Initial Recognition of Foreign Currency Transactions

Initial Recognition

• A foreign currency transaction is initially recognized by translating the foreign currency amount into the functional currency using the spot exchange rate at the date of the transaction.
• The spot exchange rate is the exchange rate for immediate delivery, also known as the current exchange rate on a given date.
• The date of a transaction is the date on which the transaction first qualifies for recognition in accordance with PFRS.

Subsequent Measurement

• At each reporting date, the following items are translated as follows:
  • Monetary items: Closing rate
  • Non-monetary items measured at historical cost: Exchange rate at the date of transaction
  • Non-monetary items measured at fair value: Exchange rate at the date when the fair value was determined
• Closing rate is the spot exchange rate at the reporting date.

Monetary Items vs. Non-monetary Items

• Monetary items are currencies held and assets and liabilities to be received or paid in a fixed or determinable amount of money.
• Non-monetary items are those which do not give rise to the receipt or payment of a fixed or determinable amount of money.
• Examples of monetary items:
  • Cash and cash equivalents
  • Accounts/Notes/Loans receivable and their related allowances and other financial assets measured at financial assets measured at
  • Finance lease receivables
  • Cash surrender value
• Examples of non-monetary items:
  • Inventories
  • Prepaid assets
  • Property, plant & equipment
  • Investment property
  • Intangible assets
  • Goodwill

Several Exchange Rates

• When several exchange rates are available, the rate used is that at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred at the measurement date.
• If exchangeability between two currencies is temporarily lacking, the rate used is the first subsequent rate at which exchanges could be made.

Translation Procedures

• The translation procedures discussed above apply to the translation of a foreign operation's financial statements.
• For foreign subsidiaries, goodwill and fair value adjustments are translated at the closing rate.
• If the subsidiary is not wholly-owned, the exchange differences are allocated to both the owners of the parent and NCI.

Net Investment in a Foreign Operation

• Net investment in a foreign operation is the amount of the reporting entity's interest in the net assets of that operation.
• A monetary item that is receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future is, in substance, a part of an entity's net investment in a foreign operation.
• Exchange differences arising on a monetary item that forms part of a reporting entity's net investment in a foreign operation are recognized as follows:
  • In profit or loss in the separate financial statements of the reporting entity or the foreign operation, as appropriate
  • In other comprehensive income in the consolidated or combined financial statements.

Disposal or Partial Disposal of a Foreign Operation

• When a foreign operation is disposed of, the cumulative amount of exchange differences recognized in other comprehensive income and accumulated in equity is reclassified to profit or loss as a reclassification adjustment.
• On a partial disposal of a foreign operation, only a proportionate share is reclassified from equity to profit or loss.

Translation Procedures - Hyperinflationary Economy

• If the functional currency is the currency of a hyperinflationary economy, the entity's financial statements are first restated in accordance with PAS 29 before they are translated under PAS 21.
• An entity cannot avoid this restatement by, for example, simply adopting another non-hyperinflationary currency as its functional currency.
• After restatement in accordance with PAS 29, all amounts (i.e., assets, liabilities, equity, income and expenses, including comparatives) are translated at the closing rate at the current reporting date.
• However, when the presentation currency is that of a non-hyperinflationary economy, comparative amounts need not be adjusted anymore for the subsequent changes in the price level or exchange rates.
• When the economy ceases to be hyperinflationary, the entity uses as the historical costs for translation into the presentation currency the amounts restated to the price level at the date the entity ceased restating its financial statements.

Summary of Restatement Procedures under PAS 29

• Only non-monetary items not already stated at the measuring unit current as of end of reporting period are restated.
• Monetary items are not restated.
• Formula for restatement:
  • Historical cost × (current price index, Index as of end of reporting period ÷ Historical price index, Index as of acquisition date)
• The gain or loss on the net monetary position (also called 'purchasing power gain or loss') is recognized in profit or loss.
• The financial statements of the branch are restated in accordance with PAS 29 and translated in accordance with PAS 21 as follows.