This paper contains an interpretation of International Accounting Standard Number 21 called "Effects of variations in foreign currency exchange rates", revised in 1993 and which is in force from the financial statements that cover years beginning as of of January 1, 1995 and examples to clarify the regulations in question. The last modifications made to this standard were in the 1999 revision.
1. INTRODUCTION
"The first time the company applies this Standard, it must separately classify and disclose the accumulated balance, at the beginning of the fiscal year, of the deferred exchange differences classified in previous fiscal years as components of equity, unless said balance cannot be reasonably determined ”.
In order to make the understanding of said rule clearer, a different structure is presented to that indicated in the regulation in question; The following table outlines the difference between the types of movements and effects that foreign currency has on a company:
In this way, the development of this work initially describes the characteristics and accounting applications related to Foreign Currency Transactions carried out by a company and subsequently the ones that mark said Standard, these can be: Foreign businesses that are an integral part of the activities of the company that presents the financial statements and / or Foreign Entities (Entities that belong to a group of Consolidated companies).
There are four SIC's that are related to this Standard, and which are indicated in the content of this work, only in the required points:
- SIC-7 Introduction of the Euro, SIC-11 Exchange Variations in Foreign Currency –Capitalization of Losses Derived from Very Important Devaluations, SIC-19 Currency of Financial Statements –Valuation and Presentation of Financial Statements according to IAS 21 and 29, and SIC -30 Reporting Currency - Conversion of the Valuation Currency to the Presentation Currency.
2. Objective
Since the company can carry out activities abroad in two different ways: Transactions in Foreign Currency, or it can have Business Abroad and in order to include such operations in its financial statements, the main objective of this International Standard on Accounting is:
"Present the applicable procedures regarding the main problems faced by accounting in the case of transactions in foreign currency and business abroad, when deciding what exchange rate to use for the conversion and how to proceed to recognition, in the states financial, the effects of exchange differences in foreign currency ”.
3. Scope
This Standard must be applied:
- When accounting for transactions in foreign currency When proceeding to convert the financial statements of the businesses that a company owns abroad, to include them in the consolidated financial statements of the aforementioned company, either using the proportional consolidation method or the equity method.
Likewise, SIC No. 7 establishes that as of 1999 for the specific case of the Economic and Monetary Union (EMU), the euro will be the autonomous currency and the conversion rates between the euro and the currencies of the participating countries will remain irrevocably fixed, thereby eliminating the risk of subsequent exchange differences between those currencies.
This Standard does not address:
- Accounting for hedges of items in foreign currency, except in the case of the treatment of exchange differences arising from obligations in foreign currency that are accounted for as hedges of net investments in foreign entities. the company from its usual currency to another, when it is done for the convenience of the users Presentation, within the statement of cash flows, of the cash flows derived from transactions in foreign currency, or from the conversion of the flows of cash from foreign entities, since IAS 7 Statement of Cash Flows states the treatment for these cases.
It does not specify anything about the usual currency in which a company presents its financial statements, however, it requires informing about the reason why it uses such currency as well as it requires informing about the reasons for a possible change in the currency of the statements. financial In this regard, SIC 19 states that as long as said standard does not specify in which currency a company must present its financial statements, it will normally use the currency of the country in which it is domiciled.
4.- Definitions
- Business abroad: It is any dependent company, associate, joint venture or branch, of the company that presents the financial statements, whose activities are based or carried out in a country other than that of the company that presents the financial statements. Foreign entity. It is any business abroad whose activities are not an integral part of those carried out by the company that presents the financial statements. Currency of financial statements. It is the currency used by the company when presenting financial statements. Foreign currency. It is any currency other than the currency of the financial statements of a company. Exchange rate. It is the ratio used for the exchange of two different types of currencies. Exchange rate. It is the change in cash existing at the balance sheet date. Closing exchange rate. It is the cash change existing at the balance sheet date. Net investment in a foreign entity. It is the part that corresponds to the company that presents the financial statements, in the net assets of that entity. Monetary items. They are the cash, as well as the assets and liabilities that are to be received or paid, at maturity, through a fixed or determinable amount of money. Fair value It is the amount for which an asset can be exchanged, or a liability settled, between an interested and duly informed buyer and seller, in a free transaction.
Thus, we will also define as the Parent Company that company that is the one that presents the Financial Statements of its operations and of those that, if applicable, will be consolidated, which will be called subsidiaries in order to more clearly identify the interpretation of the standard.
5. Foreign currency transactions
5.1 CHARACTERISTICS
A transaction in foreign currency is any operation in which settlement is established or required in a foreign currency when:
- Buy or sell goods or services whose price is established in a foreign currency (they are recorded as customers, suppliers - in foreign currency -). Lend or borrow funds if the corresponding amounts are established to be paid or received in a foreign currency (accounting are reflected as debtors, creditors - in foreign currency -). It becomes part of a non-executed contract, which is expressed in foreign currency (accounting they are expressed as documents payable or receivable - in foreign currency-), or Acquires or disposes of otherwise, assets, or else, incur or settle liabilities, provided that both are established in a foreign currency (accounting they are reflected as debtors, creditors - in foreign currency -).
5.2 INITIAL REGISTRATION
All transactions in foreign currency must be recorded, at the time of their recognition in the financial statements, in the same currency of the financial statements, applying to the corresponding amount in foreign currency the exchange rate between the currency of the financial statements and the current currency. foreign existing on the date of the operation.
The exchange rate on the date of the operation is also called the Spot Exchange Rate and this can be determined by the average weekly or monthly rate, however in case of considerable fluctuations the Exchange Rate of the date of the operation must be applied.
For example:
On December 15, 2003, Cía. CAMACUS, SA (Spain) makes a purchase on credit for 2 months of materials for 3,500 Dll from a North American company, the exchange rate at the time of the transaction is 1,22680 Eur / Dll (the average exchange rate can be used); the accounting record would be:
Initial Registration:
2,852.95 Stock
Suppliers 2,852.95
3500 Dll at the exchange rate of 1,22680 = 2,852.95
(taxes are not considered in this example)
5.3 INFORMATION IN SUBSEQUENT FINANCIAL STATEMENTS
At the end of each fiscal year or on each balance sheet date, items in foreign currency must be reported as follows:
- The Monetary Items will be updated using the closing exchange rate (customers, debtors, cash, bank accounts, suppliers, creditors).
- Non-Monetary Items (tangible fixed assets) will use the exchange rate according to the initial registration form:
- If they were recorded at historical cost, the exchange rate to be used will be that in force on the date of the transaction. If they were recorded at their fair value, the exchange rate existing when their values were determined will be used.
Let's see how the Providers account from the example prior to December 31, 2003 would be evaluated:
| Cta. DeBalance |
Amount in Dlls |
12/15/2003 | 12/31/2003 | Difference |
| TC | Valuation | TC | Valuation |
| Providers |
3,500 |
1,22680 | 2,852.95 | 1,25520 | 2788.40 | -64.55 |
In this case, the Balance will show in the Suppliers account an amount of 2,788.40 as of December 31, 2003.
5.4 RECOGNITION OF EXCHANGE DIFFERENCES
The exchange differences arising either at the time of the Settlement of the monetary items or on the Date of the financial statements, as a consequence of the existence of exchange rates different from those used in the recording of operations for the year, must be recognized as:
Expenses or income for the year in which they appeared
When the transaction is settled in the year in which it arose, the resulting exchange difference is recognized in that year. However, when the transaction is settled in a different year, the exchange differences recognized in each year that elapses until its maturity are determined by the variation in the exchange rates that occurred during that period.
Therefore, continuing with our example we would have the following accounting record as of December 31, 2003:
64.55 Suppliers
Gsts. o Engineer of the Exercise 64.55
5.5 NET INVESTMENT IN A FOREIGN ENTITY
Exchange differences derived from:
- Monetary item that is part of the net investment made by the company in a foreign entity Long-term liabilities - coverage for the net investment of the company in a foreign entity.
Initially they will be registered as: Components of Equity
And once the investment has been sold: They will be recognized as expenses or income.
5.6 ALTERNATIVE TREATMENT ALLOWED
This treatment, alternatively indicated by the Standard, refers to those entities that within their financial reports present differences arising from a strong DEVALUATION in which there was no practical possibility of carrying out hedging actions and that affected liabilities that cannot be settled, arising of the recent purchase of assets invoiced in foreign currency. In this situation the standard allows:
- They are included as part of the carrying amount of the corresponding asset, provided that the adjusted value is NOT greater than the lower of the recoverable amount of the asset for use or sale or the replacement cost (Market value).
However, if the company can settle or cover the debt, these differences will not be included in the books.
Negative differences will be part of the costs directly attributable to the asset when there is no way to settle or provide coverage, for example: when as a result of exchange controls there is a delay in obtaining the foreign exchange for payment. Therefore, according to the alternative treatment, the cost of the asset invoiced in a foreign currency is considered as the amount of currency of the financial statements that the company must pay to settle the debts arising directly from the recent acquisition of the aforementioned asset.
6. BUSINESS ABROAD
The financial statements of foreign businesses must be converted to the currency that corresponds to the financial statements published by the company and the method used will depend on the way in which the aforementioned businesses are financed and the relationship they have with the company that presents the financial statements.
6.1 BUSINESSES ABROAD THAT ARE AN INTEGRAL PART OF THE ACTIVITIES OF THE COMPANY PRESENTING THE FINANCIAL STATEMENTS
6.1.1 Characteristics and Conversion Procedure.
The companies classified within this heading are distinguished by carrying out their operation as if it were an extension of the company that presents the financial statements.
For example, it may be that the business is only dedicated to importing merchandise from the company that presents the financial statements, selling them or remitting the funds from it.
In this sense, the variations in the exchange rate are almost immediately in the cash flows, affecting the individual monetary items of the foreign businesses and not the net investment that the company has in such business.
The financial statements of these types of companies must be converted in accordance with the rules and procedures described as if they were transactions of foreign businesses that had been carried out by the company presenting the financial statements. So that:
Individual games:
They are converted as if the transactions had been carried out by the company presenting the Financial Statements.
The cost and depreciation of property, plant and equipment:
They are translated using the exchange rate on the date of purchase of each asset (fair value, using the TC existing on the valuation date).
The cost of stocks
It is converted to current TC when such costs are incurred.
Recoverable amount or the net realizable value of an asset.
They are translated at prevailing exchange rates when such costs are incurred, for example: when the net realizable value of an item of inventories is established by reference to a foreign currency, this value is translated using the exchange rate prevailing in the date on which such net realizable value was determined. Therefore, the exchange rate used is normally the closing exchange rate.
6.1.2 Adjustment for Impairment
It may be necessary to carry out an impairment adjustment in order to reduce the carrying amount of an asset in the Financial Statements of the company presenting the Edos. End. Until reaching its recoverable amount or its net realizable value, which may not be precise.
There is a possibility to undo the adjustment at the time of integration in the Edos. End of business abroad according to what is most convenient at the time of integration.
Also to account for the operations carried out by these companies, the average exchange rate can be used, as long as there are no representative fluctuations.
6.2 FOREIGN ENTITIES
These companies are very well defined and have a significant degree of autonomy so they accumulate cash and other monetary items, incur expenses, generate income and possibly agree to borrow money in their local currency. You can carry out operations in foreign currency (including in the currency of the financial statements of the company that presents the financial statements).
Its exchange rate variations produce a zero or very small direct effect on present or future cash flows of the ordinary activities of both companies, so such variations affect the net investment of the company in the foreign entity and not in the individual entities. whether or not they are monetary.
These types of companies are what we know as consolidated groups, where there is a representative part of the investment of the Parent company over other types of companies, whether they are subsidiaries, affiliates, etc.
6.2.1 Indicative Circumstances That A Business Abroad Is A Foreign Entity:
- There is autonomy (to a high degree) of its activities, even when the company that presents the Edos. End. (Parent) could control overseas business Transactions with parent company are not a high proportion of the overseas establishment's activities The overseas operations activities are financed with funds from its own operations or with local loans. Payment or settlement for the costs of labor, materials and other costs of products and services of foreign businesses are made in local currency. Sales of foreign businesses are mainly produced in currencies other than those of the Edos. End of the parent company.The cash flows of the Parent company are independent of the day-to-day activities of the foreign businesses.
Assets and Liabilities (monetary or non-monetary)
They are recorded at the closing exchange rate.
Expenses and income
According to the exchange rate existing on the dates of the transactions, except in the case of foreign companies that belong to hyperinflationary economies, in this case it will be at the closing rate.
Also in these cases, and for practical reasons, an approximate exchange rate is frequently used to convert the income and expenses of a business abroad.
All exchange differences resulting from the process will be classified as components of equity, until the disposal of the net investment.
Exchange differences are caused by:
- The conversion of income and expense items using the exchange rates of the dates of the respective transactions, as well as that of assets and liabilities at the closing exchange rate The conversion of the net investment in a foreign entity at a rate exchange rate different from the one that was converted in previous financial statements and other changes in the equity of the foreign entity.
They are not recognized as EXPENSES OR INCOME for the year, since the corresponding variations in exchange rates have little or no direct effect on the cash flows of the ordinary activities of the foreign entity or the Parent company.
When a Foreign Entity of which the entire capital is not owned is consolidated, the accumulated differences appear in the conversion and correspond to Minority Interests, are attributed to them, and are presented as components of the minority interests item in the consolidated balance sheet.
Any goodwill arising in the acquisition of a foreign entity, as well as adjustments to the fair value of the carrying amounts of assets and liabilities that occur after the acquisition of a foreign entity, can be treated alternatively as:
- Assets and liabilities of the foreign entity, in which case they are translated at the closing exchange rate. Assets and liabilities of the company presenting the financial statements, which have already been expressed in the currency of the States. End. Or they are monetary items in foreign currency, which are converted using the exchange rate existing at the time of the transaction.
6.2.3 Incorporation of the financial statements of a foreign entity in those of the parent company (company that presents the financial statements).
The incorporation of the financial statements to the parent company can be carried out through the normal consolidation procedures, established in IAS 27 and 31 and correspond to:
- Elimination of balances Intra-group transactions.
The exchange difference arising from a short or long term intra-group monetary item cannot be eliminated with the related amount arising in other intra-group balances, such monetary item represents a commitment to convert one currency into another, and exposes the company to losses or earnings when exchange fluctuations appear; therefore, the difference will continue to be recognized as an expense or income or as a component of equity until the moment of disposal of the net investment.
These exchange differences are caused by:
- The conversion of income and expense items using the exchange rates of the dates of the respective transactions, as well as that of assets and liabilities at the closing exchange rate The conversion of the net investment in a foreign entity at a rate exchange rate different from the one that was converted in previous financial statements and other changes in the equity of the foreign entity.
They are not recognized as EXPENSES OR INCOME for the year, since the corresponding variations in exchange rates have little or no direct effect on the cash flows of the ordinary activities of the foreign entity or the company that presents the financial statements.
6.2.4 Hyperinflationary Economies.
The financial statements of a foreign entity that presents information in the currency of a hyperinflationary economy must be restated in accordance with IAS 29 (Financial Information in Hyperinflationary Economies), before proceeding to convert them to the currency of the financial statements of the company that presents the Edos. End.
When the economy in question stops having hyperinflationary characteristics and the foreign entity stops preparing and presenting its reports in accordance with IAS 29, the company must:
Treat the amounts expressed in the corresponding unit of measure, on the date of the last restatement, as acquisition costs, for the purposes of translation into the currency of the Parent's financial statements.
6.2.5 Disposal of a Foreign Entity.
First, let's define what are the causes for considering that there is an alienation:
- Sale, liquidation, repayment of capital or abandonment of all or part of the operations carried out by said entity.
- The payment of dividends is part of the disposal operations, only when it constitutes a return of the investment.
The accumulated amount of exchange differences related to the foreign entity disposed of (which have been deferred until now), must be recognized as an expense or income in the same year in which the gains or losses derived from the disposal are recognized.
In the case of partial disposal, only the proportional part of the accumulated exchange differences will be included in the profit or loss for the year.
The fact of making a provision on the carrying amount of the investment in a foreign entity does not constitute a partial disposal. In accordance with the foregoing, if such provision is constituted, no part of the exchange differences accumulated up to that moment and deferred until the sale will be recognized.
7. CHANGE IN THE CLASSIFICATION GIVEN TO A BUSINESS ABROAD
Whenever there is a change in the form of financing or in the way in which the activities of the foreign company are related to the Parent company, there is a change in the given classification, so that the exchange differences arising at the time of reclassification will be as follows, provided that the company is classified as:
FOREIGN ENTITY
Differences will be recorded as components of equity
BUSINESS ABROAD
The differences will be recorded as acquisition costs of those same items in the year in which the change takes place and in subsequent years.
Exchange differences that have been deferred in the past are not recognized as expenses or income until the time of the alienation of the business abroad.
When the financial statements of a foreign entity refer to a different date than those of the Parent, the foreign entity will prepare financial statements with the same dates as those of the latter, provided that the difference does not exceed three months (IAS 27). In this case, the assets and liabilities of the foreign entity are converted at the exchange rate on the balance sheet date presented by this entity, when appropriate, adjustments will be made for significant movements in exchange rates until the balance sheet date of the entity. Parent company according to IAS 27 and 28.
8. EXAMPLE
In order to clarify the concepts described above for Foreign Entities, the following example of two companies is presented, where A corresponds to a Spanish company, this being the parent company of the group and B a Mexican company, corresponding to a subsidiary; both are Variable Capital Stock Companies and the consolidation method used is the elimination of balances (global integration or participation).
During 2002, Company A sold stocks (merchandise) to B obtaining a profit of 500 euros. B sold 50% of these inventories to third parties that same year and another 25% in 2003. The purchase was paid in cash. At the end of 2003, the balance sheets and income statements of these companies were:
STATE OF FINANCIAL POSITION
The euro / peso exchange rates (indicate how many pesos can be bought with 1 euro) are:
Historical exchange rate (12/31/2001): 8.09338
Average exchange rate in 2002: 9.24883
Average exchange rate in 2003: 12.33799
Closing exchange rate (12/31/2003): 14.08585
Determination of the Average Exchange Rate of the Year 2003 peso against Euro
Prepare the consolidated accounts as of 12/31/2003.
Solution
Taking into consideration what has been described above and with knowledge of what is established in the rules relating to Consolidation procedures, first the accounts of the investee company must be expressed in euros. For this we will use the following exchange rates:
The balance sheet items (excluding capital and reserves) are translated at the exchange rate at closing.
The capital account is converted using the historical exchange rate (1).
The reserve account is broken down:
- Those existing at the time of acquisition (500 euros) are converted using the historical exchange rate. (1) Those generated in 2002 (part of the profits of that year that has remained in the company) are converted using the exchange rate which was used to convert the profit and loss account for that year, that is, the average rate for 2002. (2). The income statement is converted using the average exchange rate for the year (3). The accounts of Company B expressed in euros are therefore:
STATE OF FINANCIAL POSITION
4) There is a conversion difference with a negative sign of 783 euros, which allows assets and liabilities to be balanced.
| PASSIVE | ||||
| Capital | 4,000 | 8.09338 | 494 | (one) |
| Bookings | 9,000 | 1,050 | ||
| Breakdown | 5,000 | 8.09338 | 618 | (one) |
| 4,000 | 9.24883 | 432 | (two) | |
| Translation difference of consolidated companies | -783 | (4) | ||
| Results of the exercise | 16,000 | 12,33799 | 1,297 | (3) |
| Providers | 18,000 | 14.08585 | 1,278 | |
| Other ac / p debtors | 31,000 | 14.08585 | 2,201 | |
| 78,000 | 5,537 |
STATEMENT OF INCOME
| Sells purchases | 65,000 | 12,33799 | 5,268 | |
| 8,500 | 12,33799 | 689 | ||
| (+) | Variation of existences | -5,000 | 12,33799 | -405 |
| (+) | Ending Stock | 37,000 | 12,33799 | 2,999 |
| (-) | Initial stocks | 42,000 | 12,33799 | 3,404 |
| (=) | Gross margin | 51,500 | 4,174 | |
| (-) | Amortization of property, plant and equipment | 8,000 | 12,33799 | 648 |
| (-) | Other expenses | 27,500 | 12,33799 | 2,229 |
| (=) | Result of the excersice | 16,000 | 1,297 |
With these data, it is possible to prepare the consolidated accounts for 2003:
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
The consolidation effects apply the following adjustments:
- The amount of "participations in group companies" is eliminated. The equity of the investee company is eliminated. The part of the equity of the investee company that corresponds to 20% owned by other partners is recognized. In the acquisition by A of 80% of B a trading fund of 200 euros was generated. As 2 years have passed since the acquisition, 20% of this fund (40 euros) has been amortized: 20 euros in 2002 (charged against reserves) and 20 euros in 2003 (charged against results). the conversion difference is assigned to 20% owned by other partners The reserves of the investee company have increased since the participation was acquired by 432 euros, of which 80% (346 euros) correspond to the participation of the parent company.This amount is recorded in the account "reserves in consolidated companies". 25% of the inventories sold in 2002 by Company A to B are still in stock, while another 25% was sold in 2003. This entails the following settings.
- In reserves, 100% of the profit originated in this sale was collected, therefore the one corresponding to this 50% (250 euros) must be eliminated. In the income statement, the profit of 25% of the stocks sold this year must be collected. This setting is done as follows:
Opening stocks for the period were overvalued by € 250 (at the beginning of the year, 50% of these stocks were in stock). Being an item of expenses, this deduction has a positive sign.
Ending stocks are overvalued by € 125 (25% of stocks are in stock). This adjustment is also included in the balance sheet, under the heading "inventories".
These two adjustments have a positive impact on results of 125 euros.
The results for the year increase by 105 * euros:
- 125 for the sale to third parties of 25% of the inventories sold to Company B in 2002, and 20 euros for the amortization of goodwill.
The results of the year are distributed between the parent company and the other partners.
9. INFORMATION TO BE DISCLOSED
Companies must disclose in their financial statements:
- Amount of exchange differences that have been included in the net profit or loss for the year Exchange differences, which have been classified as components of equity, as well as a reconciliation of the balances of the differences at the beginning and end of the The amount of exchange differences arising during the year, which have been incorporated into the book value of the assets, according to the alternative treatment allowed.
The reasons for the use of a currency other than the local currency must be reported, when this is used in the preparation of financial statements, or for its use in any eventuality.
If there is a change with a material effect in the classification of a foreign business, the company must disclose the following:
- Nature of the change in the classification. Reasons for making said change. Impact that the change has had on the net worth of the company. Impact on the net profit or loss from each year, which is the subject of presentation.
The company must disclose the method selected to convert goodwill and fair value adjustments of the balance sheet items, arising at the time of the acquisition of a foreign entity.
In this way, the effect of the variation in exchange rates that occurred after the balance sheet date will also be reported, either on monetary items or on the financial statements of a foreign business, provided that the variation is of such importance that the lack Information about it could affect the ability of users of financial statements to correctly perform evaluations and make appropriate decisions.
The standard advises companies to report on the policy followed in risk management in foreign currency.
Download the original file
