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16- Foreign transaction and entities - Coggle Diagram
16- Foreign transaction and entities
Objective
Produce results which are generally compatible with the effect of rate changes on a co' cash flows and its equity
Ensure FS present true and fair view of the results of management action
1st type of currency
Functional
Primary economic environment in which the entity operates
The currency used for measurement in FS
Other currencies treated as a foreign currency
Rates
Spot exchange rates
Immediate delivery
Closing rate
Spot exchange rate at the end of reporting period
Factors in determining functional currency
Mainly influences the sales prices for G&S
Currency of the country whose competitive forces and regulations mainly determine the sales price of its G&S
Currency that mainly influence labor, material and other costs of providing G&S
Funds from financing activities are generated
Receipts from operating activities are usually retained
Changes to the functional currency
Functional currency cannot be changed once it has been determined unless there is a change to those underlying transactions, events and conditions
The effect of a change in functional currency is accounted for prospectively
All items are translated into new functional currency using the exchange rate at the date of change
The resulting translated amounts for non-monetary items are treated as their historical cost
Exchange diff. arising from the translation of foreign operation previously recognized in OCI are not reclassified from equity to P/L until the disposal of the operation
Reporting foreign currency transaction into functional currency
Initial recognition
Use spot exchange rate at the date of transaction
If rates do not fluctuate significantly, use average rate as an approximation
Year end
Monetary assets and liabilities
Restated at closing rate
Non-monetary assets measured in terms of historical costs
Not restated that is they remain at historic rate of original transaction
Non-current assets
Non-monetary assets measured at FV
Rate at the date when FV was measured
Recognition of exchange diff.
Recognised in P/L
If under IAS 16, PPE is measured at FV, and the changes in FV is recognised in OCI, the exchange diff will also be recognised in OCI
Link to the CF
Arguments
Exchange diff. arising from long-term monetary assets and liabilities such as loan repayable in the future should not be recognised in the P/L. This is because gains and losses reported in one period may then be reversed in future periods, causing unnecessary fluctuations in reported P/L.
As the exchange diff. will not be realised until the monetary item is received or settled, some argue that it should be recognised in OCI
Revised CF makes it clear that SOPL is the primary source of info relating to performance but the standard can require the use of OCI on an exceptional basis. This perhaps implies that P/L is the default position for reporting gains and losses and therefore IAS 21 is consistent with this.
2nd type of currency
Presentation
Currency in which FS are presented
Can be any currency
Special rules apply to translation from functional to presentation
Results and financial position
Translated to presentation currency because
Functional currency is not the same as the currency of a hyperinflationary economy
Assets and liabilities
Including comparative
Translated at the closing rate at the date of that SOFP
Income and expenses
Including comparative
Translated at actual rate at the date of transaction
Average rate is used if no significant fluctuations
All resulting exchange diff.
Recognised in OCI
Same rules used for translating foreign operations
Foreign operations
Subs, associate, joint arrangement, branch
The activities of which are based or conducted in a country or currency other than those of the reporting entity
Determining a foreign operation's functional currency
Whether the activities of the foreign operation are extension of the reporting entity, rather than being carried out with a significant degree of autonomy
Whether transactions with the reporting entity are high or low proportion of the foreign operation's activities
Whether cash flows affect those of reporting entity and whether they are readily available for remittance to the reporting entity
Whether the cash flows are sufficient to support expected debt obligations without the help by reporting entity
Exchange rates
SOFP
All assets and liabilities
CR
Goodwill
Fair value adjustment
Share capital and pre-acquisition reserves (for exam purposes)
HR at the date of control
Post-acquisition reserve
Profit for each year
Actual or average rate
Dividends
Actual rate
Exchange diff. on net assets
Balancing figure
Results from:
Translating income and expenses at spot rate and assets and liabilities at closing rate
Translating the opening net assets at closing rate that differs from the previous closing rate
Translating goodwill on consolidation at the closing rate
May be required to calculate the exchange diff for recognition in the OCI
SOPLOCI
All translated at actual rate at the date of transaction / average rate as an approximation
Disposal of foreign operation
Cumulative amounts on exchange diff. accumulated in equity (and previously reported in OCI) relating to foreign operation are reclassified to P/L at the time disposal gains/ losses are recognised
Monetary items forming part of a net investment in a foreign operation
Net investment in a foreign operation
The amount of reporting entity's interest in the net assets of a foreign operation
Caused by monetary items that is unlikely to be received or paid to the foreign operation, therefore it becomes long term investment
Between
Parent and foreign operation
Subs and foreign operation
Separate FS
Where denominated in functional currency
Exchange diff. are recognised in the P/L in reporting entity or foreign operation
Where denominated other than functional currency
Exchange diff. will be recognised in the P/L for both entities
Consolidated FS
Exchange diff. are recognised initially, that is moved to OCI
Exchange diff are reclassified from equity to P/L on disposal of the net investment