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the cost of inventory can have been determined at one date and the net realizable value or recoverable amount at another date. The effect may be to change the amount
of any impairment loss recognized in the functional currency.
PRACTICAL INSIGHT
FJA AG, a German company, discloses that the statements of comprehensive incomes of foreign operations are converted at annual average rates. This
follows IAS 21, which allows a rate that approximates to actual exchange rates for the transaction, such as an average rate for the period, to be used to
translate income and expense items of a foreign operation.
Facts
CASE STUDY 1
An entity buys inventory from a foreign supplier for €4 million. The functional currency of the entity is the dollar. The date of the order was March 31,
20X9, the date of shipping was April 7, 20X9, the date of the invoice was April 8, 20X9, the date the goods were received was April 15, 20X9, and the
date the invoice was paid was May 31, 20X9.
Required
What is the date of the transaction for the purpose of recording the purchase of inventory?
Solution
Although IAS 2, Inventories, does not refer to the date of the initial recognition of inventory, IAS 39 says that a liability should be recognized when the
entity becomes party to the contractual provisions of a contract. The date that the risks and rewards of ownership pass will essentially be the date of the
transaction for these purposes.
It is unlikely that the ownership will pass on the date of the order, but it could pass on shipping, depending on the nature of the agreement. Similarly, it
could pass on receipt of the goods, but it is unlikely to pass on receipt of the invoice or when payment is made.
Thus the date of the transaction in this case is likely to be the date of shipping or date of receipt, depending on when the risks and rewards of ownership
pass and who would suffer loss if the inventory was damaged or lost in transit.
RECOGNITION OF EXCHANGE DIFFERENCES
Exchange differences arising on monetary items are normally reported in profit or loss in the period.
However, exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation shall be recognized in profit
or loss in the separate financial statements of the reporting entity or the individual financial statements of the foreign operation, as appropriate. In the consolidated
financial statements such exchange differences are recognized initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the
net investment.
Furthermore, when a gain or loss on a nonmonetary item is recognized in other comprehensive income, any exchange component of that gain or loss shall be
recognized in other comprehensive income. In addition, when a gain or loss on a nonmonetary item is recognized in profit or loss, any exchange component of that
gain or loss shall be recognized in profit or loss.
On the disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation recognized in other comprehensive
income and accumulated in the separate component of equity, shall be reclassified from equity to profit or loss (as a reclassification adjustment) when the gain or loss
on disposal is recognized. Loss of control gives rise to recognition in profit or loss of the parent’s share of deferred foreign exchange differences accumulated in the
separate component of equity in accordance with IAS 21 for a net investment in a foreign subsidiary. The same principle applies when a parent loses control of a
subsidiary that was classified as a foreign operation but retains an investment in that foreign operation. Thus, the entire cumulative gain or loss attributable to the parent
is recognized in profit or loss on loss of control.
If there is a change in the parent’s ownership interest in a subsidiary after control is obtained that does not result in a loss of control, deferred foreign exchange
differences recognized directly in equity are reattributed between controlling and noncontrolling interest without recognizing a profit or loss. If the parent subsequently
loses control of the subsidiary only the parent’s share of deferred foreign exchange differences recognized previously in equity is recognized in profit or loss.
CASE STUDY 2