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Learning Outcome:
to understand the principles and practices
of accounting for foreign currency
operations;
to understand the requirements of statues
and standards on accounting for foreign
currency operations;
to deal with the translation of transactions
and financial statements denominated in
foreign currencies;
to deal with the treatment of exchange
differences.
INTRODUCTION
MFRS 121 requires all entities to determine
their functional currencies and for financial
statements presented in Malaysia, the
presentation currency is Ringgit Malaysia
(RM).
FUNCTIONAL CURRENCY
Main factors (para 9):
a) The currency:
(i) that mainly influences sales prices for goods and
services (this will often be the currency in which
sales prices for its goods and services are
denominated and settled); and
(ii) of the country whose competitive forces and
regulations mainly determine the sales prices of its
goods and services.
FUNCTIONAL CURRENCY
If the above factors are mixed, an entity
may also consider following additional
supporting evidence (para 10):
The currency in which funds from
financing activities (i.e. issuing debt and
equity instruments) are generated.
The currency in which receipts from
operating activities are usually retained.
Initial Recognition
Foreign currency transactions
shall be recorded in the
functional currency, by
translating the foreign currency
amount at the spot exchange
rate (i.e. exchange rate at the
date of transaction).
Initial Recognition
Illustration 1:
On 15 January 2008, F&S Berhad bought equipment on
credit from Global Ltd., a Korean company, using US
currency amounted to USD50 million. The functional
currency is RM and F&S Berhad closes its accounts on 31
December.
The exchange rate on that date was USD1 = RM3.85
Journal entries:15/1/08
Dr. Equipment
RM192.5 m
Cr. Foreign Creditor
192.5 m
(USD50 m x RM3.85)
Reporting at subsequent
balance sheet dates
Translation at each balance sheet date:
foreign currency monetary items
- the closing rate;
non-monetary items that are measured in terms of
historical cost in a foreign currency
- the exchange rate at the date of the
transaction;
non-monetary items that are measured at fair value in a
foreign currency
- the exchange rates at the date when the fair
value was determined.
Example:
Assume that the creditor (Global Ltd) in illustration 1 had not
been paid as at 31 December 2008, and the exchange rate as
at 31 December 2008 was USD1 = RM3.75.
In this case, the creditor(in balance sheet) need to be adjusted
to reflected new exchange rate:
Dr Foreign Creditor
5,000,000
Cr Exchange gain
5,000,000
( to record exchange difference)
[192,500,000 -(USD50m x 3.75)]
Exchange differences
Exchange differences arising on the
settlement of monetary items or on
translating monetary items at rates
different from those at which they were
translated on initial recognition.
Shall be recognized in Statement of
Comprehensive Income in the period in
which they arise.
Illustration 2
XYZ Berhad carried out the following transactions related
to foreign currencies:
(a) Purchased goods from Shane Ltd on 15 May 2005
amounted to USD65,000 when the exchange rate
ruling was RM3.95 per unit of USD. The amount was
then settled on 15 July 2005, when the exchange rate
ruling was RM3.80.
(b) (Purchased machinery from Jariku Ltd amounted to 2
million Japanese Yen on 28 August 2005, when the
exchange rate ruling was RM36.50 for every 100 Yen.
The settlement was then made on 1 October 2005
when the exchange rate was at RM36.75 per 100 unit
of JYen.
The exchange rate ruling on 31 December 2005 were:
RM3.87 for every unit of USD
RM36.20 for every 100 units of Jyen
The exchange difference & journal entries?
SOLUTION:
(a)
Date
USD
Rate (RM)
RM
15/5/05
65,000
3.95
256,750
15/7/05
65,000
3.80
247,000
Exchange gain
9,750
15/5/05 Dr Inventory
Cr Ac payable
256,750
15/7/05 Dr Ac payable
Cr Cash
Exchange gain
256,750
256,750
247,000
9,750
(b)
Date
Yen
Rate (RM)
RM
28/8/05
2,000,000
36.50
730,000
1/10/05
2,000,000
36.75
735,000
Exchange loss
28/8/05
1/10/05
5,000
Dr Machinery
Cr Ac payable
730,000
Dr Ac payable
Dr Exchange loss
Cr Cash
730,000
5,000
730,000
735,000
TRANSLATION OF
FINANCIAL STATEMENTS
Problem occurs when presentation
currency is not the same as its
functional currency; or
presentation currency of the
subsidiary is not the same as the
parent company.
TRANSLATION OF
FINANCIAL STATEMENTS..
(cont)
Translation rate (MFRS 121):
Assets and liabilities - closing rate;
Income and expenses items - exchange
rates on the dates of transactions
(for practical reasons, the average rate
will be used)
All resulting translation differences are to be
taken directly to equity in the balance sheet,
until the disposal of the net investment.
TRANSLATION OF
FINANCIAL STATEMENTS.. (cont)
The translation difference may be calculated
using the following formula:
For assets and liabilities:
Beginning net asset (current years closing rate prior years closing rate)
For income statements:
Retained profit for the year (current years closing rate current years average rate)
Illustration 3:
(Example 10.12, TLT page 670)
Translation of financial
statement of foreign subsidiaries
and associates
When the presentation currencies of
the subsidiary and the associate are
not same with the parent, the parent
needs to:
translate the financial statements
of the foreign subsidiary and associate
in accordance with MFRS 121; and
consolidate the financial statements in
accordance with MFRS 127
Consolidated and Separate Financial
Statement and MFRS 128 Investment in
Associates.
Translation of financial
statement of foreign subsidiary
and associate
In preparing the consolidated financial
statements, two issues need to be
considered:
1. Share capital and pre-acquisition reserve
Translated using the historical exchange
rate prevailing at the date when the parent
acquired the shareholdings
goodwill arising from the acquisitiontranslate using closing rate
2. Post-acquisition reserve
Illustration 4
(Example 10.14, TLT page 675)
DISCLOSURE
REQUIREMENT
Information that needs to be disclosed,
please refer to;
Paragraph 52
Paragraph 53
Paragraph 54
SUMMARY
The standard requires that all entities
involved in business transactions with
foreign operations should record the
transactions in their functional currency.
However, if the functional currency is not
the same as the presentation currency, the
financial statements of the foreign
operations should be translated into the
presentation currency.