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30.2.2.2 Assessment of functional currency.
30.2.2.2.1 Steps involved in determining functional currency.
30.2.2.2.1.1 Review the primary indicators.
30.2.2.2.1.2 Review the secondary indicators (if required)
30.2.2.2.1.3 Review additional factors where still in conclusive from step 1 and 2.
30.2.2.3 Definition of foreign operation.
30.2.2.4 Requirements to review each entity individually.
30.2.2.5 Examples of determining a functional currency.
30.2.2.5.1 Intermediary holding company.
30.2.2.5.2 Function currency – foreign currency sales.
30.2.2.6 Rules with regard to a change in functional currency.
30.3.1 Extract from FRS102: Section 30.6 -30.11.
30.3.2.1.1 Definition of monetary items.
30.3.2.1.2 Examples of monetary items.
30.3.2.1.3 Recognition of monetary items.
30.3.2.1.3.1 Initial recognition.
30.3.2.1.3.1.1 Determining the date of the transaction.
30.3.2.1.3.1.2 Rules for using average rate as approximation for actual spot rate.
30.3.2.1.3.2 Subsequent measurement
30.3.2.1.3.2.1 The two exceptions to retranslating monetary assets at period end rate.
30.3.2.1.3.3 Retranslation of monetary asset – purchase.
30.3.2.1.3.4 Retranslation of monetary asset – sale.
30.3.2.2.1 Definition of non-monetary items.
30.3.2.2.1.1 Examples of non-monetary items.
30.3.2.2.2.1. Non-monetary assets not fair valued.
30.3.2.2.2.1.1 Initial recognition.
30.3.2.2.2.1.2 Subsequent measurement
30.3.2.2.2.1.4.2 Retranslation of non-monetary asset – impairment of asset
30.3.2.2.2.2 Non-monetary assets fair valued.
30.3.2.2.2.2.1 Initial recognition.
30.3.2.2.2.2.2 Subsequent measurement
30.4 Net investment in a foreign operation.
30.4.1 Extract from FRS102: Section 30.12 -30.13.
30.4.2.1 Definition of net investment in a foreign operation.
30.4.2.2 Requirements for the net investment in a foreign operation treatment
30.4.2.3 Accounting for a net investment in a foreign operation.
30.4.2.3.1 Individual entity financial statements.
30.4.2.3.2 Consolidated financial statements.
30.4.2.4 Example – Net investment in a foreign operation.
30.5 Change in functional currency.
30.5.1 Extract from FRS102: Section 30.14 -30.16.
30.5.2.1 When can a change in functional currency arise.
30.5.2.1.1 Change in functional currency due to a change in circumstances.
30.5.2.1.2 Change in functional currency due to an error
30.5.2.2 How to account for a change in functional currency due to a change in currency.
30.6 Use of a presentation currency other than the functional currency.
30.6.1 Extract from FRS102: Section 30.17-30.21.
30.7 Translation of a foreign operation into the investor’s presentation currency.
30.7.1 Extract from FRS102: Section 30.22-30.23.
30.7.2.1.1 Treatment of amount recognised in OCI on future disposal
30.7.2.2 Goodwill recognized on acquisition of a foreign operation.
30.8.1 Extract from FRS102: Section 30.24 -30.27.
30.8.2.3 Notes to the financial statements.
30.8.2.3.1 Extract from the financial statements – operating profit note.
30.8.2.3.3 Example of a Prior year adjustment due to a change in functional currency.
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30.6 Use of a presentation currency other than the functional currency
30.6.1 Extract from FRS102: Section 30.17-30.21
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.
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:
(a) assets and liabilities for each statement of financial position presented (i.e. including comparatives) shall be translated at the closing rate at the date of that statement of financial position;
(b) income and expenses for each statement of comprehensive income (i.e. including comparatives) shall be translated at exchange rates at the dates of the transactions; and
(c) all resulting exchange differences shall be recognised in other comprehensive income.
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.
30.20 The exchange differences referred to in paragraph 30.18(c) result from:
(a) translating income and expenses at the exchange rates at the dates of the transactions and assets and liabilities at the closing rate; and
(b) 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.
30.21 An entity whose functional currency is the currency of a hyperinflationary economy shall adjust its results and financial position using the procedures specified in Section 31 Hyperinflation before applying the requirements of this section.
30.6.2 OmniPro comment
Section 30.17 of FRS 102 provides a choice for entities as to which currency it presents its financial statements in. The rules for translating a functional currency to a presentational currency are stated in Section 30.18 to 30.21 of FRS 102. The rules can be summorised as follows (assuming the entity does not operate in a hyper inflationary economy):
- Assets and liability are to be retranslated at the closing foreign exchange rate at the period end date (Section 30.18(a) of FRS 102)
- Income and expenses in the statements of comprehensive income are translated at the exchange rate at the date of the transaction (as per Section 30.18(b) of FRS 102) to Section 30.19 of FRS 102 does permit an average rate to be used but only if it approximates the exchange rate at the date of the transaction (if there is a significant fluctuation then the average rate cannot be utilised).
- All resulting differences should be recognised in other comprehensive income (i.e. the differences between income and expenses retranslated at actual rate and the balance sheet retranslated at the period end date and the difference between the opening net assets at a closing rate that differs from the closing rate from the previous year).
See the example below showing application of the guidance in Section 30.17 to 30.21 of FRS 102.
Example 12: Presentational currency
Company A has a functional currency of CU. It purchased a US company, Company B for FC200,000 on 1 January 2014. The fair value of the net assets at that date was FC150,000 with goodwill of FC50,000 being recognised. The spot rate at 31 December 2013 and 31 December 2014 was FC1=CU0.80c and FC=CU0.85c. The average rate for the 31 December 2014 and 31 December 2013 year end is FC1=CU0.75c and FC1=CU0.70c respectively. See below the work required to retranslate Company B’s financial statements from the functional currency of FC to the presentational currency of CU.
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Examples
Example 1: Intermediary holding company.
Example 2: Intermediate holding Company.
Example 3: Intermediate holding Company.
Example 4: Functional currency.
Example 5: Functional currency.
Example 6: Retranslation of monetary asset – purchase.
Example 7: Retranslation of monetary asset – sale.
Example 8: Retranslation of non-monetary asset
Example 9: Retranslation of non-monetary asset – impairment of asset
Example 10: Net investment in a foreign operation.
Example 11: Change in functional currency due to a change in circumstances.
Example 12: Presentational currency.
Example 13: Consolidation of a foreign operations results.
Example 14: Extract from notes to the accounting policies.
Example 16: Example of a Prior year adjustment due to a change in functional currency.
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