Accounting for Foreign Currency Transactions and Foreign Operations (IAS 21)


Applicable Standards

  • IAS 21: The effects of changes in foreign exchange rates

Transactions in Foreign Currency

Lifecycle of a foreign currency transaction

  • Initial recognition
    • Translate the foreign currency amount into the functional currency at the spot exchange rate on the transaction date.
    • E.g. Dr Receivables, Cr Sales with Yen(US$100 * 100)
  • Reporting at period end
    • For monetary items
      • Cash, payables, receivables
      • Re-translate using closing rate at period end
      • E.g. Cr Receivables, Dr Income Statement (exchange loss) with Yen(US$100 * (100 – 80)), due to a strengthened Yen
    • For non-monetary items
      • Inventory, non-current assets
      • Not re-translated, kept at initial recognition amount
      • If there is a revaluation to fair value, re-translate at the exchange rate at the date of the FV adjustment.
  • Settlement
    • Re-translate using exchange rate at settlement
    • E.g. Dr Cash with Yen(US$100 * 90), Cr Receivable with Yen(US$100 * 80), Cr Income Statement (exchange gain) with Yen(US$100 * (90-80)), due to a weaker Yen.
  • Exchange differences (in the functional currency) upon re-translation or settlement are recognised in P&L. If gain/loss on a non-monetary item is recognised in OCI, then exchange differences on that item should be recognised in OCI as well.

Consolidation of Foreign Operations

Statement of Financial Position

  • Translated at closing rate (rate at reporting date)

Statement of Comprehensive Income / Income Statement

  • Transactions are translated at their individual dates. A single average rate can be used for all transactions if reasonable.

Consolidated Statement of Financial Position

  • Perform the consolidation as per normal.
  • Goodwill
    • Calculated in the functional currency of the foreign Sub and then re-translated at closing rate. The rate previously used is the rate at the acquisition date.
    • Exchange difference is recognised in OCI and credited to foreign exchange reserve within Equity.
  • Parent’s reserves
    • Add a “Foreign currency gain/loss on the Cost of Investment of the Sub” = Cost of Investment * (closing rate – acquisition rate) to match up with the Goodwill computation.

Calculating Exchange Difference for reporting in OCI

  • Foreign Exchange Reserve
    • A separate foreign exchange reserve under Equity (not retained earnings) is created for all exchange differences.
    • All exchange differences are recognised in OCI (not P&L), and flow into this separate reserve.
    • This reserve will  be maintained until the foreign operation is disposed.
  • Total exchange gain/loss is the balancing figure in the group’s reserve movement (the easy way)
    • Opening group reserves
    • Profits for the year
    • – Dividends paid
    • + Total exchange gain/loss
    • = Closing group reserves
  • Total exchange gain/loss = exchange gain/loss in closing net assets + exchange gain/loss in goodwill (the hard way)
    • Exchange gain/loss in “Closing Net Assets” = Closing Net Assets * Closing rate – (Opening Net Assets * Opening Rate + Sub’s Profits for the year * Average rate)
    • Exchange gain/loss in Goodwill = Closing goodwill * (Closing rate – Opening rate)
  • Group’s share of Exchange gain/loss =
    • Exchange gain/loss in Goodwill
    • + Group’s interest in Sub * Exchange gain/loss in Closing Net Assets
  • NCI’s share of Exchange gain/loss =
    • NCI’s interest in Sub * Exchange gain/loss in Closing Net Assets
  • Increase in Parent’s reserves (the hard way)
    • Share of Sub’s profit (= Group’s interest in Sub * Sub’s Profits for the year * Average rate)
    • + Group’s share of Exchange gain/loss
  • NCI (the hard way)
    • NCI share of net assets at acquisition = NCI interest in Sub * Net assets at acquisition * Rate at acquisition
    • + NCI share of post-acquisition profits = NCI interest in Sub * Post-acquisition profits * Average rate
    • + NCI’s share of Exchange gain/loss
  • NCI (the easy way)
    • NCI interest in Sub * Closing Net Assets * Closing rate

Handling Exchange Gain/Loss in OCI during Disposal of Sub

  • The cumulative balance in the separate equity reserve (i.e. previously recognised in OCI)  is reclassified to P&L (added to the Gain on disposal of Sub).
  • Amount reclassified is proportionate to % of Sub disposed. Note that amounts attributed to NCI is not reclassified.
  • To prevent equity being impacted the 2nd time (i.e. double counting of gain/loss), an offsetting loss/gain will be entered into OCI.




  1. Pingback: Foreign Currency Gain Or Loss Accounting | - February 14, 2015

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