IAS 21 – The Effected of Changes in Foreign Exchange Rates
Objective: To prescribe the accounting treatment for an entity who have foreign currency transaction and foreign operations.
Entity that have foreign currency transaction:
First determine reporting entity functional currency and then translate all foreign currency items into the functional currency.
1) Use valuation date exchange rates for non monetary items carried at fair value.
2) Use balance sheet closing rate for monetary items.
3) The exchange differences when recognized are included in net profit or loss.
Entity whose functional currency is not the currency of the economy foreign operation:
The result and financial position of an entity whose functional currency is not the currency of the economy and translated into different presentation currency.
1) Assets and liabilities for each balance sheet presented are translated at closing rate at the date of the balance sheet.
2) Income and expenses for each income statement are translated at exchange rate at the date of the transaction.
3) All resulting exchange differences are recognized as separate component of equity.
4) The exchange differences are recognized in the consolidated financial statements that include the foreign operation in separate component of equity.
The Differences and Similarities between US GAAP Law and IFRS
Similarities
IFRS | US Law GAAP | |
An entity measures its assets, liabilities, revenues and expenses in its functional currency, which is the currency of the primary economic environment in which it operates. | Like IFRS an entity measures its assets, liabilities, revenues and expenses in its functional currency, which is the currency of the primary economic environment in which it operates. | Functional currency |
An entity may present its financial statements in a currency other than its functional currency. An entity may have more than one presentation currency. | Like IFRS an entity may present its financial statements in a currency other than its functional currency. Unlike IFRS an entity may an entity may not have more than one reporting currency. | Presentation currency |
All transaction that are not denominated in an entity functional currency are foreign currency transaction, exchange differences arising from foreign currency transaction generally are recognized in profit or loss. | Like IFRS all transaction that are not denominated in an entity functional currency are foreign currency transaction, exchange differences arising from foreign currency transaction generally are recognized in profit or loss. | foreign currency transaction |
The financial statement of foreign operation are translated as follow: 1) Assets and liabilities at the closing rate. 2) Revenues and expenses at actual rates or appropriate averages. 3) Equity components at historic rates. IFRS | Like IFRS The financial statement of foreign operation are translated as follow: 1) Assets and liabilities at the closing rate. 2) Revenues and expenses at actual rates or appropriate averages. 3) Equity components at historic rates. US GAAP | Financial statement of foreign operation |
When an investment in a foreign operation is disposed of, the cumulative exchange differences recognized previously directly in equity are recognized in profit or loss. | Like IFRS when an investment in a foreign operation is disposed of, the cumulative exchange differences recognized previously directly in equity are recognized in profit or loss. | Investment in foreign operation |
When financial statements are translated into a presentation currency other than the entity's functional currency, the entity uses the same method as for translating the financial statements of foreign operation. | Like IFRS when financial statements are translated into a presentation currency other than the entity's functional currency, the entity uses the same method as for translating the financial statements of foreign operation. | Translation of financial statement. Like translation of Financial statement of foreign operation |
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