Financial Accounting Financial Reporting FR

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 21
Spread the love

IAS 21 sets out the accounting requirements for the effects of changes in foreign exchange rates. The standard provides guidance on how to account for transactions and balances that are denominated in a foreign currency, as well as how to translate the financial statements of foreign operations. Here are some cases to illustrate the application of IAS 21:

Case 1: Company A is a U.S.-based company that imports goods from China and pays for them in Chinese yuan. At the end of the reporting period, the exchange rate has changed, and the U.S. dollar has appreciated against the yuan. How should Company A account for the foreign exchange gain or loss?

According to IAS 21, foreign exchange gains and losses should be recognized in profit or loss, unless they relate to a qualifying asset or liability. In this case, Company A has a liability denominated in a foreign currency (the amount owed to the Chinese supplier in yuan), so it should recognize a foreign exchange loss in profit or loss.

Case 2: Company B is a U.K.-based company that has a subsidiary in France. At the end of the reporting period, the exchange rate has changed, and the euro has appreciated against the pound. How should Company B translate the financial statements of its French subsidiary?

IAS 21 requires that the financial statements of a foreign operation be translated into the reporting currency of the parent company using the functional currency method. This involves determining the functional currency of the foreign operation, which is the currency of the primary economic environment in which the entity operates. In this case, if the functional currency of the French subsidiary is the euro, then its financial statements should be translated into pounds using the exchange rate at the end of the reporting period.

Case 3: Company C is a Canadian company that has a U.S. dollar-denominated loan. At the end of the reporting period, the exchange rate has changed, and the Canadian dollar has appreciated against the U.S. dollar. How should Company C account for the foreign exchange gain or loss?

If the U.S. dollar-denominated loan is a liability, then Company C should recognize a foreign exchange gain in profit or loss, as the appreciation of the Canadian dollar reduces the amount of Canadian dollars that Company C will need to repay the loan. However, if the loan is a qualifying asset (i.e., it is held for the purpose of financing the acquisition of a qualifying asset, such as property, plant, and equipment), then the foreign exchange gain or loss should be recognized in other comprehensive income, rather than in profit or loss.

Leave a Reply

Your email address will not be published. Required fields are marked *