Wiley IFRS: Practical Implementation Guide and Workbook, 3rd Edition

Chapter 15

THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES (IAS 21 )

OBJECTIVES

The purpose of IAS 21 is to set out how to account for transactions in foreign currencies and foreign operations. The Standard also shows how to translate financial statements into a presentation currency. The presentation currency is the currency in which the financial statements are presented. The Standard permits an entity to present its financial statements in any currency (or currencies). The key issues are the exchange rate(s) that should be used and where the effects of changes in exchange rates are reported in the financial statements.

DEFINITIONS OF KEY TERMS

(in accordance with IAS 21)

 

Exchange difference. The difference resulting from translating a given number of units of one currency into another currency at different exchange rates.

Foreign operation. A subsidiary, associate, joint venture, or branch whose activities are based or conducted in a country or currency other than those of the reporting entity.

Functional currency. The currency of the primary economic environment in which the entity operates.

Closing rate. The spot exchange rate at the end of the reporting period.

Spot rate. The exchange rate for immediate delivery.

Presentation currency. The currency that is used to present the financial statements.

FUNCTIONAL CURRENCY

The functional currency should be determined by looking at several factors. This currency should be the one in which the entity normally generates ...