Key terms mg pi | tt ei tt sale, therefore the tee! works must be Included in continuing operations. Information about the planned closure could be disclased in the notes to the financial statements, 5 IAS 21 Foreign currency transactions st Nae a company trades overseas, it will uy or sell assets in foreign currencies. For example, an American Company might buy materials from Canada, and pay for them in US dolirs, and then sell its finished {goods in Germany, receiving payment in Euros, or perhaps in some other currency. Ifthe company owes ‘money in a foreign cutrency atthe end ofthe accounting year, or holds assets which were bought in a foreign currency, those Ftilties or assets must be translated Into the local currency inorder to be Included inthe financial statements. ‘Accompany might have a subsidiary abroad (Ie a foreign entity that it owns), and the subsidiary will trade in its own local currency. The subsidiary will kep books of account and prepare its annual accounts in its ‘own currency. However at the year end, the holding company must ‘consolidate’ the results of the ‘overseas subsidiary into its group accounts, so that somehow, the assets and liabilities and the annual profits of the subsidiary must be translated from the foreign currency into. Note. The Financial Reporting exam will ony be testing foreign currency inthe context of single entities, ‘0 We will not be covering group aspects. tt foreign cuitency exchange rates remained constant, there would be no accounting problem. However, foreign exchange rates are continually changing, for instance the rate of exchange between the Japanese yen and string might be Y183 to £1 at the start of the accounting year, and Y174 tot atthe end ofthe year. 5.1 Definitions ‘These are some ofthe definitions given by IAS 21. Foreign curreney. A currency other than the functional currency ofthe entity, Functional eureney. The currency of the primary economic environment in which the entity operates. Presentation curreney. The curency in which the financial statements are presented, Exchange rate. The rato of exchange fortwo currencies. Exchange difference. The difference resulting from translating a given numberof units of one currency into another currency at different exchange rates. (Closing rate. The spot exchange rate atthe year-end date. ‘Spot exchange rate. The exchange rate for immediate delivery. Monetary items. Units of currency hold and assets and liabilities to be received or pad ina fixed or determinable number of units of currency. (AS 21: para. 8) 5.2 Functional currency Each entity — whether an individual company, a parent ofa group, or an operation within a group (such as a subsidiary, associate or branch) — should determine is functional currency and measure its results and financial position in that currency For most individual companies the functional currency will be the currency ofthe country in which they are located and in which they carry out most of their transactions. Determining the functional currency is‘much more key to be an issue where an entity operates as part of a group. 1AS 21 contains detailed guidance on howr to determine an entity's functional currency. (IAS 21: paras. 9-13) |AS 21 states that an entity should consider the following factors in determining its functional currency: (@) The currency that mainly influences salos prices for goods and services (often the currency in ‘which prices are denominated and settled) (b) The currency ofthe country whose competitive forces and regulalfons mainly determine th sales prices ofits goods and services (©) The currency that mainly influences labour, material and othor costs of providing goods or services (often the currency in which prices are denominated and settled) (IFAS 21: para. 9) Sometimes the functional currency of an enfty isnot immediatly obvious. Management must then exercise judgement and may also need to consider: | (2) The currency in which funds from financing acti ‘generated ©) Trane heicinapermopanguiensestymine scien —_ | ‘An entity can presents financial statements in any currency or curencies) it chooses. 1AS 21 deals with ‘he situation in which financial statements are presented in @curency other than the functional currency i (WFRS 21: para. 17) | ‘Again, this i unlikely tobe an issue for most individual companies. Their presentation currency wil ‘normally be the same as ther functional currency (the currency of the country in which they operate), | 5.3 Foreign currency transactions ‘There are two distinct types of foreign currency transaction, conversion and transation. | 36 (raising loans and issuing equity) are 5.3.1 Conversion gains and losses Conversion is the process of exchanging amounls of one foreign currency for another. For example, suppose MerryCan Co, a US company, buys a consignment of goods from a supplier in Germany. The order is placed on 1 May and the agreed price is.€124,250. At the time of delivery the rate of foreign exchange was €2 to $1. MerryCan Co would record the amount owed in its books 2s follows. DEBIT Purchases (124,250 + 2) 362,125 ‘CREDIT Trade Payables $62,125 ‘When MerryCan Co comes to pay the supplier, it needs to obtain some foreign currency. By ths time, however, if the rate of exchange has altered to €2.05 to $1, the cost of raising €124,250 would be (2.06) $60,610. MerryCan Co would need to spend only $60,610 to settle a debt for inventories ‘costing 1 ‘$62,125, MerryCan Co will record a profit on conversion (or exchange gain) of $1,515. { DEBIT Trade Payables $62,125 CREDIT. Cash $60,610 CREDIT Profit on conversion $1518 | Profits (or losses) on conversion would be included in proftor loss forthe year in which conversion (whether payment or receipt) takes place. Suppose tat ante YarkiFed Co ae goods oa Mean company and ared that payment shoul | 'be made in Mexican pesos at a price of MXN1 16,000. We wil further assurme that the exchange rate atthe time of sale is MXN17.2 to $1, but when to MXN 18.1 to $1. YankiFed Co would record the saleas follows, | DEBIT Trade Recelvbles (116,000 + 17.2) $074 CREDIT Revenue $6,744 | Co a oe‘When the MXN1 16,000 are paid, YankiFed Co wll convert them into $, to obtain (+ 18.1) $6,409. In this, example, there has been a loss on conversion of $335 which will be written off to proft of loss forthe year: DEBIT cash $6,409 DEBIT —_—_Loss on conversion $335) ‘CREDIT ‘Trade Receivables 90,744 5.3.2 Translation Foreign currency translation, 2s distint from conversion, does not involve the act of exchanging one currency for another. Translation Is required atthe end of an accounting period when a company stil holds assets or lablities in its stalement of financial position which were obtained or incurred in a foreign currency. “These assets or liabilities might consist of: (@) An individual home company holding individual assets or liabitities originating in a foreign currency ‘dea’ (b) Anindividual home company with a separate branch ofthe business operating abroad which Keeps its own books of account inthe focal currency. “There has been great uncertainty about the method which should be used to translate the value of assets ‘and liabilities from a foreign currency into $ forthe year end statement of financial position, ‘Suppose, for example, that a Belgian subsidiary purchases a piece of property for €2,100,000 on ‘34 December 207. The rate of exchange a this time was €70 to $1. During 20X8, the subsidiary charged | depreciation on the building of €16,800, so that at 31 December 20X8, the subsidiary recorded the asset as follows, : | Property at cost 2,400,000, Less accumulated depreciation 00 Carrying amount 283,200 At this date, the rate of exchange has changed to €60 to $1. ‘The local holding company must translate the assets value into $, but there i a choi rates. (@) Should the rate of exchange for translation be the rate which existed atthe date of purchase, which ‘would give a carying amount of 2,083,200 + 70 = $29,760? (6) Should the rate of exchange for translation be the rate existing at the end of 20X@ (the closing rate | ‘of €60 to $1)? This would give a carrying amount of $94,720. ‘Similarly, should depreciation be charged to group profit or loss atthe rate of €70 to $1 (the historical rate), €60 to $1 (the closing rate), or atan average rate forthe year (say, €64 to $1)? of exchange 5.4 Foreign currency transactions: initial recognition 1AS 21 states that a foreign currency transaction should be recorded, on ntl recognition inthe functional currency, by applying the exchange rate between the reporting currency and the foreign currency atthe date ofthe transaction tothe foreign currency amount. (FRS 21: para. 21) [An average rate fora period may be used it exchange rates do not fluctuate significantly. (ERS 21: para. 22) 5.5 Reporting at subsequent year ends {tis important to distinguish between monetary and non-monetary items. Monetary items involve the right to receive or the obligation to deliver a feed or determinable amount of currency. This would include receivables, payables, ans etc. Non-monetary items would be items such as non-current assets and inventories, g wre pring |: re omaThe following rules apply t each subsequent year end (2) Report foreign currency monetary items using the closing rate (©) Report non-monetary stems (eg non-current assets, inventories) which are carted at historical cost in a foreign currency using the exchange rate at the dato of the transaction (historical rato) (©) Report non-monetary items which are carried a flr valuo in a foreign currency using the ‘exchange rates that existed when the values were measured (FAS 21: para. 23) 5.6 Recognition of exchange differences Exchange differences occur when there is @ change in the exchange rate between the transaction date and the date of settlement of monetary items arising from a foreign currency transaction Exchange differences arising on the settlement of monetary items (receivables, payables, loans, cash ina foreign currency) or on translating an entity's monetary items at rates different from those at which they ere translated intially, or reported in previous financial statements, should be recognised in profit loss in the period in which they arise, (IFAS 21: para. 28) There are two situations to consider: (2) ‘The transaction is settled in the same period as that in which it occurred: ll the exchange difference is recognised in that period. (b) Thetransacton i settled in a subsequent accounting period the exchange diference recognised in each intervening period up to the period of settlement is determined by the change in exchange rates during that period, In other wo'ds, where a monetary item has not been settled at the end ofa period, it should be restated using the closing exchange rate and any gain or loss taken to profit or loss. (ERS 21: para. 28) | ee ‘Seattle Co, whose year-end is 31 December, buys some goods from Telomere SA of France on 30 September. The invoice value is €60,000 and is due for settlement in equal instalments on 30 November and 31 January. The exchange rate moved as follows. 30 September 30 November 31 December 3 January Required ‘State the accounting entries in the books of Seattle Co. The purchase will be recorded in the books of Seattle Co using the rate of exchange ruling on 80 September. DEBIT Purchases —_ $37,500 ‘CREDIT ‘Trade payables $37,500 Being the $ cost of goods purchased for €60,000 (€60,000 + €1.60/$1) (0n 30 November, Seattle Co must pay €30,000. This will cost €90,000 + €1.80/$1 = $16,667 and the ‘company has therefore made an exchange gain of $18,750 ~ $16,667 = $2,083, DEBIT Trade payables $18,750 CREDIT —_Exchange gains: profit or loss $2,083 CREDIT Cash $16,667 HRT verte cranes | es Rr e@as nt December, the year end, the outstanding liability wll be recalculated using the rate applicable to that date; €30,000 + €1,90/81 = $15,789, A further exchange gain of $2,981 has boon made and will be recorded as follows, DEBIT Trade payables $2,981 CREDIT —_Exchange gains: profit or loss $2,961 The total exchange gain of $5,044 wil be included in the operating profit for the year ending $1 December. On 31 January, Seatte Co must pay the second instalment of €30,000. This wil cost them $16,216 (€30,000 + €1.85/S1). DEBIT ——_Trade payablos 315,789 Exchange losses: profit or loss ‘$427 CREDIT — Cash s16216 When a gain or loss on & non-monetary item is recognised in other comprehensive income (for example, where property is revalued), any related exchange diflerences should also be recognised in other comprehensive income. out negara wha vies ica aan Pw yeas the effect of chosen accounting policies on the reported performance and position of the company. Also to demonstrate the ability to evaluate any underlying estimates on the position of the entity. | Honntetntwnypetyrtoneenay nets earee iy | correct errors and to disclose them. This chapter deals with important disclosures and you can apply the ‘knowledge you obtain from this chapter to help to demonstrate this competence. |1 How shoulda prior period error be corrected under 1AS 87 2 Give the circumstances when a change in accounting policy might be required 3 When can a non-current asset be classified as held for sale? 4 How should an asset held for sale be measured? 5 How does IFRS 6 define a discontinued operation? 6 What is meant by functional currency? a4 Byadjusting the opening batance of retained earnings 2 @ o) 3 @ o) 4 tthe lower of cartying amount and fair value less costs of disposal ‘The change is required by an IFRS; or “The change wil resutin a mor ‘See Key Ter Section 4.6 6 Thecurrency of the primary economic environment in which the entity operates jppropriate presontation of events or transactions in the financial statements of the entity, providing more reliable and relevant information, ‘The asset must be available for Immediate sale in ts present condition. Its sale must be highly probable (ie significantly more likely than not). (Section 3.2) neste |: tate emcee SEEDee| Biffecton EPS of changes in capital sirucure we “4 Dilted EPS: {5 Presentation, diclosure and ether matiors an) Introduction Earnings pr share (EPS) is widely used by ivestors asa measure ofa ‘company's performance and is of particular importance in: (@)_ Comparing the resuls ofa company over a period a time (b) Comparing the performance of one company’s equity against the performance of anther company’s equity, and also aginst the tums tenable rom loan sock and other fr f Investment The purpose of any eamings yardstick is to achieve as far as possible clarity of meaning, compurabity beween ane company and ater, one yar and ‘nota, and abut Fpofs to th ely shares 1AS 39 Earns per ‘Share goes some way to ensuring that all these lms are achieved.| Study guide financial performance Eamings per share (eps) (0) Calouate the eps in accordance with relevant accounting standards (eating with bonus issues, ull market value issues and rights issues) (i) “Explain the relevance of the diluted eps and calculate the diluted eps wolving convertible debt and share optfons (warrants) Explain why the trend of eps may be a more accurate indicator of, performance than a company’s profit trend and the Importance of eps as.a stock market indicator {H)_iscos he titans of usa pe a patomanis ease | 8 ‘The objective of IAS 33 is to improve the comparison ofthe performance of diferent entities in the same Period and of the same entity in different accounting periods by preseribing methods for determining the ‘number of shares to be included in the calculation of earings per share and other amounts per share and bby specifying their presentation, | 1.2 Definitions f | The following definitions are given in IAS 33 and IAS 32. Key terms Ordinary shares. An equity instrument that is subordinate to all other classes of equity instruments, © Potential ordinary share. A financial instrument or other contract that may entitle is holder to ordinary shares. | © Options, warrants and their equivalents. Financial instruments that give the holder the right to purchase ordinary shares. (AS 83: para. 5) | © Financial instrument. Any contract that gives rise to both a financial asset of one entity and a ‘inanclallabitty or equity instrument of another entity. ‘© Equity instrument. Any contract that evidences a residual interest in the assets of an entity ater | | deducting al ofits liabilities. (AS32: para. 11) 1.2.1 Ordinary shares ‘There may be more than one class of ordinary shares, but ordinary shares of the same class will have the ‘same rights to receive dividends. Ordinary shares participate in the net profit forthe period only after ‘other types of shares, eg preference shares. (AS 33: para. 5) a kt ® |4.2.2 Potential ordinary shares 1AS 33 identities the following examples of financial instruments and other contracts generating potential ordinary shares. (2) Debt or equity instruments, including preference shares, that are convertible into ordinary shares (0) Share warrants and options (©) Employee plans that allow employees to receive ordinary shares as part of their remuneration and other share purchase plans (4) Shares that would be issued upon the satisfaction of certain conditions resulting from contractual arrangements, such as the purchase of a business or other assets (WAS 83: para. 7) 1.3 Scope 14S 83 has the following scope restrictions: {(@) Only companies with (potential) ordinary shares which are publicy traded need to present EPS (including companies in the process of being listed). (b) EPS need only be presented on the basis of consolidated results where the parent's results are shown 25 well. (©) Where companies choose to present EPS, even when they have na (potential) ordinary shares ‘hich are traded, they must do so in accordance wth IAS 33 (AS 35: paras. 2-4) 2 Basic EPS 2.1 Measurement Basic EPS should be calculated by dividing the net profit or loss forthe period attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. (AS 33: para. 10) Net profit/oss) attributable to ordinary shareholders Eps « ___.Net profit oss) attributable to ordinary shareholders __ = ‘Weighted average number of ordinary shares outstanding during the period 2.2 Earnings Earnings includes all items of income and expense (including tax and non-contrling interests) less net profit ztributable to preference shareholders, including preference dividends. (AS 33: para. 12) Preference dividends deducted from net profit consist of: (@) Preference dividends on non-cumulative preference shares declared in respect ofthe period (&) The ull amount of the required proference dividends for cumulative preference shares for the period, whether or not they have been dectared (excluding those paid/declared during the period in respect of previous periods) (AS 33: para. 14) Note. In an exam question any preference shares willbe redeemable and the dividend will already have ‘been accounted for under finance costs. °° rei | 18 tise EEE