LKAS 21THE EFFECTS OF CHANGES IN

FORIGN EXCHANGE RATE

ASSIGNMENT II

DEPARTMENT OF ACCOUNTINGFACULTY OF MANAGEMENT STUDIES & COM-

MERCEUNIVERSITY OF JAFFNA

ADVANCED FINANCIAL ACCOUNTING 

ACC-3132

Miss. NIRUJA RAJAKULANA-JAGAM

Reg.No-2010BAD025Index No-BAD10025

 

CONTENTS

Objective Scope Definitions Reporting foreign currency transactions in the functional currency Reporting at the ends of subsequent reporting peri-ods Recognition of exchange differences Change in functional currency Disclosure Example questions

OBJECTFIVE

THE OBJECTIVE OF THIS STANDARD IS TO PRESCRIBE HOW TO INCLUDE FOREIGN CURRENCY TRANSACTION

AND FORIEN OPERATION IN THE FINANCIAL STATEMENTS OF AN ENTITY AND HOW TO TRANSLATE

FINANCIAL STATEMENT INTO A PRESENTING CURRENCY

SCOPE

THIS STANDARD SHALL BE APPLIED, IN ACCOUNTING FOR TRANSACTION AND BALANCES IN FORIGN CURREN-CIES, EXCEPT FOR THOSE DERIVATIVE TRANSCATION AND BALANCES THAT ARE WITHIN THE SCOPE OF LKAS 39.

IN TRANSLATING THE RESULT AND FINANCIAL POSITION OF FOREIGN OPERA-TION THAT ARE INCLUDED IN THE FINANCIAL STATEMENT OF ENTITY BY CON-SOLIDATION, PROPOTIONATE CONSOLIDATION OR THE EQUITY METHOD.

IN TRANSLATING ENTITY’S RESULT AND FINANCIAL POSITION INTO A PRESENTATION CURRENCY.

DEFFINITIONS

CLOSING RATE

CLOSING RATE IS THE SPOT EXCHANGE RATE AT THE END OF THE REPORTING PERIOD

EXCHANGE DIFFERENCE

EXCHANGE DIFFERENCE IS THE DIFFERENCE RESULT-ING FROM TRANSLATING A

GIVEN NUMBER OF UNITS OF ONE CURRENCY INTO ANOTHER CURRENCY AT DIFFERENCE

EXCHANGE RATE

EXCHANGE RATES

EXCHANGE RATE IS THE RATIO OF EXCHANGE

FOR TWO CURRENCIES

FAIR VALUE

FAIR VALUE IS THE AMOUNT FOR WHICH AN

ASSET COULD BE EXCHANGED,

OR A LIABILITY BETWEEN KNOWLADGEBLE, WILLING

PARTIES IN AN ARM’S LENGTH TRANSACTION

FOREIGN CURRENCY

FOREIGN CURRENCY IS A CURRENCY OTHER THAN THE FUNCTIONAL CUR-

RENCY OF THE ENTITY

FUNCTIONAL CURRENCY

FUNCTIONAL CURRENCY IS THE CURRENCY OF THE

PRIMARY ECONOMIC ENVIRONMENT IN WHICH

THE ENTITY OPERATES

MONETARY ITEMS

MONETARY ITEMS ARE UNITS OF CURRENCY HELD AND

ASSETS & LIABILITIES TO BE RECEIVED OR PAID IN A

FIXED OR DETERMINABLE NUMBER

OF UNITS OF A CURRENCY

PRESENTATION CUR-RENCY

IT IS THE CURRENCY IN WHICH THE FINANCIAL STATEMENTS ARE PRE-

SENTED

SPOT EXCHANGE

SPOT EXCHANGE RATE IS THE EXCHANGE RATE FOR

IMMEDIATE DELIVERY

Reporting foreign currency transactions in the

functional currency

A foreign currency transaction shall be recorded, on

initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency

and the foreigncurrency at the date of the transaction.

Reporting at the ends of subse-quent reporting periods

At the end of each reporting period:(a) foreign currency monetary items shall be translated using theclosing rate;(b) non-monetary items that are measured in terms of historicalcost in a foreign currency shall be translated using theexchange rate at the date of the transaction; and(c) non-monetary items that are measured at fair value in aforeign currency shall be translated using the exchange ratesat the date when the fair value was determined.

Recognition of exchange differ-ences

Exchange differences arising on the settlement of monetary

items or on translating monetary items at rates dif-ferent

from those at which they were translated on initial recognition during the period or in previous financial

statements shall be recognised in profit or loss in the period in which

they arise.

Change in functional currency

When there is a change in an en-tity’s

functional currency, the entity shall

apply the translation procedures applicable to the newfunctional currency prospectively

from the date of the change.

DisclosureAn entity shall disclose:(a)the amount of exchange differences recognized in profit or loss except for

those arising on financial instruments measured at fair value through profit or loss in accordance with LKAS 39;

(b) net exchange differences recognized in other comprehensive income 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.

(C) When the presentation currency is different from the functional currency, that fact shall be stated, together with disclosure of the functional currency and the reason for using a different presentation currency.

(D) When there is a change in the functional currency of either the reporting entity or a significant foreign operation, that fact and the reason for the change in functional currency shall be disclosed.

(E) When an entity presents its financial statements in a currency that is dif-ferent from its functional currency, it shall describe the financial statements as complying with SLFRSs only if they comply with all the requirements of SL-FRSs

Example

On 31st December, 2012 the following balances appeared in the books of Chennai Branch of an English firm having its HO office in New York:

Amount in ‘ ’ र Amount in ‘ ’ रStock on 1st Jan., 2012 2,34,000Purchases and Sales 15,62,500 23,43,750Debtors and Creditors 7,65,000 5,10,000Bills Receivable and Payable 2,04,000 1,78,500Salaries and Wages 1,00,000 -Rent, Rates and Taxes 1,06,250 -Furniture 91,000 -Bank A/c 5,68,650New York Account - 5,99,150

36,31,400 36,31,400Stock on 31st December, 2012 was र 6,37,500.Branch account in New York books showed a debit balance of $ 13,400 on 31st December,2012 and Furniture appeared in the Head Office books at $ 1,750.The rate of exchange for 1 $ on 31st December, 2011 was र ` 52 and on 31st December, 2012 was र ` 51. The average rate for the year was र ` 50.Prepare in the Head Office books the Profit and Loss a/c and the Balance Sheet of the Branch.

Solution

Calculation of Exchange Translation LossChennai Branch Trial Balance (converted in $) as on 31st December, 2012

Dr. र Cr. र Conver-sion Rate

Dr($). Cr. ($)

Stock on 1st Jan., 2012 234000 52 4500

Purchases & Sales 1562500

2343750 50 31250 46875

Debtors & creditors 765000 510000 51 15000 10000

Receivable and Payable 204000 178500 51 4000 3500

Salaries and wages 100000 50 2000

Rent, Rates and Taxes 106250 50 2125

Furniture 91000 1750

Bank A/c 568650 51 11150

New York Account 599150 13400

Exchange translation loss

2000

3631400

3631400 73775 73775

In the books of English Firm (Head Office in New York)Chennai Branch Profit and Loss Accountfor the year ended 31st December, 2012

$ $

Opening stock 4500 Sales 46875

Purchases 31250

Closing stock (12500)

Gross profit c/d 23625

46875 59375

Salaries 2000 Gross profit b/d 23625

Rent, rates and tax 2125

Exchange translation loss

2000

Net Profit c/d 17500

23625 23625

Balance Sheet of Chennai Branchas on 31st December, 2012

Liabilities $ $ Assets $

Head Office A/c 13400

Furniture 1,750 1750

Add : Net profit 17500

30900

Closing Stock 12500

Trade creditors 10000

Trade Debtors 15000

Bills Payable 3500 Bills Receivable 4000

Cash at bank 11150

44400

44400