About

An entity may carry on foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. IAS 21 prescribes how an entity should:

  • account for  foreign currency transactions; 
  • translate financial statements of a foreign operation into the entity’s functional currency; and
  • translate the entity’s financial statements into a presentation currency, if different from the entity’s functional currency. IAS 21 permits an entity to present its financial statements in any currency (or currencies).

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.

An entity’s functional currency is the currency of the primary economic environment in which the entity operates (ie the environment in which it primarily generates and expends cash). Any other currency is a foreign currency.

What you should know

  • Explain and calculate translations of foreign currency transactions.
  • Apply the translation of foreign exchange transactions on given information.
  • Recognise and account for foreign exchange transactions.
  • Understand and explain the terms “presentation currency” and “functional currency”.
  • Present and disclose foreign exchange transactions in the financial statements of an entity.
  • Identify the reasons for translation of foreign currency transactions and financial statements and the applicable accounting standard
  • Explain exchange rates, monetary items and non-monetary items
  • Explain the difference between functional and presentation currencies
  • Apply the indicators in identifying the functional currency
  • Prepare journal entries to account for basic foreign currency transactions
  • Translate a set of financial statements from local currency into the functional currency
  • Translate financial statements into the presentation currency
  • Prepare consolidated financial statements including acquisition of foreign subsidiaries when the local currency is the functional currency
  • Prepare consolidated financial statements including foreign subsidiaries when the functional currency is that of the parent entity
  • Explain what constitutes the net investment in a foreign operation
  • Prepare the disclosures required by IAS 21