Webinar Slides: Accounting for Foreign Currencies Under IFRS

download Webinar Slides: Accounting for Foreign Currencies Under IFRS

of 29

Embed Size (px)

description

Original air date: July 10, 2014 Archived recording available at http://www.mhmcpa.com Please join us for this webinar in which our IFRS experts will talk about issues surrounding International Accounting Standard (IAS) 21: The Effects of Changes in Foreign Exchange Rates, a standard developed by the IASB to prescribe the accounting effects on a company that operates in more than one currency and reporting requirements when the operational currency of a subsidiary is different relative to that of the parent company.

Transcript of Webinar Slides: Accounting for Foreign Currencies Under IFRS

  • CBIZ & MHM Executive Education Series IFRS: Accounting for Foreign Currency Transactions Presented by: Marco Pulido, Shareholder July 10, 2014
  • 2#CBIZMHMwebinar To view this webinar in full screen mode, click on view options in the upper right hand corner. Click the Support tab for technical assistance. If you have a question during the presentation, please use the Q&A feature at the bottom of your screen. Before We Get Started
  • 3#CBIZMHMwebinar This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar. CPE Credit
  • 4#CBIZMHMwebinar The information in this Executive Education Series course is a brief summary and may not include all the details relevant to your situation. Please contact your service provider to further discuss the impact on your business. Disclaimer
  • 5#CBIZMHMwebinar Todays Presenters Marco Pulido, CPA Shareholder 310.268.2746 | mpulido@cbiz.com Marco has 15 years of experience in public accounting working with U.S. GAAP, IFRS and other foreign accounting standards in the U.S., Europe and in Latin America with Big 4 accounting firms. He has experience with SEC filers (foreign and domestic) and private companies. Marco is a CPA certified in California and has IFRS certifications by the Institute of Chartered Accountants in England and Wales (ICAEW) and the American Institute of Certified Public Accountants (AICPA). Technical accounting expertise includes the following industries: Energy (Oil & Gas) - Retail, Distribution & Manufacturing - Transportation - Utilities - Consumer Services - Construction/Real Estate - Health Sciences Financial Services Agriculture.
  • 6#CBIZMHMwebinar Todays Agenda Principal concepts of IAS 21 Determining the Functional Currency of an entity Effects of changes in exchange rates on Monetary Items Use of a Presentation Currency other than the Functional Currency 1 2 3 4 5 6 Other issues IFRS vs. US GAAP differences
  • 7#CBIZMHMwebinar The standard applies: in accounting for transactions and balances in foreign currencies, except for those derivative transactions and balances that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments in translating the results and financial position of foreign operations that are included in the financial statements of the entity by consolidation or the equity method; and in translating an entitys results and financial position into a presentation currency. Scope of IAS 21
  • 8#CBIZMHMwebinar DEFINITION: The currency of the primary economic environment in which the entity operates. Primary economic environment: Is normally the one in which it primarily generates and expends cash. Functional Currency
  • 9#CBIZMHMwebinar The currency: that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services. that mainly influences labor, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled). Determining Functional Currency Primary factors
  • 10#CBIZMHMwebinar The following factors may also provide evidence of an entitys functional currency: the currency in which funds from financing activities (i.e., issuing debt and equity instruments) are generated. the currency in which receipts from operating activities are usually retained. U.S. GAAP difference: U.S. GAAP has a list of factors to consider, all of which are generally given equal importance. Factors are not distinguished by primary and other. Determining Functional Currency Secondary factors
  • 11#CBIZMHMwebinar 1 1 Additional factors to consider in determining the functional currency of a foreign operation Does this factor suggest that the functional currency of the foreign operation is the same as the reporting entity? The activities of the foreign operation are carried out as an extension of the reporting entity. Yes or No? The activities of the foreign operation are autonomous. Yes or No? Transactions with the reporting entity represent a large proportion of the business activities of the foreign operation. Yes or No? Cash flows of the foreign operation are readily remittable to the reporting entity. Yes or No? Cash flows of the foreign operation are sufficient to service existing and normally expected debt obligations without funds being made available by the reporting entity. Yes or No? Determining Functional Currency Functional currency of a foreign operation vs. reporting entity
  • 12#CBIZMHMwebinar 1 2 Additional factors to consider in determining the functional currency of a foreign operation Does this factor suggest that the functional currency of the foreign operation is the same as the reporting entity? The activities of the foreign operation are carried out as an extension of the reporting entity. Yes The activities of the foreign operation are autonomous. No Transactions with the reporting entity represent a large proportion of the business activities of the foreign operation. Yes Cash flows of the foreign operation are readily remittable to the reporting entity. Yes Cash flows of the foreign operation are sufficient to service existing and normally expected debt obligations without funds being made available by the reporting entity. Yes Determining Functional Currency Functional currency of a foreign operation vs. reporting entity
  • 13#CBIZMHMwebinar When the indicators are mixed and the functional currency is not obvious, management uses its judgment to determine the functional currency giving priority to the primary indicators. Once determined, the functional currency is not changed unless there is a change in the underlying transactions, events and conditions. A change in functional currency can only be applied prospectively. The exchange rate of the new functional currency is applied on the date of the change. < IAS 21.12, 13 and 35 > Determining Functional Currency
  • 14#CBIZMHMwebinar A monetary item is a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency. E.g., Receivable or payable in a foreign currency Monetary items denominated in a foreign currency must be converted to the functional currency of the reporting entity using the spot exchange rate. At reporting dates and until the monetary item is settled, gains or losses due to changes in the exchange rate are recorded in the P&L as exchange gain (loss) Conversely, the essential feature of a non-monetary item is the absence of a right to receive or (an obligation to deliver) a fixed amount of units of currency. Similarly, items are converted to functional currency at date of purchase. However, no subsequent recognition of an exchange gain (loss) for changes in exchange rates. This includes items such: Prepayments for goods or services PP&E purchased in foreign currency (converted at exchange rate at date of purchase to functional currency of the reporting entity with no subsequent adjustment to the cost basis) Monetary vs. Non-monetary Items
  • 15#CBIZMHMwebinar Question: Yes or No A corporation in the U.S. purchases inventory from a supplier in China in Chinese Yuan. Upon receipt of the inventory, the U.S. corporation records a payable. Is the payable a monetary item? Example Purchase of Inventory in Foreign Currency
  • 16#CBIZMHMwebinar Question: Yes or No A corporation in the U.S. purchases inventory from a supplier in China in Chinese Yuan. Upon receipt of the inventory, the U.S. corporation records a payable. Is the payable a monetary item? Response: Yes. The payable represents an obligation to deliver a fixed amount of units of currency. Hence, this monetary item should be translated to the functional currency of the U.S. corporation (dollar) at the date that the payable is recognized, with periodic adjustments to the payable to reflect changes in the exchange rate until settlement date. Changes in the payable due to changes in the exchange rate are recorded as an exchange gain (loss) on the income statement. Example Purchase of Inventory in Foreign Currency
  • 17#CBIZMHMwebinar Financial statements must be maintained in the functional currency of each entity. If maintained in a different currency, i.e. reporting currency, the financial statements must be translated to the functional currency. This entails recognizing all transactions at their original exchange rate, which will result in a gain (loss) at closing dates. U.S. GAAP calls this a remeasurement gain (loss). An