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Exchange difference on payment to contractor for development on fixed assets

ca.lokeshjain — Sun, 08 Nov 2009 16:22:08 +0000

we have a contract for development of a fixed assets, as per the contract:-

Total Contract amount = 260 Million AED

We have to pay this amount in Euro that is already fixed as per the contract it is 4.49 AED per Euro

whatever is the rate prevailing currently doesnt matter bcoz it has been already fixed in contract,

so my concern is exchange loss on payment will be added to the value of fixed Assets or

will have to transferred to P&L A/c

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Conversion of foreign currency expenses with local currency

admin — Sun, 13 Sep 2009 09:21:21 +0000

Dear

I am in a financial organization. Our company pays some expenses (e.g. salary, fees) with foreign currency. In every month we prepare P/L account with local currency. We also perform currency exchange and change our sale/bye rate according to central bank and also booked exchange gain/loss determining mid rate. So, in which rate we convert such foreign curreny expenses with local currency to show in the P/L account monthly as well as yearly? As currency rate is variable, so at year end which rate will be applicable to prepare yearly Trial Balance. I have presented 2 scnerion bellow on expense and profit calculation base on mid rate. Please give details as per IFRS/IAS on such conversion rate.

Scenerio – 1

Month USD Rate Monthly Exp. in Local Currency Accumulated Expenses
Calculation Method Amount
Jan 10 49 (10*49)-00 490 490
Feb 10 50 (20*50)-490 510 1000
March 10 49 (30*49)-1000 470 1470
Dec 10 51 (40*51)-1470 570 2040
Total for the period 2040

P/L Account (local Currency)

Month Profit/(Loss) Accumulated Profit/(Loss)
Jan (490) (490)
Feb (510) (1000)
March (470) (1470)
Dec (570) (2040)

Scenerio – 2

Month USD Rate Monthly Exp. In Local Currency Accumulated Expenses
Calculation Method Amount
Jan 10 49 490 10*49 490
Feb 10 50 500 20*50 1000
March 10 49 490 30*49 1470
Dec 10 51 510 40*51 2040
Total for the period 1990

P/L Account (local Currency)

Month Profit/(Loss) Accumulated Profit/(Loss)
Jan (490) (490)
Feb (500) (990)
March (490) (1480)
Dec (510) (1990)

Any of the above calculation is correct? or which is the calculation method as IFRS/IAS

Regards

Tohel

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Forex translation and cash flow statement

LDaneti — Sat, 09 May 2009 16:58:12 +0000

Dear all,

I have to translate the financial statements from local currency (not a hyperinflationary economy) in EUR according IAS 21 (EUR is presentation currency) for a stand-alone company (no consolidation needed) for the first year of activity (no openings).

Income statement is translated at the average exchange rates (sum of each month separately).

Balance sheet is translated at the closing rate (end-of-the-year exchange rate) for all items (including fixed assets and equity).

First case:

The equity contains the net profit/loss (already translated at the average exchange rates). To obtain the balance it result a “translation adjustment”.

IAS 21 – 39 c “all resulting exchange differences shall be recognised in other comprehensive income”

IAS 21 – 41 “The exchange differences referred to in paragraph 39(c) result from:

(a) translating income and expenses at the exchange rates at the dates of the transactions and assets and liabilities at the closing rate.

(b) [… ]

These exchange differences are not recognised in profit or loss because the changes in exchange rates have little or no direct effect on the present and future cash flows from operations. The cumulative amount of the exchange differences is presented in a separate component of equity until disposal of the foreign operation …”

It seams to be quite clear that the translation adjustment is a BS element but my auditor (one of the big 4) asks me to apply the closing exchange rate also to the accumulated deficit element from equity. In that manner, BS is closing (assets = liab + Sh equity) and the translation adjustment is not a separate element in BS, it is included in P&L result. The IAS 21 is not respected.

Q1: am I right or it is something that I do not understand?

Second case:

Let assume that the translation adjustment obtained after the translation of P&L and BS is 20 EUR (irrespective of the placement: P&L or BS).

The next step is to do the cash flow statement (indirect method).

The main problem is that the indirect method uses the BS items (except from first line – “Profit/Loss”), items that are translated at the closing rate. In this way, it looks like IAS 7 is not respected (it is not used the spot rate or the average rates for the transaction).

If average rates are used, the elements of the cash-flow do not reconcile with the BS elements (i.e. the share capital in BS is 100 but in cash-flow the increase in the share capital is 105, and so on). More than that, the cash-flow bottom line has to be the same with cash from BS. After that type of translation, the translation adjustment will be different in cash-flow (i.e. 25) than that from BS.

My personal feeling is that for indirect method is applied the cash-flow has to be simply recomputed from P&L and BS and not to translate the cash-flow from local currency to the presentation currency. By doing this all the 3 financial statements reconcile perfectly.

Q2: which method is correct?

Thanks,

Luminita

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Foreign currency translation issue

admin — Thu, 30 Apr 2009 07:11:20 +0000

Dear Colleagues,

I have a practical case regarding the subject for a not-for profit organization based in USA having operations in several African countries.Most of functional currencies of the field operations are their respective local currencies (Neither USD nor hyper Inflationary).Funds are advanced to these places from HQ periodically and will be converted to the functional currency for operational and regulatory reason. At the end of the year, Its field offices prepare financial statement on local currencies.The translation to reporting currency becomes difficult for those field office banks don’t have Ask price for USD, it doesn’t seem they have one,Specially those countries using African franc (XAF or XOF) Or getting bank buying rate for Euro is nothing to impossible.In this situation, what rate do you suggest to use to translate field office report (Balance sheet and Income Statement) to reporting currency i.e USD and Should the exchange rate gain or loss be a balancing figure?where do you suggest the gain or loss on exchange rate be classified & reported in the financial statement?

I would welcome your thoughts.

Best Regards

Aki

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PPP

ifrslist — Sun, 14 Dec 2008 22:29:00 +0000

Please give me your opinion on forex loss on Assets. Do you capitalize it or do expense it to the foreign loss

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dear strauss,,

in the normal course of business, an account namely “profit/loss on currency exchange rate” is opened under the caption of “share capital & reserves”.

for more understanding, plz mention the company business.

Regards,

amamd

dear strauss,

it will be precessed through income statement, it will not be capitalized. . . today, most of softwares provide previlege of mutilple currency. . .

for your understanding, you should present it through profit & loss statement under the head “gain/loss on currency exchange”.

Regards,

ammad

Danella,
there are two different issues around foreign currency:
1) Translation adjustements on consolidation while translating the balance sheet from the operating to the functional currency. These differences are accounted for under translation adjustments directly through equity as these are basically unrealized gains/losses.
2) Foreign exchange gains or losses on transactions. When recognizing assets, all costs directly attributable to that asset should be capitalized. That would include foreign currency losses. The same method applies for fixed as well as financial assets.

I hope that helps,

Jeroen

As per A S 11. we cannot capitalise the forex loss on fixed asset but we have certain criteria to capitalise.

dear Danella,

plz explain the situation in detail you are encountering.

thanx & regards,

ammad

Any expenditure directly linked to the formation of assets is reflected in the cost of asset……

when added to cost of asset they become eligible for depriciation.any foriegn exchange on a capital transaction is a capital loss and hence by any stretch of imagination cannot be charged to Revenue….leave alone any standard.

Regards

R.Veeraraghavan

We bought equipment- Specifically to upgrade our CORE from a foreign supplier before our Financial Year-end. The equipment arrived at our warehouse before year-end, because of some reason we could not arrive the equipment on our system. But the transaction were recognize at the rate as at year-end. We didn’t hedge the transaction.

The payment were due in October which is after year-end. The South African Rand were much weaker against the USD, which means our forex loss in the new year is extremely high. The liability relating to this assets is much higher than at year-end.

Hope this explain a bit more

Danella

Dear,

such currency difference will be incorporatred as increase in the value of asset and will capitalized over the life of asset.

Regards,

ammad

Which means the asset became more expensive and it should be capitalized for the higher amount (intial cost + forex costs)

Dear Danella

The assets should be capitalized when it is received and put to use.
The foreign currency will be transalated based on the bill of lading
date. Assets should be debited and liability should be credited. Later
on while making the payment whatever loss or profit on transaltion
arises should be expensed/ income and not to be capitalized. The
payment has nothing to do with assets capitalization.

Thanks

Hemant

Danella,

I double checked after the comment below, and I agree with Hemant. IAS 21.28 explicitly states that gains/losses on forex should be recognized in P&L. The forex is not attributable to the asset but to the financial liability.

My apologies for my earlier answer.

Regards,

Jeroen

As far as AS-11 and Companies Act 1956 is concerned there is contradictry between these two. AS-11 suggest for charging it in P&L where Act permits to adjust it with value of Assets. But section 211 of Act says that books of accounts must be kept as per accounting standards. So, in my opinion it should be charged against profit.

–
With regards,
Sharvan

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Request for auditing standard

ifrslist — Sun, 14 Dec 2008 22:27:00 +0000

Dear all,

Can you share me the international auditing standard document. Thanks

Danella,I double checked after the comment below, and I agree with Hemant. IAS 21.28 explicitly states that gains/losses on forex should be recognized in P&L. The forex is not attributable to the asset but to the financial liability.http://www.ifac.org/IAASB/

My apologies for my earlier answer.

Regards,

Jeroen

http://www.ifac.org/Store/Category.tmpl?Category=Auditing%2C%20Assurance%20%26%20Related%20Services

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Where can I find pdf copy of US GAAP and US GAAP APB?

ifrslist — Sun, 14 Dec 2008 22:22:00 +0000

Do anyone know where I can download copy of US GAAP and US GAAP APB?

Thanks Dessanti for your answer

Our position is less than 1%, we bought in the active market Euro a
little position to speculate in market price.

The IAS 39 don’t include equity investment as applicable financial
asset to recognized the gain or loss in foreign exchange in the
current period income statement, as its explain as follows:

Available-for-sale financial assets (AFS)…. … Fair value changes on
AFS assets are recognised directly in equity, through the statement of
changes in equity, except for interest on AFS assets (which is
recognised in income on an effective yield basis), impairment losses,
and (for interest-bearing AFS debt instruments) foreign exchange gains
or losses. ……..

However, the IAS 21 explain: Foreign Currency Transactions

A foreign currency transaction should be recorded initially at the
rate of exchange at the date of the transaction (use of averages is
permitted if they are a reasonable approximation of actual). [IAS
21.21-22]

At each subsequent balance sheet date: [IAS 21.23]

Foreign currency monetary amounts should be reported using the closing rate.
Non-monetary items carried at historical cost should be reported using
the exchange rate at the date of the transaction.
Non-monetary items carried at fair value should be reported at the
rate that existed when the fair values were determined.

Exchange differences arising when monetary items are settled or when
monetary items are translated at rates different from those at which
they were translated when initially recognised or in previous
financial statements are reported in profit or loss in the period,
with one exception. [IAS 21.28] The exception is that exchange
differences arising on monetary items that form part of the reporting
entity’s net investment in a foreign operation are recognised, in the
consolidated financial statements that include the foreign operation,
in a separate component of equity; they will be recognised in profit
or loss on disposal of the net investment. [IAS 21.32]

If a gain or loss on a non-monetary item is recognised directly in
equity (for example, a property revaluation under IAS 16), any foreign
exchange component of that gain or loss is also recognised directly in
equity. [IAS 21.30]

We aren’t sure if IAS 21 applies to equity investment as AFS or equity
investment as a subsidiary participation or as part of foreign
operation, in that sense was focus our doubt.

Roberto

The standard applicable to AFS is IAS 39 even if the investment is in
a currency other than your own reporting currency.

Despite the managerial intention, if the percentage of interest owned,
directly or indirectly, by your company is above the threshold
indicated by IAS 28, IAS 31 or IAS 27 (respectively 20%, 50% and above
50%), then the investment does not meet the criteria for a
classification in the category Available for Sale (AFS) and has to be
consolidated.

An exception is applicable if your company has already started a
process for its sale within twelve months and the outcome of the sale
is likely to be successful. In this circumstance, the applicable
standard is IFRS 5.

Best regards

Antonello

Hi all,

We need some guidance in connection to apply the rules explained in
IAS 21 related to if investments AFS in capital instruments is a
non-monetary item.

Theses equity investments were made without the intention of take
control on any company, just receipt the dividends and sale it in a
high level.

thks

You will have to pay for the full versions of the US GAAP although
FASB does provide good summaries gratis. Right now the FASB is working
on a codification project for US GAAP and one can sign up and get the
full US GAAP for the rest of the year.( Note that codification is
still experimental)

I put the reference to this in my blog in June

http://ifrscanadadevilisinthedetails.blogspot.com/2008/06/ifrs-and-us-gaap-fasbs-two-horses.html

http://ifrscanadadevilisinthedetails.blogspot.com/

Hai. You can download it from fasb.org.

Regards

Godang

Pay? If you want to have it all in a neat CD Rom yes you are right but
here we go free of chargeFree Download FASB Pronouncements—Statements, Concepts Statements,
Interpretations, and Technical Bulletins, and individual EITF
Abstracts—Adobe PDF Fileshttp://www.fasb.org/st/index.shtml#int25FASB Pronouncements and
EITF AbstractsStatements of Financial Accounting Standards
Statements of Financial Accounting Concepts
FASB Interpretations
FASB Staff Positions
FASB Technical Bulletins
EITF Abstractshttp://www.fasb.org/pdf/aop_FIN23.pdf

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Equity investments AFS is a non-monetary items?

admin — Sun, 14 Dec 2008 18:45:00 +0000

Hi all,

We need some guidance in connection to apply the rules explained in IAS 21 related to if investments AFS in capital instruments is a non-monetary item.

Theses equity investments were made without the intention of take control on any company, just receipt the dividends and sale it in a high level.

Thanks

Roberto

The standard applicable to AFS is IAS 39 even if the investment is in a currency other than your own reporting currency.

Despite the managerial intention, if the percentage of interest owned, directly or indirectly, by your company is above the threshold indicated by IAS 28, IAS 31 or IAS 27 (respectively 20%, 50% and above 50%), then the investment does not meet the criteria for a classification in the category Available for Sale (AFS) and has to be consolidated.

An exception is applicable if your company has already started a process for its sale within twelve months and the outcome of the sale is likely to be successful. In this circumstance, the applicable standard is IFRS 5.

Best regards

Antonello

Thanks Dessanti for your answer

Our position is less than 1%, we bought in the active market Euro a little position to speculate in market price.

The IAS 39 don’t include equity investment as applicable financial asset to recognized the gain or loss in foreign exchange in the current period income statement, as its explain as follows:

Available-for-sale financial assets (AFS)…. … Fair value changes on AFS assets are recognised directly in equity, through the statement of changes in equity, except for interest on AFS assets (which is recognised in income on an effective yield basis), impairment losses, and (for interest-bearing AFS debt instruments) foreign exchange gains or losses. ……..

However, the IAS 21 explain: Foreign Currency Transactions

A foreign currency transaction should be recorded initially at the rate of exchange at the date of the transaction (use of averages is permitted if they are a reasonable approximation of actual). [IAS 21.21-22]

At each subsequent balance sheet date: [IAS 21.23]

Foreign currency monetary amounts should be reported using the closing rate.
Non-monetary items carried at historical cost should be reported using the exchange rate at the date of the transaction.
Non-monetary items carried at fair value should be reported at the rate that existed when the fair values were determined.

Exchange differences arising when monetary items are settled or when monetary items are translated at rates different from those at which they were translated when initially recognised or in previous financial statements are reported in profit or loss in the period, with one exception. [IAS 21.28] The exception is that exchange differences arising on monetary items that form part of the reporting entity’s net investment in a foreign operation are recognised, in the consolidated financial statements that include the foreign operation, in a separate component of equity; they will be recognised in profit or loss on disposal of the net investment. [IAS 21.32]

If a gain or loss on a non-monetary item is recognised directly in equity (for example, a property revaluation under IAS 16), any foreign exchange component of that gain or loss is also recognised directly in equity. [IAS 21.30]

We aren’t sure if IAS 21 applies to equity investment as AFS or equity investment as a subsidiary participation or as part of foreign operation, in that sense was focus our doubt.

Roberto

Based on my experience in a banking group with a large portfolio of AFS in foreign currency, the changes in fair value due to the fluctuations of the exchange rates was recognized in the profit or loss, with the change of fair value due to other reasons in the other comprehensive income. However, when separating the foreign exchange rate change from the other components of the revaluation was not practical, the entire change of the fair value was recognized in the other comprehensive income, an item pertaining to the shareholders’ equity.

Please also note that from the scope of the IAS 21, AFS financial assets are excluded as per paragraph 3.a (… except for those derivative transactions and balances that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement).

I hope this will help.

Hello.

I fm India and working in Kuwait as Finance Manager. I would like to
do CPA. Pls. suggest me the institution. Also let me know whether I
can take exams outside US.

Thanks in advance.

Regards…MANJUNATH

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Foreign Currency

ifrslist — Thu, 28 Aug 2008 15:27:00 +0000

Dears

I have a question regarding bank a/c in foreging currency, as we have one bank account in euro, where as we are maintaing our books in local currency (other than euro).

Every month we there is difference in exchage rate, and we closing our books on monthly basis. in my opinion we have to record the difference (if there) every month either expense or income, where as my manager want to show this difference (if there) one time only at the year end and he want to keep this monthly difference in temporary account (like other accurals).

So need your opinion in this regard.

Thanx & regards.

Hameed

You are right, every closing the exchange rates have to be updated and the gain/loss has to be recorded in the P&L. The only reason not to do this would be materiality (i.e. the effect is not material on net income and equity).

Kind regards,

Henk

Your comments are enlightening to me since currently am preparing for ACCA P2 exams. Most of the things am readings are just theories but its good to hear these things happening the world of accountants.please continue commenting am benefiting.

We do not record in P&L immediately. We first book all items on a temporary account (countervalue of the foreign exchange position) and then we only book the net amount on P&L by eleminating this account. It is important to know how this position on this euro account has been created.

If you have funding for the same amount and the amount is placed pn that account, there is no FX position and so there will be no impact on P&L. If this euro position has been created by a foreign exchange transaction or by paiement of invoices in other currency than the home currency, then a foreign exchange risk exists en all gains and losses need to be recorded immediately in P&L.

Peter.

From a tax perspective, at each period end, we would revalue all deferred tax assets and liabilities stemming from temporary differences at the ending spot rates. This will be a B/S revaluation. If you had any subsequent revisions to previously booked deferreds, then that true up would need to come through to the P&L (unless it were originally taken through equity).

Any transactional gain in going from operating currency to functional currency (if different) would be a P&L item.

So from my perspective the difference is whether you’re dealing with a current period P&L item – where the difference would be booked to P&L – or on a carrying balance on the B/S, in which case the currency translation adjustments would be balance sheet.

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Hedging on Foreign Currencies

ifrslist — Thu, 28 Aug 2008 15:27:00 +0000

Dear friends,

it happens that I am an employee of a manufacturing company who is making hedging for foreing currencies transactions.

Do you happen to have documentation on the bookings that I have to make in the balance sheet/profit&loss account?

With a specific example: spot exchange rate, forward exchange rate, what I should book as P&L gain/loss and in B/S as payables/receivables?

Thank you.

Adrian Mitranus

First question: Is the hedging done to cover up for risks related to the purchase of goods or as a financial instrument?

Jorge,
90% is made to cover risks related to purchase of goods.
10% related to financials , let say a loan in foreign currency for which we should cover.
Thanks.

You record the purchases in FX against the hedging rate, if there is a remainder that is not covered, that is recorded against the current spot rate. There will be no gain or loss, since the hedging will fix the payable against the hedging rate. Only gains or loss will be recorded on the part not hedged (remainder of a transaction), the gain loss will be the difference between the spot rate at transaction date and the spot rate at date of paying the creditor.

Kind regards,

Henk Oonk

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Articles on IAS 21

ifrslist — Thu, 28 Aug 2008 15:25:00 +0000

Sir,

I am a Trainee Student of Chartered Accountancy of Pakistan (ICAP) and doing articles in Anjum Asim Shahid Rahman Chartered Accountants Karachi.

I have started my study of Mod-E and need of comprehensive article on different IAS so Please

mail me a soft copy of IAS-21 (The Effects of Changes in Foreign Currency).

Thankful to u for this favor.

Regards,

I AM A CHARTERED ACCOUNTANT PRACTISING IN INDIA AND SPECIALISING IN IFRS.

AS REGARDS YOUR QUERY YOU LOG ON TO www.accountingreform.ru WHERE YOU CAN GET WORKBOOKS FOR ALL IFRS

Thank you very much for the link. I am a university lecturer in the Caribbean and I find the link very useful

Very Usefull link

Thanks a mil

Regards

No related posts.

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Difference of exchange

ifrslist — Thu, 28 Aug 2008 15:20:00 +0000

Dear All ,
Now we are part of an International Company : so we have to report monthly figures of our 35 units , our 35 units are in different country so different currency ,

We are Consolidating all the units in The Holding and we report one figure to the Worldwide company , every month they send us the rate that we should use.

MY QUESTION IS : AS PER MY KNOWLEDE FIXED ASSETS SHOULD HAVE A HISTORICAL RATE AND WE SHOULD NOT DO A MONTHLY EVALUATION FOR THAT , BUT THEY ARE ASKING US TO DO SO .

CAN ANY ONE ADVISE HOW WE DEAL WITH FIXED ASSETS IF THERE IS MONTHLY EVALUATION????

Hi Tony

Historical cost is used when we have acquired fixed asset in foreign currency (21.23(b)). But while consolidating and presenting financial statements in presentation currency, closing rate should be used. (21.39(a)).

I hope this will help.

Dear Tony,

I agreed with your aproach – fixed assets should be kept at hystorical cost and that’s it all about.

No revaluations are necesary in foreign currency.

Best regards,

Dear Tony

For Consolidation purpose, IAS21 uses closing rate method. Then you should used closing rate for all assets and liabilities to translation.

Fixed assets used historical rate when you used for foreign currency transactions.

Don’t be confused about foreign currency transactions VS Foreign currency translation.

Consolidation process used Foreign currency translation from functional currency into a different presentation currency.

Best Regards;

Wichet

PS. Please see Vikas’ opinion, I strongly agreed with him.

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IAS 23 Borrowing costs – Forex diffrences

ifrslist — Thu, 28 Aug 2008 15:08:00 +0000

As per the amended IAS 23, all borrowing costs on qualifying assets should be capitalised (no option to expense).

Does exchange differences on foreign currency loans qualify as borrowing costs to be capitalised?

Best regards
Allan

Hi Allan

To my understanding any positive/negative FX difference is expensed directly to the P&L.

Regards,
Marc

The change to IAS23 will come into force on Jan 2009. So far that is only allowed alternative, the benchmark tre
atment is to expense.

The exchange differences on foreign currency should be included to assets under construction and therefore capitalised. After capitalisation of qualifying asset any exchange differences that may arise should expensed to P&L.

Regards,

Jakub

Allan

IAS 23.6 (e) continues to allow exchange differences arising from foreign currency borrowings to be capitalised as borrowing costs to the extent that they are regarded as an adjustment to interest costs. The same has not changed even under the improvements project.

From a practical aspect, you would need to determine how much of the exchange difference can be capitalised.This would be to the extent that the exchange difference represents an adjustment to the interest cost of the borrowings. You would need to find another local currency loan which could have been taken at the same time for the same purpose and based on that, work out how much of the borrowing cost can be capitalised.

Regards
Vatsala

Foreign exchange is considered to be a part of financing cost. Therefore Under allowed treatment of borrowing cost, foreign exchange differences should be capitalized as borrowing cost.

Reg

Shabi

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Foreign exchange loss/gain

ifrslist — Thu, 28 Aug 2008 14:43:00 +0000

Dear all,

I cannot find how can I book the fx loss, gain into profit and loss
account. Should I book it as other cost/revenue or financial
cost/revenue?

–
Taczmann

Book it as a separate component of financial expenses and income, so the
categories should be:

Interest income
Interest expense
Foreign currency gains (losses)

Net financial results = sum

Kind regards,

Henk

Dear Judit
In practice most of the company showing FX charges in Financial
charges.

With Best Wishes and Regards

Thank you for your answer, however in Austrian GAAP, the f/x loss is
shown as other cost and f/x gain on a/p or a/r is shown as other
revenue. Should I rebook this according to IFRS as financial gain/loss
or can I leave them there?

For proper classification as per IFRS.\\Ex gain loss is Finance costl /
income

SHABI

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