11 Foreign currency transactions and entities 周冬华 Chapter 16

CopyRight 2013 By 周冬华 博士 CPA Topic list  Foreign currency translation  IAS 21 Individual company stage  IAS 21 consolidated financial statements stage

CopyRight 2013 By 周冬华 博士 CPA Foreign currency translation  Fast forward  Questions on foreign currency translation have always been popular with examiners. In general, you are required to prepare consolidated accounts for a group which includes a foreign subsidiary.

CopyRight 2013 By 周冬华 博士 CPA Two distinct types of foreign currency transaction  Conversion ： Conversion is the process of exchanging amounts of one foreign currency for another. Profit （ or loss ） on conversion would be included in profit or loss for the year in which conversion （ whether payment or receipt ） takes place.  Translation ： Foreign currency translation, as distinct from conversion, does not involve the act of exchanging one currency for another. Translation is required at the end of an accounting period when a company still holds assets or liabilities in its statement of financial position which were obtained or incurred in a foreign currency.

CopyRight 2013 By 周冬华 博士 CPA Example of Conversion  A foreign company sells goods to a Chinese company, and it is agreed that payment should be made in Chinese Yuan at a price of Y116,000. At the time of sale is Y10.75 to $1, but when the debt is eventually paid, the rate has altered to Y10.8 to $1.  The company would record the sale as follows. Dr Receivables account （ 116,000 / ） $10,800 Cr Sales account $10,800 When the Y116,000 are paid, Dr Cash （ 116,000 / ） $10,750 Dr Loss on conversion $50 Cr Payables account $10,800  Example on page 394

CopyRight 2013 By 周冬华 博士 CPA Example of Translation  Page 395

CopyRight 2013 By 周冬华 博士 CPA Consolidated accounts  The translation rules will depend on which currency has most impact on the subsidiary.  If this is the same as the parent’s currency, the rules will follow those used in the financial statements of a single company.  Where a foreign operation is mainly exposed to a different currency and is effectively a separate business, the colsing rate is used for most items in the statement of financial position. Exchange differences are recognized in other comprehensive income.

CopyRight 2013 By 周冬华 博士 CPA IAS 21 Individual company stage  Definitions( page 396)  Foreign currency: a currency other than the functional currency to the entity.  Functional currency: the currency of the primary economic environment in which the entity operates  Presentation currency: the currency in which the financial statements are presented  For individual company Each entity should determine its functional currency and measure its results and financial position in that currency.

CopyRight 2013 By 周冬华 博士 CPA Reporting at subsequent year ends  P397  Example on page 397

CopyRight 2013 By 周冬华 博士 CPA IAS 21 consolidated financial statements stage  Foreign operation: a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity.  Net investment in a foreign operation: the amount of the reporting entity’s interest in the net assets of that operation.  Determining functional currency on page 399.

CopyRight 2013 By 周冬华 博士 CPA Accounting treatment: different functional currency from the reporting entity  Different procedures must be followed here, because the functional currency of the parent is the presentation currency of the foreign operation.  （ i ） The assets and liabilities shown in the foreign operation’s statement of financial position are translated at the closing rate at the year end, regardless of the date on which the items originated. The balancing figure in the translated statement of financial position represents the reporting entity’s net investment in the foreign operation.  （ ii ） Amounts in the statement of comprehensive income should be translated at the rate ruling at the date of the transaction （ an average rate will usually be used for practical purposes ）.

CopyRight 2013 By 周冬华 博士 CPA  （ iii ） Exchange differences arising from the re-translation at the end of each year of the parent’s net investment should be recognized in other comprehensive income, not through the profit or loss for the year, until the disposal of the net investment. On disposal, the gains or losses recognized to date will be reclassified to profit or loss.

CopyRight 2013 By 周冬华 博士 CPA  The exchange difference consists of those exchange gains/losses arising from: （ i ） Translating income/expense items at the exchange rates at the date of transactions, whereas assets/liabilities are translated at the closing rate. （ ii ） Translating the opening net investment （ opening net assets ） in the foreign entity at a closing rate different from the closing rate at which it was previously reported.  Example on page 400