LKAS 21 Summary

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Objective of LKAS 21 To prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency. Key Definitions 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. Foreign Currency: A currency other than the functional currency of the entity. Exchange Difference: The difference resulting from translating a given number of units of one currency into another currency at different exchange rates. Foreign Operation: An entity that is a subsidiary, associate, joint venture, or branch of a reporting entity, the activities of which are based or conducted in a country other than that of the reporting entity. Functional Currency Determination The primary indicators for determining an entity's functional currency include: The currency that mainly influences sales prices for goods and services. The currency of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services. The currency that mainly influences labor, material, and other costs of providing goods or services. Secondary indicators include: The currency in which funds from financing activities are generated. The currency in which receipts from operating activities are usually retained. Foreign Currency Transactions Initial Recognition A foreign currency transaction (e.g., purchasing or selling goods whose price is denominated in a foreign currency) shall be recorded at the spot exchange rate at the date of the transaction. Reporting at Subsequent Balance Sheet Dates Monetary Items: Translated using the closing rate. Non-monetary Items at Historical Cost: Translated using the exchange rate at the date of the transaction. Non-monetary Items at Fair Value: Translated using the exchange rate at the date when the fair value was measured. Recognition of Exchange Differences Exchange differences arising on the settlement or translation of monetary items are recognized in profit or loss in the period in which they arise. An exception exists for monetary items that form part of a net investment in a foreign operation – these are recognized in other comprehensive income (OCI) and reclassified to profit or loss on disposal of the net investment. Exchange differences arising on non-monetary items measured at fair value are recognized in profit or loss or OCI consistent with the recognition of the gain or loss on the item itself. Translation of Foreign Operations The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy are translated into a different presentation currency using the following procedures: Assets and Liabilities: For each statement of financial position presented, all assets and liabilities (including goodwill and fair value adjustments arising on acquisition) are translated at the closing rate at the date of that statement of financial position. Income and Expenses: For each statement of comprehensive income, income and expenses are translated at exchange rates at the dates of the transactions. For practical reasons, average rates are often used for income and expenses, provided there are no significant fluctuations. Exchange Differences: All resulting exchange differences are recognized in other comprehensive income (OCI) and accumulated in a separate component of equity (currency translation reserve). Translation of a Foreign Operation in a Hyperinflationary Economy Financial statements of an entity whose functional currency is the currency of a hyperinflationary economy must first be restated in accordance with LKAS 29 Financial Reporting in Hyperinflationary Economies . Then, all amounts (assets, liabilities, equity items, and income/expenses) are translated at the closing rate of the most recent statement of financial position. Disposal of a Foreign Operation On the disposal of a foreign operation, the cumulative amount of the exchange differences deferred in OCI relating to that foreign operation must be reclassified from equity to profit or loss as a reclassification adjustment. A partial disposal is accounted for proportionately. Disclosure Requirements The amount of exchange differences recognized in profit or loss. Net exchange differences recognized in OCI and accumulated in a separate component of equity, and a reconciliation of the amount of such exchange differences at the beginning and end of the period. When the presentation currency is different from the functional currency, state that fact together with the functional currency and the reason for using a different presentation currency. When there is a change in the functional currency of either the reporting entity or a significant foreign operation, disclose that fact and the reason for the change.