International Financial Reporting Standards_guide.pdf

Chapter 22 The Effects of Changes in Foreign Exchange Rates (IAS 21) 251
translation of monetary and nonmonetary items. The net investment can then be
calculated and recognized in the parent’s financial statements per IFRS 3.
■ Goodwill on the acquisition of the foreign operation and any fair value adjustments to
the carrying amounts of assets and liabilities at acquisition date are treated as assets of
the foreign operation and are therefore carried in the functional currency of the foreign
operation and translated at the closing rate each year.
■ At each reporting date until settlement, any monetary items included as part of the
net investment in the foreign operation are translated at the closing rate. The resulting
exchange difference is recognized in profit or loss in the separate financial statements
of the parent, and in other comprehensive income of its consolidated financial
statements.
■ On disposal of the foreign operation, the cumulative exchange differences recognized
in other comprehensive income are transferred to profit or loss when the gain or loss
on disposal is recognized. If it is only a partial disposal, only the proportionate share of
exchange differences is realized and transferred to profit or loss.
■ On impairment of the net investment in the foreign operation, no portion of the
exchange differences in other comprehensive income is realized in profit or loss.
22.5 PRESENTATION AND DISCLOSURE
22.5.1 An entity should make the following disclosures:
■ the amount of exchange differences recognized in profit or loss, except for differences
arising on financial instruments measured at fair value through profit or loss in
accordance with IAS 39; and
■ the net exchange differences classified in other comprehensive income as a separate
component of equity (a foreign exchange reserve), and a reconciliation of the amount of
such exchange differences at the beginning and end of the period.
22.5.2 The difference between the presentation and functional currency should be stated,
together with disclosure of the functional currency and the reason for using a different presentation
currency.
22.5.3 Any change in the functional currency of an entity, and the reason for the change,
should be disclosed.
22.5.4 When an entity presents its financial statements in a currency that is different from
its functional currency, the entity should describe the financial statements as complying
with IFRS only if the statements comply with all the requirements of each applicable standard
and interpretation.
22.6 FINANCIAL ANALYSIS AND INTERPRETATION
22.6.1 Changes in the value of assets and liabilities resulting from exchange rate movements
are treated in one of two ways. Gain or losses from individual transactions are recognized
in profit or loss, whereas changes in the assets and liabilities of foreign operations are
reported in other comprehensive income.
22.6.2 Foreign currency–denominated monetary assets such as cash reflect a gain when the
value of that currency rises relative to the functional currency, and a loss when the value of
that currency falls. Inversely, foreign currency denominated–liabilities reflect a loss when the
value of the foreign currency rises and a gain when it falls. Where an entity holds both mon-