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Foreign Currency Translation

SME Par.IFRS SMEU.S. GAAP
Scope of this section
30.1 An entity can conduct 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. This section prescribes 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. Accounting for financial instruments denominated in a foreign currency and hedge accounting of foreign currency items are dealt with in Section 11 Basic Financial Instruments and Section 12 Other Financial Instruments Issues. Like IFRS SMEs, the standard on foreign currency translation deals with foreign currency transactions and with translation of foreign currency financial statements.

Like IFRS SMEs, an entity may present its financial statements in a foreign currency. Unlike IFRS SMEs, however, a reporting entity may not have more than one reporting (presentation) currency.
Functional currency
30.2 Each entity shall identify its functional currency. An entity's functional currency is the currency of the primary economic environment in which the entity operates. Same.
30.3 The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. Therefore, the following are the most important factors an entity considers in determining its functional currency:
  1. the currency:
    1. 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
    2. of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.
  2. the currency that mainly influences labour, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled).
 As under IFRS SMEs, these are factors an entity considers in determining its functional currency. Unlike IFRS SMEs, however, no priority is given to these factors over other factors (see 30.4 and 30.5). Rather, management must weigh the relative importance of all factors and use its judgment in determining the functional currency.
30.4 The following factors may also provide evidence of an entity's functional currency:
  1. the currency in which funds from financing activities (issuing debt and equity instruments) are generated.
  2. the currency in which receipts from operating activities are usually retained.
 As under IFRS SMEs, these are factors an entity considers in determining its functional currency. Unlike IFRS SMEs, however, no priority is assigned to these factors in relation to other factors (see 30.3 and 30.5).
30.5 The following 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 (the reporting entity, in this context, being the entity that has the foreign operation as its subsidiary, branch, associate or joint venture):
  1. whether the activities of the foreign operation are carried out as an extension of the reporting entity, rather than being carried out with a significant degree of autonomy. An example of the former is when the foreign operation only sells goods imported from the reporting entity and remits the proceeds to it. An example of the latter is when the operation accumulates cash and other monetary items, incurs expenses, generates income and arranges borrowings, all substantially in its local currency.
  2. whether transactions with the reporting entity are a high or a low proportion of the foreign operation's activities.
  3. whether cash flows from the activities of the foreign operation directly affect the cash flows of the reporting entity and are readily available for remittance to it.
  4. whether cash flows from the activities of the foreign operation are sufficient to service existing and normally expected debt obligations without funds being made available by the reporting entity.
 As under IFRS SMEs, these are factors an entity considers in determining its functional currency. Unlike IFRS SMEs, however, no priority is assigned to these factors in relation to other factors (see 30.4 and 30.5).
Reporting foreign currency transactions in the functional currency
 Initial recognition
30.6 A foreign currency transaction is a transaction that is denominated or requires settlement in a foreign currency, including transactions arising when an entity:
  1. buys or sells goods or services whose price is denominated in a foreign currency;
  2. borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; or
  3. otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency.
 Same.
30.7 An entity shall record a foreign currency transaction, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. Same.
30.8 The date of a transaction is the date on which the transaction first qualifies for recognition in accordance with this IFRS. For practical reasons, a rate that approximates the actual rate at the date of the transaction is often used, for example, an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate. Same.
 Reporting at the end of the subsequent reporting periods
30.9 At the end of each reporting period, an entity shall:
  1. translate foreign currency monetary items using the closing rate;
  2. translate non-monetary items that are measured in terms of historical cost in a foreign currency using the exchange rate at the date of the transaction; and
  3. translate non-monetary items that are measured at fair value in a foreign currency using the exchange rates at the date when the fair value was determined.
  1. Same.
  2. Same.
  3. Not applicable.
30.10 An entity shall recognise, in profit or loss in the period in which they arise, 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 during the period or in previous periods, except as described in paragraph 30.13. Same.
30.11 When another section of this IFRS requires a gain or loss on a non-monetary item to be recognised in other comprehensive income, an entity shall recognise any exchange component of that gain or loss in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognised in profit or loss, an entity shall recognise any exchange component of that gain or loss in profit or loss. Unlike IFRS SMEs, foreign currency transaction gains and loss that are excluded from the determination of net income for the period are limited to the following:
  1. Gains and losses that pertain to certain intercompany transactions.
  2. Gains and losses on transactions that are designated as, and effective as, economic hedges of net investments in a foreign entity
Net investment in a foreign operation
30.12 An entity may have a monetary item that is receivable from or payable to a foreign operation. An item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, a part of the entity's net investment in that foreign operation, and is accounted for in accordance with paragraph 30.13. Such monetary items may include long-term receivables or loans. They do not include trade receivables or trade payables. Same.
30.13 Exchange differences arising on a monetary item that forms part of a reporting entity's net investment in a foreign operation shall be recognised in profit or loss in the separate financial statements of the reporting entity or the individual financial statements of the foreign operation, as appropriate. In the financial statements that include the foreign operation and the reporting entity (eg consolidated financial statements when the foreign operation is a subsidiary), such exchange differences shall be recognised initially in other comprehensive income and reported as a component of equity. They shall not again be recognised in profit or loss on disposal of the net investment. Unlike IFRS SMEs, an entity that disposes of a foreign operation must reclassify the amount of cumulative foreign currency translation adjustments from other comprehensive income to profit or loss.
Change in functional currency
30.14 When there is a change in an entity's functional currency, the entity shall apply the translation procedures applicable to the new functional currency prospectively from the date of the change.  
30.15 As noted in paragraphs 30.2–30.5, the functional currency of an entity reflects the underlying transactions, events and conditions that are relevant to the entity. Accordingly, once the functional currency is determined, it can be changed only if there is a change to those underlying transactions, events and conditions. For example, a change in the currency that mainly influences the sales prices of goods and services may lead to a change in an entity's functional currency. Same.
30.16 The effect of a change in functional currency is accounted for prospectively. In other words, an entity translates all items into the new functional currency using the exchange rate at the date of the change. The resulting translated amounts for non-monetary items are treated as their historical cost. Same.
Use of a presentation currency other than the functional currency
 Translation to the presentation currency
30.17 An entity may present its financial statements in any currency (or currencies). If the presentation currency differs from the entity's functional currency, the entity shall translate its items of income and expense and financial position into the presentation currency. For example, when a group contains individual entities with different functional currencies, the items of income and expense and financial position of each entity are expressed in a common currency so that consolidated financial statements may be presented. Same.
30.18 An entity whose functional currency is not the currency of a hyperinflationary economy shall translate its results and financial position into a different presentation currency using the following procedures:
  1. Assets and liabilities for each statement of financial position presented (ie including comparatives) shall be translated at the closing rate at the date of that statement of financial position.
  2. Income and expenses for each statement of comprehensive income (ie including comparatives) shall be translated at exchange rates at the dates of the transactions.
  3. All resulting exchange differences shall be recognised in other comprehensive income.
 Same.
30.19 For practical reasons, an entity may use a rate that approximates the exchange rates at the dates of the transactions, for example an average rate for the period, to translate income and expense items. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate. Same.
30.20 The exchange differences referred to in paragraph 30.18(c) result from:
  1. translating income and expenses at the exchange rates at the dates of the transactions and assets and liabilities at the closing rate, and
  2. translating the opening net assets at a closing rate that differs from the previous closing rate.
When the exchange differences relate to a foreign operation that is consolidated but not wholly-owned, accumulated exchange differences arising from translation and attributable to the non-controlling interest are allocated to, and recognised as part of, non-controlling interest in the consolidated statement of financial position.		 Same.
30.21 An entity whose functional currency is the currency of a hyperinflationary economy shall translate its results and financial position into a different presentation currency using the procedures specified in Section 31 Hyperinflation. See Section 31.
 Translation of a foreign operation into the investor's presentation currency
30.22 In incorporating the assets, liabilities, income and expenses of a foreign operation with those of the reporting entity, the entity shall follow normal consolidation procedures, such as the elimination of intragroup balances and intragroup transactions of a subsidiary (see Section 9 Consolidated and Separate Financial Statements). However, an intragroup monetary asset (or liability), whether short-term or long-term, cannot be eliminated against the corresponding intragroup liability (or asset) without showing the results of currency fluctuations in the consolidated financial statements. This is because the monetary item represents a commitment to convert one currency into another and exposes the reporting entity to a gain or loss through currency fluctuations. Accordingly, in the consolidated financial statements, a reporting entity continues to recognise such an exchange difference in profit or loss or, if it arises from the circumstances described in paragraph 30.13, the entity shall classify it as equity. Same.
30.23 Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation. Thus, they shall be expressed in the functional currency of the foreign operation and shall be translated at the closing rate in accordance with paragraph 30.18. Same.

 

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