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    Pas 21

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    Anne
    This document discusses accounting for foreign currency transactions and foreign operations under PAS 21. It defines a foreign currency transaction as one involving a currency different from the entity's functional currency, and a foreign operation as a subsidiary or branch using a currency other than the parent's. For transactions, the exchange rate on the transaction date is used initially and closing rates are used at each period end to retranslate monetary items. Exchange differences are recognized in the period they arise. For foreign operations, assets/liabilities are translated at closing rates, while revenues/expenses use average or transaction date spot rates, with differences reported in other comprehensive income.

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    Pas 21

    Uploaded by

    Anne
    33 views4 pages
    This document discusses accounting for foreign currency transactions and foreign operations under PAS 21. It defines a foreign currency transaction as one involving a currency different from the entity's functional currency, and a foreign operation as a subsidiary or branch using a currency other than the parent's. For transactions, the exchange rate on the transaction date is used initially and closing rates are used at each period end to retranslate monetary items. Exchange differences are recognized in the period they arise. For foreign operations, assets/liabilities are translated at closing rates, while revenues/expenses use average or transaction date spot rates, with differences reported in other comprehensive income.

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    PAS 21

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    This document discusses accounting for foreign currency transactions and foreign operations under PAS 21. It defines a foreign currency transaction as one involving a currency different from the entity's functional currency, and a foreign operation as a subsidiary or branch using a currency other than the parent's. For transactions, the exchange rate on the transaction date is used initially and closing rates are used at each period end to retranslate monetary items. Exchange differences are recognized in the period they arise. For foreign operations, assets/liabilities are translated at closing rates, while revenues/expenses use average or transaction date spot rates, with differences reported in other comprehensive income.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    33 views4 pages

    Pas 21

    Uploaded by

    Anne
    This document discusses accounting for foreign currency transactions and foreign operations under PAS 21. It defines a foreign currency transaction as one involving a currency different from the entity's functional currency, and a foreign operation as a subsidiary or branch using a currency other than the parent's. For transactions, the exchange rate on the transaction date is used initially and closing rates are used at each period end to retranslate monetary items. Exchange differences are recognized in the period they arise. For foreign operations, assets/liabilities are translated at closing rates, while revenues/expenses use average or transaction date spot rates, with differences reported in other comprehensive income.

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    of 4

    27/04/2022

    CONCEPTUAL FRAMEWORK
    &
    ACCOUNTING STANDARDS

    PAS 21 The Effects of Changes in Foreign


    Exchange Rates

    Learning Objectives
    • Differentiate between the two ways of
    conducting foreign activities.
    • State the initial and subsequent
    measurements of foreign currency
    transactions.
    • Describe the procedures in translating
    financial statements into a presentation
    currency.
    Conceptual Framework & Acctg.
    2
    Standards (by: Zeus Vernon B. Millan)

    Two ways of conducting foreign activities

    1. Foreign currency transactions – individual


    entities often enter into transactions in a foreign
    currency.

    2. Foreign operations – groups often include overseas


    entities.

    Conceptual Framework & Acctg.


    3
    Standards (by: Zeus Vernon B. Millan)

    1
    27/04/2022

    Two main accounting issues

    • Exchange rates are constantly changing. Therefore, the


    principal issues in accounting for foreign activities are
    determining:
    1. Which exchange rate(s) to use; and
    2. How to report the effects of changes in exchange rates
    in the financial statements.

    Conceptual Framework & Acctg.


    4
    Standards (by: Zeus Vernon B. Millan)

    Functional currency

    • When preparing financial statements, a reporting entity must


    identify its functional currency.

    • Functional currency is the currency of the primary


    economic environment in which the entity operates.

    • The primary economic environment in which an entity


    operates is normally the one in which it primarily generates
    and expends cash.

    Conceptual Framework & Acctg.


    5
    Standards (by: Zeus Vernon B. Millan)

    Factors in determining functional currency


    Primary factors
    An entity’s functional currency is:
    1. The currency that mainly influences:
    o Sales prices
    o Cost of goods sold / Cost of services provided
    Secondary factors
    2. The currency in which funds from financing activities are
    generated.
    3. The currency in which receipts from operating activities are
    usually retained.

    Conceptual Framework & Acctg.


    6
    Standards (by: Zeus Vernon B. Millan)

    2
    27/04/2022

    Foreign currency transactions

    • Initial recognition :
    The foreign currency amount is translated at the spot exchange
    rate at the date of the transaction.

    • Subsequent recognition: At the end of each reporting period:


    1. Foreign currency monetary items are re-translated using
    the closing rate;
    2. Non-monetary items that are measured at historical cost in a
    foreign currency shall be translated using the exchange rate at
    the date of the transaction; and
    3. Non-monetary items that are measured at fair value in a
    foreign currency shall be translated using the exchange rates at
    the date when the fair value was determined.
    Conceptual Framework & Acctg.
    7
    Standards (by: Zeus Vernon B. Millan)

    Monetary items

    • Monetary items – are units of currency held and assets


    and liabilities to be received or paid in a fixed or
    determinable number of units of currency.

    Conceptual Framework & Acctg.


    8
    Standards (by: Zeus Vernon B. Millan)

    Recognition of exchange differences

    • When a foreign currency transaction occurred in one period and


    settled in another period:
    a. The exchange difference between the transaction date and the
    end of reporting period is recognized in the period of
    transaction, while
    b. The exchange difference between the end of the previous
    reporting period and the date of settlement is recognized in the
    period of settlement.

    • When a foreign currency transaction occurred and settled in the


    same period, all the exchange difference is recognized in that period.
    Conceptual Framework & Acctg.
    9
    Standards (by: Zeus Vernon B. Millan)

    3
    27/04/2022

    Foreign operations

    • A foreign operation is 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.

    Conceptual Framework & Acctg.


    10
    Standards (by: Zeus Vernon B. Millan)

    Translation to the presentation currency


    1. Assets and liabilities are translated at the closing rate at the date
    of the statement of financial position.
    2. Income and expenses, including other comprehensive income, are
    translated at spot exchange rates at the dates of the
    transactions. For practical reasons, average rates for a period
    may be used, if they provide a reasonable approximation of the spot
    rates when the transactions took place. However, if exchange rates
    fluctuate significantly, the use of the average rate is inappropriate.
    3. The resulting exchange difference is recognized in other
    comprehensive income.

    Conceptual Framework & Acctg.


    11
    Standards (by: Zeus Vernon B. Millan)

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