THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE – 2015/2016 Principles of Financial and Cost Accounting Thilanka Warnakulasooriya B. Com Special (Col), ACA, MBA Fin ( Col)

LKAS 21 The Effects of Changes in Foreign Exchange Rates

LKAS 21 The Effects of Changes in Foreign Exchange Rates �Definitions � Functional currency is the currency of the primary economic environment in which the entity operates. � Presentation currency is the currency in which the financial statements are presented. � Foreign currency is a currency other than the functional currency of an entity. � Closing � Spot rate is the spot exchange rate at the reporting date. exchange rate is the exchange rate for immediate delivery.

� Foreign operation is a subsidiary, associate, joint venture or branch of the reporting enterprise, the activities of which are based or conducted in a country other than the country of the reporting entity. � Net investment in a foreign operation is the amount of the reporting entity’s interest in the net assets of that operation. � Monetary items are currency held and assets and liabilities to be received or paid in fixed or determinable number of units of currency.

Determining functional currency The currency: �That mainly influences sales price �of country whose rules & regulations influence sales price �that influences labour, materials and other costs �in which financing generated �in which receipts from activities retained

� Initial recognition ◦ record foreign currency transactions in a consistent manner. ◦ Every transaction will be translated into the functional currency at the spot rate ruling at the time of the transaction. � Reporting at the ends of subsequent reporting periods Monetary items Non monetary items measured at cost Non monetary items measured at FV • Closing rate – Rate prevailed at end of the reporting period. • Exchange rate at the date of the transaction • Exchange rate at the date when the FV was determined.

Recognition of exchange differences �Exchange differences arising on settlement, or translating at the reporting date, of monetary items all go to profit or loss. �If gains/losses on a non-monetary item are taken to other comprehensive income (OCI) then any exchange difference is also taken to equity, through other comprehensive income. �If gains/losses on a non-monetary item are NOT taken to equity then any exchange difference is taken to profit or loss.

Presentation currency If the presentation currency is different to the functional currency: ◦ Assets/liabilities are translated at closing rate ◦ Income/expenses are translated at actual rate (average may be used) ◦ Exchange differences are taken to equity, through other comprehensive income ◦ Cumulative exchange difference reclassified to profit or loss on disposal of subsidiary.