10. Foreign currency
What is the problem with foreign currency?
Currencies continuously fluctuated and sometimes with extreme values. As a company you are very much exposed to this risks.
Translating the financial statements of foreign operations that are included with those of the reporting entity by (2)
1. consolidation
2. applying the equity method
Definition of functional currency
currency of the primary economic environment in which the entity operates.
Foreign currency is a currency other than the functional currency of the entity. What do you need to do?
translate all the foreign currencies to the functional currency of the company.
Definition of presenetation currency
currency in which the financial statements are presented
Definition of spot exchange rate
Spot exchange rate is the rate for immediate delivery.
Definition of closing rate:
the rate at the balance sheet date. You use the closing date of the day that you are preparing the balance sheet.
Inititial measurement for transactions in foreign currency (3)
the transaction is translated into (1) the functional currency at (2) the spot rate ruling (3) at the date of the transaction
Measurement at the BS date of Monetary items:
at the closing rate
Measurement at the balance sheet date of Non-monetary items measured at historical cost
at the exchange rate ruling at the date of the transaction
Measurement at the balance sheet date of Non-monetary items measured at fair value
at the exchange rate ruling at the date of the valuation.
Treatment of exchange differences are included in ... for the period.
income
Translating foreign operations (3)
1. Determine the appropriate functional currency
2. Draw up financial statement in that currency and then translate it into the presentation currency
3. Exchange differences are taken to equity
When determining the functional currency of a foreign subsidiary consideration must be given as to whether the subsidiary is action as (2)
(1) an intermediary for the parent’s activities or
(2) as a free-standing unit
IAS 21 provides the following indicative factors to consider in determine the functional currency:
1. Currency in which the entity generates cash
2. Currency funding / financing is generating in
3. Currency in which operating receipts are retained
4. The relationship and transactions with the parent
Identifying the functional currency:
judgement is required to determine which most faithfully represents the economic effects of the underlying transactions and events
Translation of financial statements – there are two possible translations required under IAS 21 (2)
1. From the local to the functional currency
2. From the functional to the presentation currency
Note: a group does not have a ... currency
functional
The translation form local to functional currency is typically done by 1. ..., but if not, these have to be performed by 2.... The translation form functional currency to presentation currency is typically done by 3....
1. subsidiary
2. parent
3. parent
Hyperinflation: a state where inflation has reached such levels that:
1. The local currency is no longer usefull
2. The general population prefers no local currency
3. Cum. inflation over past 3 years >100%
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