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| International Accounting standard(IAS) IAS-21 |
What is the International Accounting Standards (IAS-21)? Describes in details:
IAS 21 (International Accounting Standard 21) is a standard issued by the International Accounting Standards Board (IASB) that provides guidelines on the effects of changes in foreign exchange rates. It outlines how to account for foreign currency transactions and the translation of financial statements of foreign operations into the reporting currency.
Key aspects of IAS 21 include:
1.Functional Currency:
Each entity should determine its functional currency, which is the currency of the primary economic environment in which the entity operates. This currency is used to measure the financial performance and position of the entity.
2.Foreign Currency Transactions:
Transactions in foreign currencies must be recorded using the exchange rate at the date of the transaction. If the exchange rate changes between the transaction date and the settlement date, the difference is recognized as a foreign exchange gain or loss.
3.Translation of Foreign Operations:
When translating the financial statements of a foreign operation into the reporting currency, IAS 21 provides two methods based on whether the foreign operation is integrated or a self-sustaining entity.
4.Current Rate Method:
For self-sustaining foreign operations, assets and liabilities are translated at the closing rate at the end of the reporting period, and income and expenses are translated at the exchange rates at the dates of the transactions. Any exchange differences are recognized in other comprehensive income.
5.Temporal Method:
For integrated foreign operations, assets and liabilities are translated at historical exchange rates, and income and expenses are translated at the exchange rates on the transaction dates. Exchange differences are recognized in profit or loss.
6.Exchange Differences:
Exchange differences arising from the translation of foreign currency transactions or the translation of foreign operations are generally recognized in profit or loss, unless they relate to net investments in foreign operations, in which case they are recognized in other comprehensive income.
7.Disclosures:
IAS 21 requires disclosures related to the impact of foreign exchange rates on financial statements, including the amount of foreign exchange gains or losses recognized in profit or loss, the functional currency of the entity, and the impact of translating foreign operations.
In short, IAS 21 governs how to handle foreign currency transactions and translation of foreign operations, ensuring that the financial impact of currency fluctuations is properly accounted for and disclosed in the financial statements.