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Lucubrate Magazine, Issue 41, October 5th, 2018

Consider that once a day goes by, the exchange rate for that day, yesterday, is fixed in time and will never change.

  • Accounting Series – article No: 22
  • Accounting Theory – Advanced Part 12

By Peter Welch, Georgia, CEO GlobalCfo.LLC.


How does the IASB introduce the IAS 21 statement:

  1. An entity may carry on foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. In addition, an entity may present its financial statements in a foreign currency. The objective of this Standard is 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.

  2. The principal issues are which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements.


Thus far, we have addressed accounting standards that for the most part relative to the material in these articles are pretty straightforward with the minimal complexity. IAS 21 is really the first standard we have addressed that is especially complex. To apply IAS 21 requires multiple worksheets and in-depth analysis of the financial statements. That analysis combined with classifications discussed below provides the information necessary to apply IAS 21 i.e. foreign exchange rates.

All Foreign Exchange Rates are Driven by Many Factors

Is the Framework, (faithful representation, transparency, and comparability) still the bricks and mortar when it comes to foreign exchange, for a slight deviation appears when it comes to comparability! To understand this you need to realize that foreign exchange rates fluctuate continuously throughout every day if not every minute or less, just watch the charts. When an entity deals with foreign currencies they are required, based upon whether they are dealing with monetary or nonmonetary classifications, in addition to revenue and expenses (transactions) to select the appropriate foreign exchange rate in accordance with IAS 21. All foreign exchange rates are driven by many factors including politics, economics, interest rates and frequently simply by emotions on the part of market participants and all embedded within forward-rate expectations. The use of derivatives, for example, six-month forward rate contracts are commonly used to hedge against adverse rates changes. These derivatives are all based on directional expected changes, in other words, will the foreign exchange (FX) rate increase or decrease. Depending upon your position, either buying or selling, and the nature of the transaction, either directional movement could be very favorable. The FX market terms of today’s rate as ‘Spot’ and future market expectations as forwarding rates. Though the use of averages can help to offset aberrations in the market when compared on a year-to-year basis external factors, vis-à-vis exchange rates can make a material difference. Consider that once a day goes by, the exchange rate for that day, yesterday, is fixed in time and will never change.

Photo: Pixaby

As you review this chart you will realize that comparability will be impacted by rates once locked into the system, i.e. closing rate.

Courtesy of IFRSbox

For all monetary items in foreign currency – use closing exchange rate at the reporting date;

For all non-monetary items in foreign currency carried at historical cost – use the historical exchange rate (at the date of transaction);

For all non-monetary items in foreign currency carried at fair value – use the exchange rate at the date when fair value was determined.

Courtesy of IFRSbox

As you can begin to appreciate, this article which highlights the main attributes of IAS 21, reflects the detailed complexity and the level of documentation required to ensure compliance. It doesn’t take much to realize in an entity that deals with multi-functional currencies IAS 21 has very onerous requirements including preparation of Cash Flow statements, IAS 7. Documentation and worksheets (and/or software/Bank downloads) complying with IAS 21 requires a great deal of pre-preparation detailing for each and every line item within the financial statements the FX rate/source required.

Let’s now consider all monetary and nonmonetary classifications under IAS 21:

Courtesy of IFRSbox

These additional notes, courtesy of IFRSbox, reflect additional complexities within IAS 21. As noted it is not apparently always clear cut what is the classification of monetary versus nonmonetary applies. Within the IASB, it is apparent that ambiguities can arise when dealing with how to apply a complex statement like IAS 21. It should be noted that these supplemental notes have been included to indicate that certain line items require further investigation as to their nature and characteristics. Relative to the nature of this article these notes are informational, not complete, indicating further research.

“Advances paid or received: You need to assess the character and substance of every advance paid or received carefully because some advances can be monetary and some of them can be non-monetary.”

“Deferred taxation: Currently, this is a little bit unclear in the standards. The standard IAS 12 Income Taxes indirectly indicates that the deferred tax assets and liabilities are monetary items.”


Investments in preference shares: Investments in preference shares are another item that requires our careful judgment. More specifically, you should assess the rights attaching to the shares. In fact, both IAS 39 and IFRS 9 say that investments in equity instruments are non-monetary items.

Share capital in a foreign currency: Some companies issue their share capital in a foreign currency. However, neither IAS 21 nor IFRS 9/IAS 39 specify whether the share capital in a foreign currency is the monetary or non-monetary item and how to treat the difference.

Courtesy of IFRSbox


Let us now address the concept of functional currency and presentation currency:

  • Definition: Presentation currency
  • The currency in which the financial statements of an entity are presented. Definition: Functional currency
  • The currency of the primary economic environment in which an entity operates.
  • Definition: Foreign currency
  • A currency other than the functional currency of the entity.

Photo: Pixaby

Courtesy Emile Woolf Essential IFRS Guide 2018

Finally is there a ‘check-list’ that contributes towards identifying presentation vs functional currency (and don’t forget documentation)?

  • The currency of your sales; (IAS 21)
  • The currency of your cost of sales and other expenses (IAS 21),

And/or consider

  • Funding
  • Cash flows
  • Group considerations (degree of autonomy)

From IFRSbox




Do you have a comment or do you want to give your feedback on this article? Do you want to write letters to the editor? Please use the link https://lucu.nkb.no/feedback/


Lucubrate Magazine, Issue 41, October 5th, 2018

(Illustration on top: Pixaby)

(Categories: Accounting, Magazine)

Photo: Pixabay


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Peter Welch
Peter Welch

GlobalCfo.LLC is an expert at developing entrepreneurs and building 3-5 year business plans and cash flow projections as a prerequisite for accessing financing sources. GlobalCfo.LLC targets accounting standards compliance and theory, sound infrastructure /process mapping and COSO 2013-17/solid internal controls, ERM, and last but not least documentation /Policy and Procedures and other manuals. Additionally, interim CFO services (or Rent-a-CFO by the hour/day) are offered locally or remotely as well as training at all levels and all functions, not just accounting; e.g., management and leadership skills. Pre/Post-M&A is also offered.

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