic rates, average rates, closing rates, all are used here!
Exchange differences here are reported in P & L because it’s Mama, she has ready food
and so difference can be posted to where we can all eat and have our bum share.
Don’t forget…………..food is always ready with Mommy.
Post exchange difference to P & L!!!!
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10. FINANCIAL
STATEMENTS
Balance Sheet (SoFP)
1. Non-monetary items at
historic, birthday rate
2. Monetary at closing rate
3. Exceptions
..Head office current
account….adjusted to be
equal to branch current
account
Income Statement
1. Average rate used for all
items but there are
exceptions
2. Exceptions
..Goods to branch adjusted
..Depreciation is birthday
rate
..Inventory translation…
opening inventory is historic,
closing is closing rate
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11. INDEPENDENT (digging deeper)
Daddy is just interested in what his son is doing and what he would become in future.
No details………..Just Net Investment
Dad is not concerned, no birthdate.
Here, we use only closing rates and average rates.
Yep! Only average rates and closing rates with independent or autonomous branches!
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12. FINANCIAL
STATEMENTS
Balance Sheet (SoFP)
All items at closing rate
Monetary Items……YES
Non-Monetary
Items……I said YES
Except
Head office current
account to be adjusted
Income Statement
Whoever you are, we use
the average rate
Except
Only the goods received
from Daddy (Head Office)
to be adjusted
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13. There you are! The end of it!
This is the little I can give you.
You know the most annoying but yet important aspect of all these rates????
They are subject to the company’s policy………yep you heard me.
Management can decide what is done, which rate is to be used and for what.
Watch out for that my sweet little rocky chubby friend.
Until we meet again, go into your groups and don’t stop punching.
Thanks for stopping by!2/11/2017 13