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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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30.8 Disclosures
30.8.1 Extract from FRS102: Section 30.24 -30.27
30.24 In paragraphs 30.26 and 30.27, references to functional currency apply, in the case of a group, to the functional currency of the parent.
30.25 An entity shall disclose the following:
(a) the amount of exchange differences recognised in profit or loss during the period, except for those arising on financial instruments measured at fair value through profit or loss in accordance with Sections 11 Basic Financial Instruments and Section 12.
(b) the amount of exchange differences arising during the period and classified in equity at the end of the period.
30.26 An entity shall disclose the currency in which the financial statements are presented. When the presentation currency is different from the functional currency, an entity shall state that fact and shall disclose the functional currency and the reason for using a different presentation currency.
30.27 When there is a change in the functional currency of either the reporting entity or a significant foreign operation, the entity shall disclose that fact and the reason for the change in functional currency.
30.8.2 OmniPro comment
30.8.2.1 Overview
See illustration of the disclosure requirements of Section 30.24 to 30.27 of FRS 102 below
30.8.2.2 Accounting policies
Example 14 – Extract from notes to the accounting policies
Currency
(a) Functional and presentation currency.
Items included in the financial statements of the company are measured using the currency of the primary economic environment in which the company operates (“the functional currency”). The financial statements are presented in stg/euro, which is the company’s functional and presentation currency and is denoted by the symbol “CU”.
OR
The company has chosen to present the financial statement in a currency that differs from its functional currency so that it can be easily consolidated into the parent company’s financial statements. The company’s functional currency is XX.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the spot exchange rates at the dates of the transactions.
At each period end foreign currency monetary items are translated using the closing rate. Non-monetary items measured at historical cost are translated using the exchange rate at the date of the transaction and non-monetary items measured at fair value are measured using the exchange rate when fair value was determined.
Foreign exchange gains and losses that relate to borrowings and cash and cash equivalents are presented in the profit and loss account within ‘finance (expense)/income’. All other foreign exchange gains and losses are presented in the profit and loss account within ‘Other operating (losses)/gains’.
(c) Group
Each entity in the group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. The assets and liabilities of overseas subsidiary undertakings are retranslated into the presentational currency at the rate of exchange ruling at the balance sheet date. Income and expenses for each statement of comprehensive income are translated at the exchange rate at the dates of the transactions. All resulting exchange differences are reflected in other comprehensive income.
30.8.2.3 Notes to the financial statements
30.8.2.3.1 Extract from the financial statements – operating profit note
OPERATING PROFIT Operating profit is stated after charging/(crediting):
| 2015 | 2014 | ||
| CU | CU | ||
| Depreciation | 149,999 | 170,037 | |
| Directors’ remuneration: | 212,000 | 225,600 | |
| Impairment of goodwill (included within administrative expenses) | – | – | |
| Foreign exchange gain/loss | – | – | |
| Impairment of investment in subsidiary/associate/joint venture | – | – | |
| Reversal of impairment of property, plant and equipment (included within administrative expenses) See note 1 | – | – | |
| Reversal of impairment of goodwill/intangibles (included within administrative expenses) | – | – | |
| Reversal of impairment of inventory (included within cost of sales) | – | – | |
| Impairment of inventory (included within cost of sales) | – | – | |
| Inventory recognised as an expense | – | – | |
| Auditors’ remuneration | |||
| Audit | 13,000 | 13,000 | |
| Non audit services | 3,000 | 3,000 | |
| Tax Advisory | 3,225 | 3,225 |
30.8.2.3.2 Example of a change of functional currency due a change in circumstance i.e. adjusted prospectively (application of Section 30.27 of FRS 102)
Example 15: Example of a change of functional currency due a change in circumstance i.e. adjusted prospectively (application of Section 30.27 of FRS 102)
Change in functional Currency The company changed functional currency from FC (“FC”) to United States Dollar (“USFC”) on 31 December 2014. This change arose as a result of the acquisition of the company by a larger group. As a result a change was made to the cost and funding structure such that the primary economic environment in which the company operates resulted in a change in functional currency to USFC. The 2014 results and financial position for comparative purposes were translated to USFC as follows:
- Assets and liabilities at the closing rate of 1.6184 as of 31 December 2014
- Income and expenses for 2014 are retranslated at the 2014 average rate of 1.6259
- All resulting exchange differences were recognised as a separate component of equity, described as the other reserve.
| Restated | ||
| 2014 | 2014 | |
| USFC | FC | |
| Turnover | 237,601 | 146,134 |
| Cost of sales | (220,264) | (135,471) |
| Gross profit | 17,337 | 10,663 |
| Administrative expenses | (16,066) | (9,882) |
| Other operating income | – | – |
| Operating profit | 1,270 | 781 |
| Interest receivable | – | – |
| Interest payable and similar expenses | (355) | (218) |
| Profit before taxation | 916 | 563 |
| Tax on profit | (416) | (256) |
| Profit for the financial period after taxation | 499 | 307 |
| Balance sheet | Restated | |
| 2014 | 2014 | |
| USFC | FC | |
| Fixed assets | ||
| Tangible assets | 5,637 | 3,483 |
| Financial assets | 8,810 | 5,443 |
| ____________ | ____________ | |
| 14,447 | 8,927 | |
| Current assets | ||
| Debtors | 387,831 | 239,641 |
| Cash at bank and in hand | 32,999 | 20,390 |
| ____________ | ____________ | |
| 420,831 | 260,031 | |
| Creditors: amounts falling due within one year | (255,617) | (157,946) |
| ____________ | ____________ | |
| Net current assets | 165,214 | 102,086 |
| Creditors: amounts falling due after more than one year | (5,273) | (3,258) |
| Provision for liabilities | (1,900) | (1,174) |
| ____________ | ____________ | |
| Net assets | 172,488 | 106,581 |
| ____________ | ____________ | |
| Capital and reserves | ||
| Called-up share capital presented as equity | 6 | 3 |
| Other reserve | 64,548 | 39,884 |
| Profit and loss account | 107,935 | 66,693 |
| ____________ | ____________ | |
| Equity shareholder’s funds | 172,488 | 106,581 |
30.8.2.3.3 Example of a Prior year adjustment due to a change in functional currency
Example 16: Example of a Prior year adjustment due to a change in functional currency
Historically, financial statements for the company were prepared on the bass that the FC was the functional currency of the entity. During the current year the directors considered further the functional currency and have determined that the CU is, and always was, the functional currency that most accurately portrays the economic results of the company and thereby achieves the objective of foreign currency translation. As a result, the financial statements for the year ended 31 December 2015 are prepared in CU and the comparative numbers restated. The 2014 results and financial position for comparative purposes were restated to CU as follows:
– Assets and liabilities which were denominated in CU are shown at the actual CU balance at 31
December 2014 and non CU denominated balances were retranslated at the year end spot rate
– Income and expenses for 2014 are shown at the actual CU amounts that were incurred and any non CU balances were retranslated at the average rate for the year.
– All resulting differences were recognised in profit and loss reserves brought forward.
| Balance Sheet | As restated | ||
| 2014 | 2014 | ||
| FC | CU | ||
| Creditors: amounts falling due within one year | |||
| Amounts owed to group undertakings | (14,183) | (22,953) | |
| ‘A’ preference shares | (85,972) | (152,165) | |
| Creditors: amounts falling due after more than one year | |||
| ‘B’ preference shares | (416) | (666) | |
| (100,571) | (175,784) | ||
| Profit and loss account reserves brought forward | (100,571) | (175,874) | |
| Profit and Loss Account | |||
| As restated | |||
| 2014 | 2014 | ||
| FC | CU | ||
| Administrative expenses | 120 | (21) | |
| Interest payable and similar expenses | (4,159) | (8,219) | |
| Loss for the financial year | (4,039) | (8,241) | |
30.8.2.4 Extract from other comprehensive income showing foreign exchange differences on retranslation
Consolidated Statement of Comprehensive Income
| Profit for the financial year | 1,000,000 | 500,000 |
| Cash flow hedges | ||
| – effective portion of changes in fair value to cash flow hedges | XXX | XXX |
| – fair value of cash flow hedges transferred to income statement | XXX | XXX |
| Actuarial loss in respect of the defined pension scheme | (XXX) | (XXX) |
| Exchange differences on retranslation of foreign subsidiary undertakings | XXX | (XXX) |
| Gain/(loss) on revaluation of intangible assets | XXX | (XXX) |
| Gain/(loss) on revaluation of property, plant and equipment | XXX | (XXX) |
| Gain/(loss) on revaluation of subsidiaries, associates, etc. | XXX | (XXX) |
| Deferred tax on components of other comprehensive income | XXX | XXX |
| – | – | |
| Total other comprehensive income for the year net of tax | 200,000 | 100,000) |
| Total comprehensive income for the year | 1,200,000 | 400,000 |
| Total comprehensive income for the financial year attributable to: | ||
| Owners of the parent company | XXX | XXX |
| 1,200,000 | 400,000 |
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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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