ias 21

© 2005 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved. IAS 21 - 1

IAS 21 (revised 2003)IAS 21 (revised 2003)The Effects of Changes in Foreign Exchange RatesThe Effects of Changes in Foreign Exchange Rates

AUDITAUDIT

KPMG International Financial Reporting GroupKPMG International Financial Reporting Group


ObjectivesObjectives

Understand how foreign currency transactions and balances are translated into a company’s functional currency

Understand how foreign currency financial statements (FS) are translated for consolidation purposes


Improvement of IAS 21 (revised 2003)Improvement of IAS 21 (revised 2003)

IASB’s project on Improvements of IAS

New requirements on:

the translation method

determining the functional and presentation currencies

Effective date

1January 2005


IAS 21 definitionsIAS 21 definitions

Presentation currency

The currency in which the financial statements are presented

Functional currency

The currency of the primary economic environment in which the entity operates

Foreign currency

A currency other than the functional currency of an entity


Determination of functional currency – Primary factorsDetermination of functional currency – Primary factors

Reflects the underlying transactions, events and conditions that are relevant to the entity

Currency that influences sales prices for goods and services

Currency that influences sales prices for goods and services

Currency of the countryinfluencing the pricing

of transactions

Currency of the countryinfluencing the pricing

of transactions

Cash reservesCash reservesCurrency in which fundsfrom financing activities

are generated

Currency in which fundsfrom financing activities

are generated

Labour, material,other costs

Labour, material,other costs

But also…


Determination of functional currency – Additional factorsDetermination of functional currency – Additional factors

Degree of independence of a foreign operation

from its parent

Degree of independence of a foreign operation

from its parent

Financial autonomy of a foreign operation compared with its

parent

Financial autonomy of a foreign operation compared with its

parent

Influence of a foreign operation’s cash

flows on its parent’s cash flows

Influence of a foreign operation’s cash

flows on its parent’s cash flows

Proportion of transactions

between a foreign operation and its

parent

Proportion of transactions

between a foreign operation and its

parent


Choice of functional currency?Choice of functional currency?

An entity cannot avoid restatement in accordance with IAS 29

For example, adopting a stable currency (such as the

functional currency of its parent) as its functional

currency.

An entity does not have a free choice of functional currency


Reporting foreign currency transactions in the functional currency – Initial recognitionReporting foreign currency transactions in the functional currency – Initial recognition

Recognise transaction at the rate at the transaction date

May use approximate rate e.g. average rate for week or month

average rates not reliable if currency fluctuates significantly


Reporting foreign currency transactions in the functional currency – Subsequent measurementReporting foreign currency transactions in the functional currency – Subsequent measurement

Non-monetary items at

historical cost

Rate at the date of transaction

Revalued non-monetary

items

Rate at date of valuation

Monetaryitems

Closing rate


Change in functional currencyChange in functional currency

Only if there is a change to the underlying transactions, events and conditions

Translation procedures should be applied to the new functional currency prospectively from the date of the change


Monetary assetsMonetary assets

Cash

Cash equivalents

Marketable debt securities

Accounts receivable

Notes receivable


Non-monetary assetsNon-monetary assets

Inventory

Prepaid expenses

Marketable equity security

Investment property

Property, plant, and equipment

Intangible assets (e.g. goodwill)


Monetary liabilitiesMonetary liabilities

Accounts payable

Notes payable

Bonds payable

Leases payable

Accruals

Deferred tax


Non-monetary liabilitiesNon-monetary liabilities

Deferred income

Government grant


Translation to the Presentation currencyTranslation to the Presentation currency

Assets and liabilities

Income and expenses

All resulting exchange differences classified as equity

Closing rate at the dateof each BS presented

Rate at the date of transaction

(or average rate)

To P/L on disposal


Explanation of exchange rate differenceExplanation of exchange rate difference

Rationalisation of the yearly foreign exchange difference:

EOY = Rate at year end (closing rate)

BOY = Rate at beginning of year (opening rate)

Translation adjustment in equity

Net asset changes from other equity transactions x (EOY – historical or average rate)

Net asset changes from P/L x (EOY – historical or average rate)

Opening net assets x (EOY – BOY)

+

+

=


Key disclosuresKey disclosures

Exchange rate differences included in:

P/L (except for financial instruments measured at FV)

Equity (with a reconciliation)


Additional disclosuresAdditional disclosures

Reasons (if applicable):

why there has been a change in the functional currency

why the presentation and functional currency are different

If an entity’s presentation currency is different from its functional currency, its financial statements should only be described as compliant with IFRSs if all the requirements of IAS 21 have been applied

If an entity’s additional financial information is displayed in a currency different from either its functional or its presentation currency and all the requirements of IAS 21 have not been met:

clearly identify such information as supplementary

disclose the currency of the supplementary information

disclose the entity’s functional currency and the method of translation used as a basis for presenting the supplementary information

© 2005 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

Bottom lineBottom line

An entity does not have a free choice of functional currency

Translation of foreign currency assets and liabilities

distinguish between monetary and non-monetary

Unrealised exchange gains and losses recognised in P/L

Comparative Financial Statements

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2005 KPMG IFRG Limited, a UK registered company, limited by guarantee, and a member firm of KPMG International, a Swiss cooperative. All rights reserved.

Contact details

KPMG IFRG Limited

+44 (0)20 7694 8871

www.kpmgifrg.com

Contact details

KPMG IFRG Limited

+44 (0)20 7694 8871

www.kpmgifrg.com

ias 21

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