|
Summary of the overall approach
Entity level
Management should determine the functional currency
of the entity based on the requirements of IAS 21R
. An entity does not have a free choice
of functional currency [IAS21R.IN8]. All currencies
other than the functional currency are treated as
foreign currencies [IAS21R.8].
An entity's management may choose a currency different
from its functional currency in which to present
the financial statements, the presentation currency
[IAS21R.38].
Group level
Different entities within a multi-national group
will often have different functional currencies.
The functional currency is identified at entity
level for each group entity [IAS21R.17]. Each group
entity translates its results and financial position
into the presentation currency of the reporting
entity [IAS21R.18].
Normal consolidation procedures are followed for
the preparation of the consolidated financial statements
once all the consolidated entities have prepared
their financial information in the appropriate presentation
currency .
Identification of the functional currency
The functional currency is the currency of the primary
economic environment in which the entity operates
[IAS21R.8]. The primary economic environment in which
an entity operates is normally the one in which it
primarily generates and expends cash. An entity's
management considers the following factors in determining
its functional currency [IAS21R.9]:
| a) |
The currency that dominates the determination
of the sales prices; and |
|
| b) |
The currency that most influences operating
costs. |
The currency that dominates the determination of
sales prices will normally be the currency in which
the sales prices for goods and services are denominated
and settled. It will also normally be the currency
of the country whose competitive forces and regulations
have the greatest impact on sales prices. The currency
that most influences operating costs will often
be the currency in which such costs are denominated
and settled. The emphasis is, however, on the currency
of the economy that determines the pricing of transactions,
as opposed to the currency in which transactions
are denominated, if these are different [IAS21R.IN7]
[IAS21R.9].
Factors other than the dominant currency for sales
prices and operating costs are also considered when
identifying the functional currency. The currency
in which an entity's finances are denominated are
also considered [IAS21R.10]. The focus is on the
currency in which funds from financing activities
are generated and the currency in which receipts
from operating activities are retained. Financing
activities include issuing debt and equity instruments.
Additional factors are considered in determining
the functional currency of a foreign operation and
whether its functional currency is the same as that
of the reporting entity. These include considerations
of the autonomy of a foreign operation from the
reporting entity and the level of transactions between
the two. Consideration is also given to whether
the foreign operation generates sufficient cash
flows to meet its cash needs and whether the cash
flows of the foreign operation directly affect those
of the reporting entity [IAS21R.11].
When the above indicators are mixed and the functional
currency is not obvious management uses its judgement
to determine the functional currency that most faithfully
represents the economic effects of the underlying
transactions, events and conditions. Management
gives priority to the currency most affecting sales
prices and operating costs before considering the
currency most relevant to the financing of an entity
and the degree of autonomy and independence. The
latter factors are designed to provide additional
supporting evidence in determining an entity's functional
currency [IAS21R.12]
.
Change in functional currency
An entity's functional currency reflects the underlying
transactions, events and conditions that are relevant
to it. Accordingly, once determined, the functional
currency does not change unless there is a change
in those underlying transactions, events and conditions
[IAS21R.13] [IAS21R.36]
The effect of change in functional currency is
accounted for prospectively [IAS21R.37].
Presentation currency
An entity may present its financial statements in any
currency (or currencies) [IAS21R.38]
. IAS 21R prescribes a specific
methodology for translating from the functional
currency to the presentation currency, where the
functional currency is not hyperinflationary [IAS21R.39]:
| a) |
Assets and liabilities are translated at
the closing rate at each balance sheet date
for each period presented; |
|
| b) |
Income and expenses are translated
at the exchange rates existing at the dates
of the transactions. The average rates may be
used if the exchange rate does not fluctuate
significantly [IAS21R.40]; and |
|
| c) |
All resulting exchange differences
are recognised as a separate component in equity.
|
An entity whose functional currency is the currency
of a hyperinflationary economy restates its financial
information in accordance with IAS 29 . The following procedures are followed
for the translation of the financial information
from the functional currency to the presentation
currency:
| a) |
Assets, liabilities, income and expenses
are translated at the closing rate at the current
balance sheet date; |
|
| b) |
When the presentation currency
is non-hyperinflationary, comparative amounts
shall be those that were presented as current
year amounts in the relevant prior year financial
statements; and |
|
| c) |
When the presentation currency
is hyperinflationary, comparative amounts are
translated at the closing rate at the date of
the current balance sheet date. |
Disclosure
An entity shall disclose the following:
| a) |
The amount of exchange differences recognised
in profit or loss except for those arising on
financial instruments measured at fair value
through profit or loss in accordance with IAS
39 [IAS21R.52(a)]; and |
|
| b) |
The net exchange differences
classified in a separate component of equity,
and a reconciliation of the amount of such exchange
differences at the beginning and end of the
period [IAS21R.52(b)]; |
|
| 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 [IAS21R.53]
; |
|
| 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 [IAS21R.54]. |
The following additional disclosures are required
when an entity displays certain supplementary financial
information in a currency that is different from
the presentation currency, and that information
is not translated in accordance with the standard
(for example a 'convenience translation' of certain
balance sheet and income statement items into a
different currency than the presentation currency)
[IAS21R.57]:
| a) |
This information is clearly identified
as supplementary information (to distinguish
it from information prepared in accordance with
IFRS); |
|
| b) |
The currency in which the supplementary
information is presented; and |
|
| c) |
The entity's functional currency
and the method of translation used to determine
the supplementary information. |
|
