WeekII - foreign currencies - for presentation

WeekII - foreign currencies - for presentation - Advanced...

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Unformatted text preview: Advanced IFRS Foreign Currency IAS21 Foreign currency Session overview • Introduction • Foreign currency transactions • Functional currency • Presentation currency • Consolidated financial statements 2 Foreign currency Scope a in accounting for transactions and balances in foreign currencies, except for those derivative transactions and balances that are within the scope of IAS 39; b in translating the results and financial position of foreign operations that are included in the financial statements of the entity by consolidation; and c. in translating an entity's results and financial position into a presentation currency. 3 Foreign currency Definitions Closing rate = the spot exchange rate at the balance sheet date. Exchange difference = the difference resulting from translating a given number of units of one currency into another currency at different exchange rates. Exchange rate = the ratio of exchange for two currencies. 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. 4 Foreign currency Definitions Foreign currency = a currency other than the functional currency of the entity. Foreign operation = an entity that is a subsidiary, associate, joint venture 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 = the currency of the primary economic environment in which the entity operates. 5 Foreign currency Definitions Monetary items = units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency. Presentation currency = the currency in which the financial statements are presented. Spot exchange rate = the exchange rate for immediate delivery. 6 Foreign currency transactions Applicable exchange rates Initial recognition Subsequent measurement (at reporting date) Non-monetary items carried at cost Spot* rate at date of transaction Spot* rate at date of transaction Non-monetary items carried at fair value Spot* rate at date of transaction Spot* rate at date of revaluation Spot* rate at date of Closing rate at balance sheet date Monetary items transaction * For practical reasons the average rate may be used 7 Foreign currency transactions Co A acquired a buildings for € 10m on 2 December 2007 (Co A has the local currency (LC) as its functional currency): Building cost € 10,000,000 2 December Building cost € equals: 1 in LC: 1 10,000,000 Which rate should Co A use? 8 1.1 11,000,000 1,000,000 % change: Average 10.00% Spot at 2/12/07 Foreign currency transactions Co A has 10m Euro bank deposits that earn 6%p.a. (Co A has the local currency (LC) as its functional currency): Bank balance Interest income for December 10,000,000 50,000 € equals: 1 1 December 31 December Average Which rate should Co A use? 9 Interest income in LC: 1 1.2 1.1 Average rate 50,000 60,000 55,000 Functional Currency CURRENCY OF THE PRIMARY ECONOMIC ENVIRONMENT IN WHICH THE ENTITY OPERATES IS WHERE IT GENERATES AND EXPENDS CASH 10 Functional Currency primary indicators 1. Factors to consider: a. the currency This will often be the currency in which sales prices are denominated. However the emphasis is on determination - that mainly influences sales prices; and - whose competitive forces and regulations mainly determine the sales prices of its goods and services. b. the currency that mainly influences labour, material and other costs of providing the goods/services 11 Functional Currency example 1 What is the functional currency? Entity A, is trading in the retail sale of computer equipment in the UK. It has the following: a. All its sales are denominated and settled in pound Sterling b. The competition within the UK is fierce c. Labour and other costs are influenced by Stg £ (70%) d. Computer equipment is acquired from a US manufacturer with prices denominated in US $ (30%) 12 Functional Currency exercise 1 (handout) Saudi Arabian oil refinery 100 Denominated and settled US$ -10 -5 -50 Saudi Arabian Riyal US$ over 10 years US$ Revenue Cost of sales cash expenses cash expenses depreciation 35 Other costs cash expenses cash expenses 13 -1 -4 30 Saudi Arabian Riyal US$ What is the functional currency? US$ Functional Currency secondary indicators 2. Other factors a. The currency in which funds from financing activities are generated; and b. The currency in which receipts from operating activities are retained 3. Additional factors a. Degree of autonomy from the reporting entity; b. The proportion of its transactions with the reporting entity; c. Whether its cash flows are readily available for the reporting entity; and d. Whether its cash flows are self sufficient 14 Functional Currency example 2 Holding entities: Holding (French): • Holding investment properties Holding € • Equity and debt finance in Euro • Experienced management Subsidiary (Russian): • Owns one investment property • Financing from Holding Subsidiary • Income is remitted to Holding • No active management 15 € Functional Currency example 3 Holding entities: Holding (French): • Holding investment properties Holding • Equity and debt finance in Euro € • Experienced management Subsidiary (UK): Subsidiary £ • Holding various investment properties • All its financing has been obtained in Sterling other than the paid in capital (euro) • Active management 16 Functional Currency summary Focus is on the primary economic environment - the currency that mainly influences sales prices and costs of providing goods and services Also consider - the currency that funds from financing activities are generated and receipts from operating activities are retained If applicable consider - the degree of autonomy 17 Functional Currency example 4: Complex areas Holding entities: Holding Holding (Swiss): • Not operating (set up for tax reasons) Ru • Equity and debt finance in $ • No active management Subsidiary (Russian): Subsidiary Ru • Trading in real estate in Russia • Its income is denominated in $ • Has its own active management 18 Functional Currency exercise 2 (handout) Handout 2: Treasury Holding (operating) - Euro Treasury ? Subsidiary - Euro Subsidiary - Euro Subsidiary - Stg £ 19 Subsidiary - Rouble € Subsidiary - US$ Functional Currency example 5: Complex areas Intermediate Holding Company (IHC) Holding (operating) - Euro IHC/ Treasury ? Subsidiary - US$ Subsidiary - Euro Subsidiary - Rouble Subsidiary - Rouble 20 Subsidiary - Euro Functional currency Questions? Is it acceptable under IAS 21 to have a change of functional currency? YES If yes, under what circumstances? Only when there is change in the underlying transactions, events and conditions that are relevant to the entity How should the change in functional currency be applied? PROSPECTIVELY 21 Presentation currency CURRENCY THAT MANAGEMENT CHOOSES TO PRESENT THE ENTITY’S (or GROUP’S) FINANCIAL STATEMENTS Note: 1. There is free choice of presentation currency 2. All financial information should be prepared in accordance with IAS 21 3. If management uses a convenience translation Disclosures 22 Translation to the presentation currency If the functional currency is not the currency of a hyperinflation economy : • Assets and liabilities at closing rates • Income and expenses at spot* rate at transaction date (* allowed to use average rates if rates did not fluctuate significantly) • Equity - historical rates • Exchange differences deferred in equity • Exchange differences recycled at disposal date of the foreign operation 23 Translation to the presentation currency 1 USD [email protected] incorporated in Turkey 1 USD [email protected] Presentation functional currency =TRY as of 31 December 2007 Entity A as of 31 December 2007 Banks Accounts receivable Fixed asset, net 100 TRY 1,500 USD 1,000 USD Loan Accounts payable Tax payable Capital 800 USD 700 TRY 100 TRY 1,000 USD Retained earning 24 Sales <COS> <COS> <Operating expenses> <Operating expenses> <Financial expenses> <Taxation expense> Net income 2,000 USD 500 USD 300 TRY 200 USD 120 TRY 50 USD 100 TRY Retained earning? Net income? Translation to the presentation currency If the functional currency is the currency of a hyperinflationary economy: • All amounts - at closing rates of the most recent balance sheet, except that • When amounts are translated into the currency of a nonhyperinflationary economy, comparatives shall be those already presented in the prior year financial statements 25 Consolidated financial statements - overall procedure Determine the functional currency of each entity within the Group Account for all transactions in each entity ’s functional currency Prepare all the required information for consolidation purposes in each entity’s functional currency (if applicable include goodwill and fair value adjustments as part of the entity’s assets) If the Group ’s presentation currency is different translate all the information in the Group presentation currency 26 Perform consolidation adjustments and prepare the Consolidated Financial Statements ...
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This note was uploaded on 04/08/2010 for the course FEAS AD 476.01 taught by Professor Müfitbodur during the Spring '10 term at Boğaziçi University.

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