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Content
30.2.2.2 Assessment of functional currency.
30.2.2.2.1 Steps involved in determining functional currency.
30.2.2.2.1.1 Review the primary indicators.
30.2.2.2.1.2 Review the secondary indicators (if required)
30.2.2.2.1.3 Review additional factors where still in conclusive from step 1 and 2.
30.2.2.3 Definition of foreign operation.
30.2.2.4 Requirements to review each entity individually.
30.2.2.5 Examples of determining a functional currency.
30.2.2.5.1 Intermediary holding company.
30.2.2.5.2 Function currency – foreign currency sales.
30.2.2.6 Rules with regard to a change in functional currency.
30.3.1 Extract from FRS102: Section 30.6 -30.11.
30.3.2.1.1 Definition of monetary items.
30.3.2.1.2 Examples of monetary items.
30.3.2.1.3 Recognition of monetary items.
30.3.2.1.3.1 Initial recognition.
30.3.2.1.3.1.1 Determining the date of the transaction.
30.3.2.1.3.1.2 Rules for using average rate as approximation for actual spot rate.
30.3.2.1.3.2 Subsequent measurement
30.3.2.1.3.2.1 The two exceptions to retranslating monetary assets at period end rate.
30.3.2.1.3.3 Retranslation of monetary asset – purchase.
30.3.2.1.3.4 Retranslation of monetary asset – sale.
30.3.2.2.1 Definition of non-monetary items.
30.3.2.2.1.1 Examples of non-monetary items.
30.3.2.2.2.1. Non-monetary assets not fair valued.
30.3.2.2.2.1.1 Initial recognition.
30.3.2.2.2.1.2 Subsequent measurement
30.3.2.2.2.1.4.2 Retranslation of non-monetary asset – impairment of asset
30.3.2.2.2.2 Non-monetary assets fair valued.
30.3.2.2.2.2.1 Initial recognition.
30.3.2.2.2.2.2 Subsequent measurement
30.4 Net investment in a foreign operation.
30.4.1 Extract from FRS102: Section 30.12 -30.13.
30.4.2.1 Definition of net investment in a foreign operation.
30.4.2.2 Requirements for the net investment in a foreign operation treatment
30.4.2.3 Accounting for a net investment in a foreign operation.
30.4.2.3.1 Individual entity financial statements.
30.4.2.3.2 Consolidated financial statements.
30.4.2.4 Example – Net investment in a foreign operation.
30.5 Change in functional currency.
30.5.1 Extract from FRS102: Section 30.14 -30.16.
30.5.2.1 When can a change in functional currency arise.
30.5.2.1.1 Change in functional currency due to a change in circumstances.
30.5.2.1.2 Change in functional currency due to an error
30.5.2.2 How to account for a change in functional currency due to a change in currency.
30.6 Use of a presentation currency other than the functional currency.
30.6.1 Extract from FRS102: Section 30.17-30.21.
30.7 Translation of a foreign operation into the investor’s presentation currency.
30.7.1 Extract from FRS102: Section 30.22-30.23.
30.7.2.1.1 Treatment of amount recognised in OCI on future disposal
30.7.2.2 Goodwill recognized on acquisition of a foreign operation.
30.8.1 Extract from FRS102: Section 30.24 -30.27.
30.8.2.3 Notes to the financial statements.
30.8.2.3.1 Extract from the financial statements – operating profit note.
30.8.2.3.3 Example of a Prior year adjustment due to a change in functional currency.
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30.5 Change in functional currency
30.5.1 Extract from FRS102: Section 30.14 -30.16
30.14 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.
30.15 As noted in paragraphs 30.2 to 30.5, the functional currency of an entity reflects the underlying transactions, events and conditions that are relevant to the entity. Accordingly, once the functional currency is determined, it can be changed only if there is a change to those underlying transactions, events and conditions. For example, a change in the currency that mainly influences the sales prices of goods and services may lead to a change in an entity’s functional currency.
30.16 The effect of a change in functional currency is accounted for prospectively. In other words, an entity translates all items into the new functional currency using the exchange rate at the date of the change. The resulting translated amounts for non-monetary items are treated as their historical cost.
30.5.2 OmniPro comment
30.5.2.1 When can a change in functional currency arise
As per section 30.15 of FRS 102 once a functional currency has been determined at inception it cannot change unless this is a change to the underlying transactions event and conditions.
30.5.2.1.1 Change in functional currency due to a change in circumstances
Section 30.16 of FRS 102 states that a change in functional currency is adjusted prospectively.
30.5.2.1.2 Change in functional currency due to an error
However where the functional currency was wrong due to an error then it would have to be adjusted retrospectively under Section 10. An example of such a retrospective adjustment has not been shown in this manual, however disclosures have been included. If this were the case, then a detailed exercise would need to be performed to identify the historical costs of the non-monetary assets and equity so that the asset can be retranslated at that date of the transaction. This would be a very time consuming exercise for an entity. See an example of possible disclosure at 30.8.2.3.3
30.5.2.2 How to account for a change in functional currency due to a change in circumstances
For a change in functional currency due to a change in circumstances both the profit and loss and balance sheet in the prior year comparatives are restated at the foreign exchange rate at the date of the change in functional currency as stated in Section 30.16 of FRS 102. The carrying amount of non-monetary items when retranslated at the date of change remains the historical costs for these items going forward.
See example below for application of the guidance in Section 30.14 to 30.16 of FRS 102. Note where the change occurs at the start of a financial year, the prior year profit and loss would be translated at the average exchange rate so as to allow comparability. An example of a disclosure is included in the disclosure section at 30.8.2.3.2
Example 11: Change in functional currency due to a change in circumstances
Company A carries out a software trade in Australia where its functional currency was CU. At the start of the year Company A was acquired by a US multinational software Group. Following acquisition, the US group using its synergies restructured the group whereby all of the cost of sales with regard to the software developments was recharged by the US parent in FC. This resulted in 85% of all costs being incurred in FC. The acquisition also resulted in the Company acquiring a significant portion of contracts with companies around the world all of these contracts were agreed in FC and received from customers in FC. 70% of all sales are now in FC. The company acquired FC loans from other group companies to allow it to expand.
From the above facts, it can be seen that the functional currency has changed to FC as the primary indicators now indicate that it is FC. If we assume for simplicity here that the functional currency changed on 1 January 2014 and the year end is 31 December 2014. Assume the year end FX rate at 1 January 2014 was CU1=FC1.20. The opening balance sheet would be retranslated as follows:
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Examples
Example 1: Intermediary holding company.
Example 2: Intermediate holding Company.
Example 3: Intermediate holding Company.
Example 4: Functional currency.
Example 5: Functional currency.
Example 6: Retranslation of monetary asset – purchase.
Example 7: Retranslation of monetary asset – sale.
Example 8: Retranslation of non-monetary asset
Example 9: Retranslation of non-monetary asset – impairment of asset
Example 10: Net investment in a foreign operation.
Example 11: Change in functional currency due to a change in circumstances.
Example 12: Presentational currency.
Example 13: Consolidation of a foreign operations results.
Example 14: Extract from notes to the accounting policies.
Example 16: Example of a Prior year adjustment due to a change in functional currency.
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