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SBR- C16-Foreign Transactions and Entities

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17 views28 pages

SBR- C16-Foreign Transactions and Entities

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temwananikondowe
Copyright
© © All Rights Reserved
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C16-FOREIGN

TRANSACTIONS AND
ENTITIES
PRESENTED BY HOLLEN KAMANGA
LEARNING OBJECTIVES

- Outline and apply the transaction of foreign currency amounts and transactions into
functional and presentation currency
- Account for the consolidation of foreign operations and their disposal
• Exam tip: the chapter could feature as part of a groups question, either requiring the
preparation of extracts from the translation reserve where the entity has foreign subsidiary
• One needs to be comfortable with the treatment of foreign currency in both separate and
consolidated FSs which include foreign operation.
• Explanation of the accounting treatment is vital other than just the calculation of the
numbers.
CURRENCY CONCEPTS

▪ The translation of foreign currency transactions and financial


statements should:
a) Produce results which are generally compatible with the effects of
rate changes on a company's cash flows and its equity; and
b) Ensure that the financial statements present a true and fair view of
the results of management actions.
CURRENCY CONCEPTS

• Two currency concepts include:


a) Functional currency
- Currency of the primary economic environment in which the entity operates
- Currency used for measurement in the financial statements
- Other currencies treated as a foreign currency
a) Presentation currency
- Currency in which the financial statements are presented
- Can be any currency
- Special rules apply to translation from functional to presentation currency
- Same rules used for translating foreign operations
FUNCTIONAL CURRENCY
FACTORS TO CONSIDER IN DETERMINING AN
ENTITY’S FUNCTIONAL CURRENCY
REPORTING FOREIGN CURRENCY TRANSACTIONS
IN THE FUNCTIONAL CURRENCY

▪ Initial recognition
❖Translate each transaction by applying the spot exchange rate
between the functional currency and the foreign currency at
the date of transaction. An average rate for a period may be
used as an approximation if rates do not fluctuate significantly
(IAS 21: paras.21–22).
REPORTING FOREIGN CURRENCY TRANSACTIONS
IN THE FUNCTIONAL CURRENCY

• At the end of the reporting period


REPORTING FOREIGN CURRENCY TRANSACTIONS
IN THE FUNCTIONAL CURRENCY

• Exchange differences
Class exercise
Solution
LINK TO THE CONCEPTUAL FRAMEWORK
PRESENTATION CURRENCY

▪ The currency in which financial statements are presented


▪ An entity may present its financial statements in any currency
(or currencies)- IAS 21. Para. 38
Translation rules
FOREIGN OPERATIONS
TRANSLATION METHOD
How to determine a foreign operation’s functional currency

➢ The following additional factors are considered in determining the functional currency of a
foreign operation, and whether its functional currency is the same as that of the reporting entity
(IAS21:para.11):
EXCHANGE RATES

See text on the approach adopted when translating the financial


statements of a foreign operation; for exam purposes (see below).
Statement of financial position

Statement of profit or loss and other comprehensive income;


✓ All items are translated at actual rate at date of the transaction (or
average rate as an approximation)(AR)

Exchange differences;
✓ All exchange differences on translation of a foreign operation are
recognised in other comprehensive income.
CALCULATION OF THE EXCHANGE DIFFERENCES

• The exchange differences result from;


CALCULATION OF THE EXCHANGE DIFFERENCES

• Exchange differences
GOODWILL CALCULATION FOR A FOREIGN
OPERATION

❑ Any goodwill and fair value adjustments are treated as assets and
liabilities of the foreign operation and are translated at each year
end at the closing rate (IAS 21: para. 47).
❑ However, the goodwill must first be calculated at the date of
control. Practically, this can be achieved by adding two additional
columns to the standard goodwill calculation:
Goodwill calculation
DISPOSAL OF A FOREIGN OPERATION
ACCOUNTING FOR MONETARY ITEMS FORMING PART OF A NET
INVESTMENT IN A FOREIGN OPERATION (SEE ILLUSTRATION 3 FOR
PRACTICE)

▪ Net investment in a foreign operation: The amount of the reporting


entity's interest in the net assets of a foreign operation. (IAS 21: para.8).
ACCOUNTING FOR MONETARY ITEMS FORMING PART OF A NET
INVESTMENT IN A FOREIGN OPERATION (CONTINUED)
?

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