(IFRS) for Small and Medium-sized Entities (SMEs)

IFRS FOR SMES – JULY 2009Section 30Foreign Currency TranslationScope of this section30.1 An entity can conduct foreign activities in two ways. It may have transactions inforeign currencies or it may have foreign operations. In addition, an entity maypresent its financial statements in a foreign currency. This section prescribes howto include foreign currency transactions and foreign operations in the financialstatements of an entity and how to translate financial statements into apresentation currency. Accounting for financial instruments denominated in aforeign currency and hedge accounting of foreign currency items are dealt within Section 11 Basic Financial Instruments and Section 12 Other Financial InstrumentsIssues.Functional currency30.2 Each entity shall identify its functional currency. An entity’s functional currencyis the currency of the primary economic environment in which the entityoperates.30.3 The primary economic environment in which an entity operates is normally theone in which it primarily generates and expends cash. Therefore, the followingare the most important factors an entity considers in determining its functionalcurrency:(a)the currency:(i)(ii)that mainly influences sales prices for goods and services (this willoften be the currency in which sales prices for its goods and servicesare denominated and settled), andof the country whose competitive forces and regulations mainlydetermine the sales prices of its goods and services.(b)the currency that mainly influences labour, material and other costs ofproviding goods or services (this will often be the currency in which suchcosts are denominated and settled).30.4 The following factors may also provide evidence of an entity’s functionalcurrency:(a)(b)the currency in which funds from financing activities (issuing debt andequity instruments) are generated.the currency in which receipts from operating activities are usuallyretained.30.5 The following additional factors are considered in determining the functionalcurrency of a foreign operation, and whether its functional currency is the sameas that of the reporting entity (the reporting entity, in this context, being theentity that has the foreign operation as its subsidiary, branch, associate or jointventure):184 © IASCF