--Chapter 17-Translation of financial statements into a

presentation currency
Explain the purpose of translating financial statements from one currency into
another
Two main issues:
1. What currency will be used for accounting in the overseas location
2. Wat currency will be used for preparation of consolidated F/S of entity as a
whole
F/S may be recorded in a foreign currency and translated into AUD for the
purpose of combining those statements with F/S of a related Australian company.
Distinguish between functional currency and presentation currency
AASB121
Types of currencies
Local currency of country in which foreign operation is based
Foreign currency other than functional currency
Functional currency of primary economic environment in which foreign
entity operates
Presentation- - currency in which F/S are presented by reporting entity

Identifying the functional currency

Primary indicators AASB 121 paragraph 9(a) and (b) should be considered:
Econo
mic
indicat
or
Sales
prices

Sales
market
s
Expens
es

Indicators pointing to
foreign operations
currency as functional
currency
Prices are not primarily
responsive in the short term
to exchange rate changes.
Determined primarily by local
conditions
There are active local
markets, although there may
be significant amounts of
exports
Production costs and
operating expenses are
determined primarily by local
conditions

Indicators pointing to reporting

entitys currency as functional
currency
Prices primarily responsive to
exchange rate changes in the short
term and are determined primarily
by global competition
Sales are mostly in the country of
the reporting entity, or denominated
in the reporting entitys currency
Production costs and operating
expenses are obtained primarily
from reporting entity sources

Note: AASB 121 paragraph 12 states that determination of functional currency is a matter of
judgement

Secondary factors AASB 121 paragraph 10

Economi
c
indicato
rs
Financin
g

Indicators pointing to
foreign operations currency
as functional currency

Indicators pointing to
reporting entitys currency
as functional currency

Funds are primarily

denominated in the local
currency, and come from the
foreign operations activities
including local fund-raising

Retenti
on of
funds

Profits generated by the foreign

operation are retained in the
foreign entity and used for its
expansion

Funds are primarily from the

reporting entity as a result of
that entitys fund raising
activities, or the reporting entity
is expected to service the debt
of the foreign operation
Profits are remitted to the
reporting entity

Additional factors AASB 121 paragraph 11

Economic
indicators

Autonomy

Intercomp
any
transactio
ns

Cash
flows

Indicators pointing to
foreign operations
currency as functional
currency
The foreign operation operates
as an independent entity,
having little interaction either
in terms of inputs or outputs
with the reporting entity
There is a low volume of
intragroup transactions and
there is not an extensive
interrelationship between the
operations of the foreign
operation and those of the
reporting entity. However, the
foreign entity may rely on the
reporting entitys competitive
advantages, such as patents
and trademarks
The cash outlaid on goods and
services is paid to entities
other than the reporting entity,
and cash inflows from sales are
from entities other than the

Indicators pointing to
reporting entitys currency
as functional currency
The foreign operation obtains
raw materials from the
reporting entity

There is a high volume of

intragroup transactions; there is
an extensive interrelationship
between the operations of the
reporting entity and those of
the foreign operation or the
foreign operation is an
investment or financing device
for the reporting entity

The foreign operation pays the

reporting entity for goods and
services and receives revenues
from sales of output to the
reporting entity

Servicing
of debt
obligation
s

reporting entity
The foreign operation
generates sufficient cash to be
able to services its own debt
obligations

The foreign operation relies on

the reporting entity to supply
funds to pay debts incurred by
the foreign operation