Question

In Note ii (p. 91) of the Qantas Annual Report 2017 it states:

ii. Foreign Operations

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into Australian Dollars at the exchange rates at the reporting date. The income and expenses of foreign operations are translated into Australian Dollars at the exchange rates at the date of the transactions.

Foreign currency differences are recognised in the Consolidated Statement of Comprehensive Income and accumulated in the Foreign Currency Translation Reserve….  

Required Explain this note to a reader of the Qantas report. Your explanation should deal with all the elements of a set of financial statements, with the translation methods adopted for each element, including all the component parts of equity, together with description of why foreign exchange differences arise, where they are recognized and where do they get transferred to.                      

Answer 1

The objective of IAS 21 The Effects of Changes in Foreign Exchange Rates is to prescribe:

• How to include foreign currency transactions and foreign operations in the financial statements of an entity; and

• How to translate financial statements into a presentation currency.

Recognition of exchange differences ;

• Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognised in profit or loss in the period in which they arise.

• When a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange component of that gain or loss shall be recognised in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss shall be recognised in profit or loss.

• When monetary items arise from a foreign currency transaction and there is a change in the exchange rate between the transaction date and the date of settlement,

• an exchange difference results. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognised in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognised in each period up to the date of settlement is determined by the change in exchange rates during each period.

Translation to the presentation currency :

• An entity may present its financial statements in any currency (or currencies). If the presentation currency differs from the entity’s functional currency, it translates its results and financial position into the presentation currency. For example, when a group contains individual entities with different functional currencies,

• The results and financial position of each entity are expressed in a common currency so that consolidated financial statements may be presented. 39 The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

• (a) assets and liabilities for each balance sheet presented (ie including comparatives) shall be translated at the closing rate at the date of that balance sheet;

• (b) income and expenses for each statement of profit and loss presented (ie including comparatives) shall be translated at exchange rates at the dates of the transactions; and

• (c) all resulting exchange differences shall be recognised in other comprehensive income.