05/01/2023 1

MY FOREIGN EXCHANGE REVISION KITIAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

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Hello Rocky Friend,

This is an important lesson in your advanced accounting class and should be enjoyed to the fullest, don’t you think so???

IAS 21The standard helps us with 2 issues, and I mean just 2.

• The issue with which exchange rate at all do you use? and the 2nd is• The issue with how you, my dear friend, would report the exchange difference in the

FS.

That’s all you need to know

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The 2 issues we talked about just now interestingly, also manifests in 2 ways.

Ils sont;

1. When the entity makes a foreign transaction, eg. Buying or selling items in foreign

currency, borrowing or paying debts owed in foreign currencies and

2. When the entity has a foreign operation, like a branch or subsidiary or associate,

etc.

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FOREIGN TRANSACTIONSMonetary Items eg.

Consumables, cash, bank, receivables, stock

Initial Recognition

Transaction Rate (spot rate then)

Subsequent Measurement

Closing Rate

Exchange difference goes to…………

P & L

Non-monetary Items eg. Fixed assets, long term loans

and debentures!

Initial Recognition

Transaction Rate (spot rate then)

Subsequent Measurement

Historical Rate If asset is revalued, use rate at revaluation date

No translation differences

But conversion differences upon payment in future

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Currency Translation and Currency Conversion.

How different are they????I’m glad you asked! Here you are Rocky,

Currency Conversion deals with taking cash (functional currency) and converting to foreign currency to make a payment (both monetary and the non……)

eg. what is done at the forex bureau is conversion!

Currency Translation. Here, there is no nonsense of forex bureau, just translating the balances (both monetary and non….) in our books to another currency!

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A quick test!Changing currency to make a payment is………………….. Converting a balance at year end

is………………………. (Check previous slide if still in limbo!)

And just to add up, there won’t be exchange differences in the translation of non-

monetary items because their initial measurement is the same as their subsequent

measurement!!! What did I say?….IM=SM for translation

But there would be exchange differences when there is conversion……………

And the exchange difference goes to wherever the gain or loss on the asset goes………if

P & L, so be it, if OCI, well, what can we say!

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Well done dear!

That’s all for the first manifestation, FOREIGN TRANSACTIONS.

The second is much simpler……………………

Take a deep breath and let’s try this one!

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FOREIGN OPERATIONSHere, the guiding principle on which rate to use is based on the relationship of head

office with branch, or parent with subsidiaries.

Foreign operation, branch or subsidiary, can be what I call, either a Mommy’s boy or a Daddy’s boy.

Mommy’s boy means son goes wherever mommy goes and is an integral part. Boy or son is an integral part, an extension of Mama. NB!!!

Aha! If he is Daddy’s boy, he is on his own, independent, autonomous, quasi-autonomous (exclusive for good fathers……..LOL!)

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DEPENDENT (in further detail)

Mommy’s boy means dependent, integral…..remember???

Mom, Head Office, wants to know everything about the son (branch) with details of birthdays, etc. so historic rates, average rates, closing rates, all are used here!

Exchange differences here are reported in P & L because it’s Mama, she has ready food and so difference can be posted to where we can all eat and have our bum share.

Don’t forget…………..food is always ready with Mommy.

Post exchange difference to P & L!!!!

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FINANCIAL STATEMENTS

Balance Sheet (SoFP)

1. Non-monetary items at historic, birthday rate

2. Monetary at closing rate

3. Exceptions..Head office current

account….adjusted to be equal to branch current

account

Income Statement

1. Average rate used for all items but there are

exceptions

2. Exceptions..Goods to branch adjusted..Depreciation is birthday

rate

..Inventory translation… opening inventory is

historic, closing is closing rate

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INDEPENDENT (digging deeper)

Daddy is just interested in what his son is doing and what he would become in future.

No details………..Just Net Investment

Dad is not concerned, no birthdate.

Here, we use only closing rates and average rates.

Yep! Only average rates and closing rates with independent or autonomous branches!

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FINANCIAL STATEMENTS

Balance Sheet (SoFP)

All items at closing rate

Monetary Items……YES

Non-Monetary Items……I said YES

ExceptHead office current

account to be adjusted

Income Statement

Whoever you are, we use the average rate

ExceptOnly the goods received

from Daddy (Head Office) to be adjusted

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There you are! The end of it!

This is the little I can give you.

You know the most annoying but yet important aspect of all these rates????

They are subject to the company’s policy………yep you heard me.

Management can decide what is done, which rate is to be used and for what. Watch out for that my sweet little rocky chubby friend.

Until we meet again, go into your groups and don’t stop punching. Thanks for stopping by!