What are the basics of currency translation under IFRS?

What are the basics of currency translation under IFRS?

Basic steps for translating foreign currency amounts into the functional currency

• the reporting entity determines its functional currency.
• the entity translates all foreign currency items into its functional currency.

What are the major differences between IFRS and US GAAP in the translation of foreign currency financial statements?

The primary difference between the two systems is that GAAP is rules-based and IFRS is principles-based. This disconnect manifests itself in specific details and interpretations. Basically, IFRS guidelines provide much less overall detail than GAAP.

What are foreign currency translation adjustments?

The foreign currency translation adjustment or the cumulative translation adjustment (CTA) compiles all the fluctuations caused by varying exchange rate. Businesses with international operations must translate their transactions like the acquisition of assets or the purchase of services into their functional currency.

When treating exchange differences What is included in income for the period?

The exchange differences which arise on monetary items are reported in the income statement in the period. 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.

How is functional currency determined under IFRS?

The functional currency is determined by looking at a number of relevant factors. This currency should be the currency in which an entity usually generates and spends cash. Functional currency should be the one in which the business transactions of an entity are normally denominated.

What is presentation currency as used in IFRS?

The presentation currency is the monetary unit used by a firm to record its transactions and to present its financial statements. The presentation currency is also known as the reporting currency or accounting currency.

What is a translation adjustment?

Translation adjustments are those journal entries made during the process of converting an entity’s financial statements from its functional currency into its reporting currency. The adjustments are needed so that the parent can produce consolidated financial statements.

What do you mean by foreign currency translation?

Foreign currency translation is the restatement, in the currency in which a company presents its financial statements, of all assets, liabilities, revenues, expenses, gains and losses that are denominated in foreign currencies.

How do you account for exchange rate differences?

Post the payment of the accounts receivable at the original rate and record the loss on exchange by accounting for the difference between the original transaction value and the settlement amount. Following the example, credit the bank account with the actual amount paid of $15,500.

How is exchange difference treated?

Accounting Treatment of Exchange Difference Approach # 1. Single Transaction Approach: Single transaction approach is based on the premise that any transaction and its settlement is a single event. So if any exchange difference is there that may be charged to cost of goods purchased or to an export sale.

What is IFRS guidance for foreign currency translation?

In IFRS, the guidance related to accounting for foreign currency translation issues is contained in International Accounting Standard (IAS) 21, The Effects of Changes in Foreign Exchange Rates. Additional IFRS guidance is contained in IAS 29, Financial Reporting in Hyperinflationary Economies.

How are translation differences reported on an income statement?

Amounts in the income statements are translated using the average rate for the accounting period if the exchange rates do not fluctuate significantly. The translation differences arising are reported in equity under other comprehensive income. Translation differences in equity are separately tracked and the cumulative amounts disclosed.

What do you need to know about IFRS and Gaap?

For example, both U.S. GAAP and IFRS require entities to remeasure assets, liabilities, income and expenses into the entity’s functional currency, which is the currency of the primary economic environment in which the entity operates.

How are foreign currency exchange rates are translated?

foreign currency monetary items are translated using the closing rate (i.e. the spot exchange rate at the end of the reporting period); non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction, i.e. are not re-translated using the closing rate;