FOREIGN EXCHANGE (FOREX) • Subsequent reporting
✓ Subsequently, at the end of each
• The objective of PAS 21 The Effects of Changes
reporting period, you should translate:
in Foreign Exchange Rates is to prescribe:
o All monetary items in foreign
✓ How to include foreign currency
currency using the closing rate.
transactions and foreign operations in the
o All non-monetary items
financial statements of an entity.
measured in terms of historical
✓ How to translate financial statements into
cost using the exchange rate at
presentation currency.
the date of transaction (historical
Functional vs. Presentation Currency rate).
o All non-monetary items
• Functional currency is the currency of the measured at fair value using the
primary economic environment in which the exchange rate at the date when
entity operates. It is the own entity’s currency and the fair value was measured.
all other currencies are foreign currencies.
✓ The most important factor in determining How to report foreign exchange differences
the functional currency is the entity’s
• All exchange rate differences shall be recognized
primary economic environment in which
in profit or loss, with the following exceptions:
it operates.
✓ Exchange rate gains or losses on non-
✓ The primary economic environment is
monetary items are recognized
normally the one in which the entity
consistently with the recognition of gains
primarily generates and expands the
or losses on an item itself. For example,
cash. The following factors can be
when an item is revalued with the
considered:
changes recognized in other
o What currency does mainly
comprehensive income, then also
influence sales prices for goods
exchange rate component of that gain or
and services?
loss is recognized in OCI, too.
o In what currency are the labor,
✓ Exchange rate gain or loss on a monetary
material and other costs
item that forms a part of a reporting
denominated and settled?
entity’s net investment in a foreign
o In what currency are funds from
operation shall be recognized:
financing activities generated
o In the separate entity’s or foreign
(loans, issued equity
operation’s financial statements:
instruments)?
in profit or loss.
• Presentation currency is the currency in which the
o In the consolidated financial
financial statements are presented.
statements: initially in other
• An entity can decide to present its financial comprehensive income and
statements in a currency different from its subsequently, on disposal of net
functional currency – for example, when investment in the foreign
preparing consolidation reporting package for its operation, they shall be
parent in a foreign country. reclassified to profit or loss.
• While an entity has only 1 functional currency, it • Change in functional currency
can have 1 or more presentation currencies, if an ✓ When there is a change in a functional
entity decides to present its financial statements currency, then the entity applies the
in more currencies. translation procedures related to the new
How to report transactions in Functional Currency functional currency prospectively from
the date of the change.
• Initial Recognition
✓ Initially, all foreign currency transactions How to translate financial statements into a
shall be translated to functional currency Presentation Currency
by applying the spot exchange rate • When an entity presents its financial in the
between the functional currency and the presentation currency different from its
foreign currency at the date of the functional currency, then the rules depend on
transaction. whether the entity operates in a non-
✓ The date of transaction is the date when hyperinflationary economy or not.
the conditions for the initial recognition
of an asset or liability are met in line with
PFRS.
• Non-hyper inflationary economy
✓ When an entity’s functional currency is
NOT the currency of a hyperinflationary
economy, then an entity should translate:
o All assets and liabilities for each
statement of financial position
presented using the closing rate
at the date of that statement of
financial position. This rule
applies for goodwill and fair
value adjustments.
o All income and expenses and
other comprehensive income
items using the exchange rates at
the date of transactions. PAS 21
permits using some period
average rates for the practical
reasons, but if the exchange rates
fluctuate a lot during the
reporting period, then the use of
averages is not appropriate.
o All resulting exchange
differences shall be recognized
in other comprehensive income
as a separate component of
equity.
o However, when an entity
disposes the foreign operation,
then the cumulative amount of
exchange differences relating to
that foreign operation shall be
reclassified from equity to profit
or loss when the gain or loss on
disposal is recognized.