Objective: To establish how companies should include foreign currency activities in their financial statements and how to translate financial statements into a presentation currency.
Monetary Items
Items that will be affected by changes in exchange rates:
- Accounts payable, accounts receivable
- Liabilities
Required to be remeasured: in each transaction and at reporting date
Non-Monetary Items
Items not affected by changes in exchange rates:
- Property, plant and equipment (PPE)
- Investment property
- Inventory
Not remeasured at reporting date
Recognized at cost using the exchange rate at the date of transaction
Non-Monetary Items Measured at Fair Value
When non-monetary items are measured at fair value:
Revaluation model: Fair value
Changes recognized in:
- Any Change Recognised in Other Comprehensive Income (OCI)
- Unless Reverse for Previous Loss Recognised in Statement of Profit or Loss (SOPL)
Measured at the exchange rate on the date of measurement
Summary Table
| Item Type | Examples | Exchange Rate Treatment | Measurement |
|---|---|---|---|
| Monetary Items | Accounts payable, Accounts receivable, Liabilities | Affected by exchange rate changes | Remeasured at each transaction and reporting date |
| Non-Monetary Items | PPE, Investment property, Inventory | Not affected by exchange rate changes | Recognized at cost using transaction date exchange rate |
| Non-Monetary at Fair Value | Revalued assets | Affected when measured at fair value | Measured at exchange rate on date of fair value measurement |
Key Principles
Functional Currency: The currency of the primary economic environment in which the entity operates
Presentation Currency: The currency in which financial statements are presented
Exchange Differences: Arise from translating items at exchange rates different from those at initial recognition
Recognition of Exchange Differences
- Monetary items: Exchange differences recognized in profit or loss
- Non-monetary items at fair value: Exchange differences treated as part of fair value gain/loss
- Equity investments at FVOCI: Exchange differences recognized in other comprehensive income