Translation to the Presentation Currency from the Functional Currency

IAS 21, The Effect of Changes in Foreign Exchange Rates defines Presentation Currency as the currency in which the financial statements are presented. While the Functional Currency was defined as the currency of the primary economic environment in which the entity operates.

As stated in para.38 of IAS 21, an entity may present its financial statements in any currency. If the presentation currency differs from the entity’s functional currency, it translates its results and financial position into the presentation currency.

If the financial statements of the entity are not in the functional currency of a hyperinflationary economy, then the results and financial position shall be translated into a different presentation currency using the following procedures :

1. assets and liabilities for each statement of financial position presented (ie including comparatives) shall be translated at the closing rate at the date of the statement of financial position;
2. income and expenses for each statement of comprehensive income or separate income statement presented (ie including comparatives) shall be translated at exchange rates at the dates of the transactions; and
3. all resulting exchange differences shall be recognised in other comprehensive income.

The exchange differences as stated above which result from :

• translating income and expenses at the exchange rates at the dates of the transactions and assets and liabilities at the closing rate;
• translating the opening net assets at a closing rate that differs from the previous closing rate

Such 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. When the exchange differences relate to a foreign operation that is consolidated but not wholly-owned, accumulated exchange differences arising from translation and attributable to non-controlling interest are allocated to, and recognised as part of non-controlling interests in the consolidated statement of financial position (para.41 of IAS 21).

Further, para. 42 of IAS 21 states that the results and financial position of an entity whose functional currency is the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures :

1. all amounts (ie assets, liabilities, equity items, income and expenses, including comparatives) shall be translated at the closing rate at the date of the most recent statement of financial position, except that
2. when amounts are translated into the currency of a non-hyperinflationary economy, comparative amounts shall be those that were presented as current year amounts in the relevant prior year financial statements (ie not adjusted for subsequent changes in the price level or subsequent changes in exchange rates).

When there is a change in an entity’s functional currency, the entity shall apply the translation procedures applicable to the new functional currency prospectively from the date of the change (para.35 of IAS 21) (Hrd).