lkas 21
DESCRIPTION
srilankan accounding standard 21TRANSCRIPT
LKAS 21THE EFFECTS OF CHANGES IN
FORIGN EXCHANGE RATE
ASSIGNMENT II
DEPARTMENT OF ACCOUNTINGFACULTY OF MANAGEMENT STUDIES & COM-
MERCEUNIVERSITY OF JAFFNA
ADVANCED FINANCIAL ACCOUNTING
ACC-3132
Miss. NIRUJA RAJAKULANA-JAGAM
Reg.No-2010BAD025Index No-BAD10025
CONTENTS
Objective Scope Definitions Reporting foreign currency transactions in the functional currency Reporting at the ends of subsequent reporting peri-ods Recognition of exchange differences Change in functional currency Disclosure Example questions
OBJECTFIVE
THE OBJECTIVE OF THIS STANDARD IS TO PRESCRIBE HOW TO INCLUDE FOREIGN CURRENCY TRANSACTION
AND FORIEN OPERATION IN THE FINANCIAL STATEMENTS OF AN ENTITY AND HOW TO TRANSLATE
FINANCIAL STATEMENT INTO A PRESENTING CURRENCY
SCOPE
THIS STANDARD SHALL BE APPLIED, IN ACCOUNTING FOR TRANSACTION AND BALANCES IN FORIGN CURREN-CIES, EXCEPT FOR THOSE DERIVATIVE TRANSCATION AND BALANCES THAT ARE WITHIN THE SCOPE OF LKAS 39.
IN TRANSLATING THE RESULT AND FINANCIAL POSITION OF FOREIGN OPERA-TION THAT ARE INCLUDED IN THE FINANCIAL STATEMENT OF ENTITY BY CON-SOLIDATION, PROPOTIONATE CONSOLIDATION OR THE EQUITY METHOD.
IN TRANSLATING ENTITY’S RESULT AND FINANCIAL POSITION INTO A PRESENTATION CURRENCY.
DEFFINITIONS
CLOSING RATE
CLOSING RATE IS THE SPOT EXCHANGE RATE AT THE END OF THE REPORTING PERIOD
EXCHANGE DIFFERENCE
EXCHANGE DIFFERENCE IS THE DIFFERENCE RESULT-ING FROM TRANSLATING A
GIVEN NUMBER OF UNITS OF ONE CURRENCY INTO ANOTHER CURRENCY AT DIFFERENCE
EXCHANGE RATE
EXCHANGE RATES
EXCHANGE RATE IS THE RATIO OF EXCHANGE
FOR TWO CURRENCIES
FAIR VALUE
FAIR VALUE IS THE AMOUNT FOR WHICH AN
ASSET COULD BE EXCHANGED,
OR A LIABILITY BETWEEN KNOWLADGEBLE, WILLING
PARTIES IN AN ARM’S LENGTH TRANSACTION
FOREIGN CURRENCY
FOREIGN CURRENCY IS A CURRENCY OTHER THAN THE FUNCTIONAL CUR-
RENCY OF THE ENTITY
FUNCTIONAL CURRENCY
FUNCTIONAL CURRENCY IS THE CURRENCY OF THE
PRIMARY ECONOMIC ENVIRONMENT IN WHICH
THE ENTITY OPERATES
MONETARY ITEMS
MONETARY ITEMS ARE UNITS OF CURRENCY HELD AND
ASSETS & LIABILITIES TO BE RECEIVED OR PAID IN A
FIXED OR DETERMINABLE NUMBER
OF UNITS OF A CURRENCY
PRESENTATION CUR-RENCY
IT IS THE CURRENCY IN WHICH THE FINANCIAL STATEMENTS ARE PRE-
SENTED
SPOT EXCHANGE
SPOT EXCHANGE RATE IS THE EXCHANGE RATE FOR
IMMEDIATE DELIVERY
Reporting foreign currency transactions in the
functional currency
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 foreigncurrency at the date of the transaction.
Reporting at the ends of subse-quent reporting periods
At the end of each reporting period:(a) foreign currency monetary items shall be translated using theclosing rate;(b) non-monetary items that are measured in terms of historicalcost in a foreign currency shall be translated using theexchange rate at the date of the transaction; and(c) non-monetary items that are measured at fair value in aforeign currency shall be translated using the exchange ratesat the date when the fair value was determined.
Recognition of exchange differ-ences
Exchange differences arising on the settlement of monetary
items or on translating monetary items at rates dif-ferent
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.
Change in functional currency
When there is a change in an en-tity’s
functional currency, the entity shall
apply the translation procedures applicable to the newfunctional currency prospectively
from the date of the change.
DisclosureAn entity shall disclose:(a)the amount of exchange differences recognized in profit or loss except for
those arising on financial instruments measured at fair value through profit or loss in accordance with LKAS 39;
(b) net exchange differences recognized 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.
(C) 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.
(D) 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.
(E) When an entity presents its financial statements in a currency that is dif-ferent from its functional currency, it shall describe the financial statements as complying with SLFRSs only if they comply with all the requirements of SL-FRSs
Example
On 31st December, 2012 the following balances appeared in the books of Chennai Branch of an English firm having its HO office in New York:
Amount in ‘ ’ र Amount in ‘ ’ रStock on 1st Jan., 2012 2,34,000Purchases and Sales 15,62,500 23,43,750Debtors and Creditors 7,65,000 5,10,000Bills Receivable and Payable 2,04,000 1,78,500Salaries and Wages 1,00,000 -Rent, Rates and Taxes 1,06,250 -Furniture 91,000 -Bank A/c 5,68,650New York Account - 5,99,150
36,31,400 36,31,400Stock on 31st December, 2012 was र 6,37,500.Branch account in New York books showed a debit balance of $ 13,400 on 31st December,2012 and Furniture appeared in the Head Office books at $ 1,750.The rate of exchange for 1 $ on 31st December, 2011 was र ` 52 and on 31st December, 2012 was र ` 51. The average rate for the year was र ` 50.Prepare in the Head Office books the Profit and Loss a/c and the Balance Sheet of the Branch.
Solution
Calculation of Exchange Translation LossChennai Branch Trial Balance (converted in $) as on 31st December, 2012
Dr. र Cr. र Conver-sion Rate
Dr($). Cr. ($)
Stock on 1st Jan., 2012 234000 52 4500
Purchases & Sales 1562500
2343750 50 31250 46875
Debtors & creditors 765000 510000 51 15000 10000
Receivable and Payable 204000 178500 51 4000 3500
Salaries and wages 100000 50 2000
Rent, Rates and Taxes 106250 50 2125
Furniture 91000 1750
Bank A/c 568650 51 11150
New York Account 599150 13400
Exchange translation loss
2000
3631400
3631400 73775 73775
In the books of English Firm (Head Office in New York)Chennai Branch Profit and Loss Accountfor the year ended 31st December, 2012
$ $
Opening stock 4500 Sales 46875
Purchases 31250
Closing stock (12500)
Gross profit c/d 23625
46875 59375
Salaries 2000 Gross profit b/d 23625
Rent, rates and tax 2125
Exchange translation loss
2000
Net Profit c/d 17500
23625 23625
Balance Sheet of Chennai Branchas on 31st December, 2012
Liabilities $ $ Assets $
Head Office A/c 13400
Furniture 1,750 1750
Add : Net profit 17500
30900
Closing Stock 12500
Trade creditors 10000
Trade Debtors 15000
Bills Payable 3500 Bills Receivable 4000
Cash at bank 11150
44400
44400