15.1 Each entity should identify its reporting currency. An entity‘s reporting currency is the currency of the primary economic environment in which the entity operates.
15.2 The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. Therefore, the following are the most important factors an entity considers in determining its reporting currency:
(a) the currency:
(i) that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled), and
(ii) of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.
(b) the currency that mainly influences labour, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled).
15.3 The following factors may also provide evidence of an entity‘s reporting currency:
(a) the currency in which funds from financing activities (issuing debt and equity instruments) are generated.
(b) the currency in which receipts from operating activities are usually retained.
15.4 The following additional factors are considered in determining the reporting currency of a foreign operation, and whether its reporting currency is the same as that of the reporting entity (the reporting entity, in this context, being the entity that has the foreign operation as its subsidiary, branch, associate or joint venture):
(a) whether the activities of the foreign operation are carried out as an extension of the reporting entity, rather than being carried out with a significant degree of autonomy.
An example of the former is when the foreign operation only sells goods imported from the reporting entity and remits the proceeds to it. An example of the latter is when the operation accumulates cash and other monetary items, incurs expenses, generates income and arranges borrowings, all substantially in its local currency.
(b) whether transactions with the reporting entity are a high or a low proportion of the foreign operation‘s activities.
(c) whether cash flows from the activities of the foreign operation directly affect the cash flows of the reporting entity and are readily available for remittance to it.
(d) whether cash flows from the activities of the foreign operation are sufficient to service existing and normally expected debt obligations without funds being made available by the reporting entity.
© Copyright 61 SME-FRF & SME-FRS (Revised December 2015)
Foreign currency transactions
15.5 A foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.
15.6 At the end of each reporting period:
(a) foreign currency monetary items should be reported using the closing rate; and (b) non-monetary items (including investments in subsidiaries, associates and joint
ventures) denominated in a foreign currency should be reported using the exchange rate at the date of the transaction or event (for example, the recognition and reversal of an impairment loss).
15.7 Exchange differences arising on the settlement of monetary items or on reporting an entity’s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognised as income or expenses in the period in which they arise.
Translation of a foreign operation
15.8 Where a foreign operation does not form an integral part of the entity and operates as a separate business with local finance, it is not uncommon that the foreign operation would report in a currency which is different from the reporting currency of the entity. Where this is the case, the results and financial position of the foreign operation should be translated into the reporting currency of the entity using the following procedures:
(a) assets and liabilities for each statement of financial position presented (i.e. including comparatives) should be translated at the closing rate at the end of that reporting period;
(b) income and expenses for each income statement (i.e. including comparatives) should be translated at average rate for the period or closing rate at the end of that reporting period; and
(c) all resulting exchange differences should be recognised as a separate component of equity.
15.9 On the disposal of a foreign operation, the cumulative amount of the exchange differences deferred in the separate component of equity relating to that foreign operation should be recognised in profit or loss when the gain or loss on disposal is recognised.
15.10 Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation should be treated as assets and liabilities of the foreign operation. Thus they should be expressed in the reporting currency of the foreign operation and should be translated at the closing rate.
Forward contracts
15.11 Where a non-speculative forward contract is used as a hedge of a net monetary asset or liability the gain or loss on the contract should be taken to the income statement and the discount or premium may be either amortised over the period of the contract or taken to the income statement.
© Copyright 62 SME-FRF & SME-FRS (Revised December 2015) 15.12 Where a non-speculative forward contract is used as a hedge of a firm commitment no gain or
loss need normally be recognised during the commitment period. At the end of that period any gain or loss will be added to, or deducted from, the amount of the relevant transaction. The discount or premium should be either amortised over the period of the contract or deferred with the gain or loss.
15.13 Where a forward contract is speculative the gain or loss should be credited or charged to the income statement.
Disclosure
15.14 An entity should disclose:
(a) the accounting policy adopted for foreign currency transactions, including the basis used in the translation of the foreign currency transactions, balances denominated in foreign currencies at the end of the reporting period and the basis used in the translation of financial statements of foreign operations and the treatment accorded to exchange differences;
(b) the amount of exchange differences included in the profit or loss for the period; and (c) net exchange differences recognised as a separate component of equity, and a
reconciliation of the amount of such exchange differences at the beginning and end of the period.
© Copyright 63 SME-FRF & SME-FRS (Revised December 2015)