Objectives, scope and definitions of IFRS 2 Disclosure requirements

Chapter 18 – Events After the Reporting Period Page 250 10 Chapter Review This chapter has dealt with the treatment of events that occur after the end of the reporting period. This chapter has covered:  the objectives, scope, definitions and disclosure requirements of IAS 10;  an overview of IAS 10;  adjusting and non-adjusting events;  the recognition of dividends; and  the going concern basis of preparation. Chapter 18 – Events After the Reporting Period Page 251 11 Self Test Questions Chapter 18 1. The Sarin Companys financial statements for the year ended 30 April 20X8 were approved by its finance director on 7 July 20X8 and a public announcement of its profit for the year was made on 10 July 20X8. The board of directors authorised the financial statements for issue on 15 July 20X8 and they were approved by the shareholders on 20 July 20X8. Under IAS10 Events after the reporting period, after what date should consideration no longer be given as to whether the financial statements to 30 April 20X8 need to reflect adjusting and non-adjusting events? A 7 July 20X8 B 10 July 20X8 C 15 July 20X8 D 20 July 20X8 2. Are the following statements true or false according to IAS10 Events after the reporting period? 1 Notes to the financial statements should give details of all material adjusting events included in those financial statements. 2 Notes to the financial statements should give details of material non- adjusting events which could influence the economic decisions of users. Statement 1 Statement 2 A False False B False True C True False D True True Chapter 18 – Events After the Reporting Period Page 252 3. Are the statements about the classification of each of the following events after the end of the reporting period but before the financial statements are authorised for issue true or false, according to IAS10 Events after the reporting period? 1 A decline in the market value of investments would normally be classified as an adjusting event. 2 The settlement of a long-running court case would normally be classified as a non-adjusting event. Statement 1 Statement 2 A False False B False True C True False D True True 4. The Citril Companys financial year end was 31 October 20X7. Between the date on which the financial statements for this year were completed and the date on which they were due to be authorised for issue, a number of events took place. According to IAS10 Events after the reporting period, which TWO of the following four events should be classified as non-adjusting events requiring disclosure? A The Citril Company announced the discontinuation of its assembly operation B The Citril Company entered into an agreement to purchase the freehold of its currently leased office buildings C The Citril Company received CU 150,000 in respect of an insurance claim measured in the 31 October 20X7 financial statements at CU90,000 D A mistake was discovered in the calculation of the allowance for uncollectible trade receivables, leading to it being understated in the 31 October 20X7 financial statements by CU220,000 Chapter 18 – Events After the Reporting Period Page 253 5. The Vittex Company is preparing its financial statements for the year to 30 June 20X8. The board of directors reviews the final draft financial statements and authorises them for issue on 8 August 20X8. The earnings figure and key data are issued to the public on 19 September 20X8. The financial statements are issued to shareholders on 6 October 20X8 and approved by shareholders on 10 November 20X8. The period in respect of which the company should consider events after the end of reporting period in accordance with IAS10 Events after the reporting period, is from 30 June 20X8 to A 8 August 20X8 B 19 September 20X8 C 6 October 20X8 D 10 November 20X8 6. The Alsenax Companys financial statements for the year to 31 December 20X7 are to be authorised for issue on 31 March 20X8. The following dividends relate to the year to 31 December 20X7: Proposed by directors Approved by shareholders Paid Interim 29 July 20X7 - 29 August 20X7 Final 14 February 20X8 28 April 20X8 22 May 20X8 Are the following statements about the treatment of these dividends in the companys financial statements for the year to 31 December 20X7 true or false, according to IAS10 Events after the reporting period? 1 The interim dividend should be presented in the statement of changes in equity. 2 The final dividend should be recognised as a liability. Statement 1 Statement 2 A False False B False True C True False D True True Chapter 18 – Events After the Reporting Period Page 254 7. The Pinder Company is completing the preparation of its draft financial statements for the year ended 31 May 20X7. On 24 July 20X7, a dividend of CU175,000 was declared and a contractual profit share payment of CU35,000 was made, both based on the profits for the year to 31 May 20X7. On 20 June 20X7, a customer went into liquidation having owed the company CU34,000 for the past 5 months. No allowance had been made against this debt in the draft financial statements. On 17 July 20X7, a manufacturing plant was destroyed by fire, resulting in a financial loss of CU260,000. According to IAS10 Events after the reporting period, which TWO amounts should be recognised in Pinders profit or loss for the year to 31 May 20X7 to reflect adjusting events after the end of reporting period? A CU175,000 dividend B CU35,000 bonus C CU34,000 allowance for uncollectible trade receivables D CU260,000 loss on manufacturing plant 8. The Carp Company carried a provision of CU200,000 in its draft financial statements to 31 March 20X8 in relation to an unresolved court case. On 27 April 20X8, when the financial statements to 31 March 20X8 had not yet been authorised for issue, the case was settled and the court decided the final total damages payable by Carp to be CU280,000. According to IAS10 Events after the reporting period, what should be the accounting treatment in relation to this event? A Disclose CU80,000 B Adjust CU80,000 C Disclose CU280,000 D Adjust CU280,000 Chapter 18 – Events After the Reporting Period Page 255 9. The Elder Companys draft financial statements show the profit before taxation for the year to 31 December 20X7 as CU9 million. The board of directors is to authorise the financial statements for issue on 20 March 20X8. A fire occurred at one of Elders sites on 13 January 20X8 with resulting damage costing CU7 million, only CU4 million of which is covered by insurance. The repairs will take place and be paid for in April 20X8. The CU4 million claim from the insurance company will however be received on 14 February 20X8. Taking account of these events in accordance with IAS10 Events after the reporting period, what should be Elders profit before taxation in its financial statements? A CU2 million B CU9 million C CU13 million D CU6 million Chapter 19 – Foreign Exchange Page 257

Chapter 19 FOREIGN EXCHANGE

1 Business Context Business is becoming increasingly international in terms of trading goods and services and in the operation of capital markets. One measure of the significance of globalisation is that most developed countries have external trade in the range of 15 to 30 of their gross domestic product. International activity can vary enormously, from relatively straightforward import and export transactions through to financing arrangements in multiple currencies or maintaining operations overseas, for example in the form of a subsidiary or branch. Operating in multi-currency locations presents a number of accounting challenges, including:  conversion – accounting for transactions where one currency has been physically changed into another currency;  translation – restating assets and liabilities initially recognised in more than one currency into a common currency; and  exchange gains and losses – where relative currency values change and gains and losses arise which need to be appropriately measured and recognised. 2 Chapter Objectives This chapter deals with accounting for foreign currency transactions in accordance with IAS 21 The effects of changes in foreign exchange rates. A key aspect of the standard is to determine the main operating currency of each individual entity and how an entity, or group, should translate its financial statements where it presents those statements in a different currency. On completion of this chapter you should be able to:  understand the scope and objectives of IAS 21 in respect of the effects of changes in foreign exchange rates;  identify the important terminology and definitions which relate to foreign exchange activities;  understand and demonstrate knowledge of the key principles concerning recognition and measurement in terms of different currencies;  demonstrate knowledge of the principal disclosure requirements of IAS 21; and  apply knowledge and understanding of foreign exchange transactions through basic calculations. Chapter 19 – Foreign Exchange Page 258 3 Objectives, Scope and Definitions of IAS 21 An entity may carry on foreign activities either by conducting transactions in foreign currencies, for example purchasing a non-current asset from an overseas supplier, exporting goods to an overseas customer or arranging a loan in a foreign currency, or by having foreign operations, for example a subsidiary or branch located overseas. In addition, an entity may choose to present its financial statements in a foreign currency. The objective of IAS 21 is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity, and how to translate financial statements into a different currency for presentation purposes. IAS 21 applies to: [IAS 21.3]  accounting for transactions that the entity enters into which are in a foreign currency and any resulting balances note that items that fall within the scope of IAS 39 Financial instruments: recognition and measurement are dealt with by that standard;  translating the financial statements of foreign operations that are included in the financial statements of another entity, for example, on consolidation of subsidiaries or the inclusion of associates by the equity accounting method; and  translating an entitys results and financial position into a different currency for the presentation of its financial statements. 4 Key Issues

4.1 The functional currency

The overall approach required by IAS 21 is for an entity to translate foreign currency items and transactions into its functional currency. A functional currency “is the currency of the primary economic environment in which the entity operates” and the primary economic environment ”is normally the one in which it primarily generates and expends cash”. [IAS 21.8, 21.9] In a group, each entity, for example the parent, each subsidiary and associate, needs to determine its own functional currency rather than adopting a single one which is common across the whole group. An entity cannot choose its functional currency; instead, management needs to make an informed assessment of the facts. IAS 21 includes a number of practical indicators to assist entities in identifying their functional currency, for example:  the currency that mainly influences the prices at which goods and services are sold;  the country whose competitive forces and regulations mainly influence the pricing structure for the supply of goods and services;  the currency in which financing is generated; and  the currency in which cash generated from an entity’s operating activities is usually retained. Additional factors should be considered to determine whether the functional currency of a foreign operation is the same as that of the reporting entity the group. It should not be assumed that this is the case. The overriding factor is whether the foreign operation operates Chapter 19 – Foreign Exchange Page 259 independently of the reporting entity or is merely an extension of that entity. Factors might include, for example, whether the foreign operation requires additional funding from its parent in order to continue in operation and whether transactions with the reporting entity are a high proportion of its total operating activities. Where an entity, for example a subsidiary, is not deemed to be autonomous of the parent the reporting entity, it will have the same functional currency as the parent. As a functional currency is based on an entity’s underlying economic activity, it cannot be changed unless its underlying economic activity changes.

4.2 The presentation currency

Although the overall approach required by IAS 21 is for an entity to translate foreign currency items and transactions into its functional currency, it is not required to present its financial statements using this currency. An entity has a completely free choice of the currency in which its financial statements are presented. This is referred to as the presentation currency. [IAS 21.8] The approach that is required to translate the financial statements of an entity, or a group of entities, into a different presentation currency is discussed below.

4.3 Monetary and non-monetary items

IAS 21 distinguishes between monetary and non-monetary items. Monetary items are units of currency held, and assets and liabilities to be received or paid in a fixed or determinable number of units of currency, for example cash, receivables, payables and loans. [IAS 21.8] Non-monetary items are therefore those which do not give rise to a right to receive or an obligation to deliver a fixed or determinable amount of money, for example property, plant and equipment, goodwill, inventories and intangible assets.

4.4 Summary of the approach of IAS 21

For a group of entities, IAS 21 requires a two stage process: 1 individual entity level: treatment of foreign exchange transactions functional currency; and 2 consolidation level: translation of the financial statements of entities, for example subsidiaries, associates and branches, into a common currency for consolidated financial statements purposes presentation currency. Chapter 19 – Foreign Exchange Page 260 Illustration 1 A parent entity, P, operates in Cornu where the currency is the CU. It has two wholly-owned subsidiaries, N which operates in Narnia using N, and A which operates in Aslan using A. All three entities in the group import and export goods around the world. Step 1: Determine the functional currency of each of the three entities. This is a question of fact based upon the criteria in IAS 21 outlined above. It has been assumed here that the functional currency is that of the country in which each entity operates i.e. CU, N, A. Step 2: Each entity translates foreign currency transactions arising from its import and export activities into its functional currency and reports the effects of such translation. Step 3: In preparing the consolidated financial statements of the group, it is necessary to choose a presentation currency. IAS 21 permits the presentation currency of a reporting entity to be any currency. In this scenario the presentation currency is likely to be CU, the currency of the parent entity. Step 4: The results and financial position of each individual entity within the group whose functional currency differs from the presentation currency in this case N and A if CU is selected as the presentation currency are translated for the purposes of preparing consolidated financial statements. 5 Transactions in the Functional Currency

5.1 Initial recognition

An entity should record foreign currency transactions, for example the buying or selling of goods or services whose price is denominated in a foreign currency, in a consistent manner. IAS 21 requires that an entity does this by recognising each transaction at the spot exchange rate on the date that the transaction took place. [IAS 21.21] Thus, if an entity whose functional currency is CU buys a non-current asset for N1 million when the spot exchange rate is CU1:N2, then the transaction will initially be recorded at CU500,000. Where there are high volumes of such transactions, for practical reasons an average exchange rate over the relevant period may be used as an approximation. However, if exchange rates fluctuate significantly over short periods of time it is not appropriate to use an average rate since it would not be a fair approximation for actual rates. P CU N N A A Chapter 19 – Foreign Exchange Page 261

5.2 Reporting at the ends of subsequent reporting periods

At the end of each reporting period the following translations of foreign currency should be carried out. [IAS 21.23] Item Exchange rate Monetary items Closing rate i.e. the spot exchange rate at the end of the reporting period Non-monetary items measured at historical cost Rate of exchange at the date of the original transaction i.e. the date of purchase of the non-current asset Non-monetary items measured at fair value Exchange rate at the date when fair value was determined

5.3 Recognition of exchange differences

The difference that arises from translating the same amounts at different exchange rates is referred to as an exchange difference. Such amounts will generally arise in the preparation of a set of financial statements from the settlement of monetary amounts payable or receivable in a foreign currency and the retranslation at the entity’s period end. Exchange differences should normally be recognised as part of the profit or loss for the period. However, where gains and losses on a non-monetary item are recognised in other comprehensive income, for example a gain on the revaluation of a property in accordance with IAS 16 Property, plant and equipment, any exchange difference resulting from retranslation of the revalued asset is also reported as part of other comprehensive income. [IAS 21.28, 21.30]

5.3.1 Transactions settled within the period

When a foreign currency transaction is settled within the same accounting period as that in which it was originally recorded, any exchange differences arising are recognised in the profit or loss of that period.

5.3.2 Transaction balance is outstanding at the end of the reporting period

When a foreign currency transaction is settled in a different accounting period to the one in which the transaction originated, the exchange difference recognised in profit or loss for each period, up to the date of settlement, is determined by the change in exchange rates during each period. Illustration 2 Aston has a year end of 31 December 2007 and uses the CU as its functional currency. On 25 October 2007 Aston buys goods from an overseas supplier for N286,000. The goods are still held by Aston as part of inventory at the year end. Exchange rates: 25 October 2007 CU1 = N11.16 16 November 2007 CU1 = N10.87 31 December 2007 CU1 = N11.25 a If, on 16 November 2007, Aston pays the overseas supplier in full the following entries should be recognised: 25 October 2007. The initial transaction is recorded as a purchase and a liability at the exchange rate at the date that the transaction took place N286,000 11.16 = CU25,627.