Unit 3: Foreign currency and joint arrangements
International Accounting notes · PTU syllabus (MCOPAF311-18)
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Unit summary
Multinationals operate in many currencies and through joint arrangements. This unit covers IFRS 11 joint arrangements, IFRS 12 disclosure of interests in other entities, IAS 21 effects of changes in foreign exchange rates, foreign currency transactions and hedging of foreign exchange risk, and translation of foreign currency financial statements.
After this unit you can
- Explain joint operations and joint ventures under IFRS 11 and IFRS 12 disclosures
- Account for foreign currency transactions under IAS 21
- Explain hedging of foreign exchange risk
- Translate foreign operations' financial statements into the presentation currency
PTU syllabus topics
- IFRS 11 joint arrangements
- IFRS 12 disclosure of interests in other entities
- IAS 21 effects of changes in foreign exchange rates
- foreign currency transactions and hedging foreign exchange risk
- translation of foreign currency financial statements
Assets and liabilities
Closing rate
Other comprehensive income
Income and expenses
Rate at transaction date (or average)
Other comprehensive income
Monetary items in own books
Closing rate
Profit or loss
Topic 1
IFRS 11 — joint arrangements
- Joint arrangement: two or more parties have joint control — decisions about relevant activities require unanimous consent.
- Joint operation: parties have rights to the assets and obligations for the liabilities — each recognises its share of assets, liabilities, revenues and expenses.
- Joint venture: parties have rights to the net assets — accounted using the equity method (IAS 28); proportionate consolidation is no longer allowed.
Topic 2
IFRS 12 — disclosure of interests in other entities
- Disclose significant judgements (control, joint control, significant influence), interests in subsidiaries (NCI, restrictions), joint arrangements and associates (summarised financial information, commitments), and unconsolidated structured entities (nature, risks).
- Purpose: help users evaluate the nature of interests, associated risks and effects on financial position and performance.
Topic 3
IAS 21 — foreign currency transactions
- Functional currency: currency of the primary economic environment (determined by sales prices, costs, financing). Presentation currency: currency in which statements are presented.
- 1Initial recognition
At spot rate on the transaction date
- 2Monetary items at reporting date
Retranslated at closing rate
- 3Non-monetary items at historical cost
Keep historical rate
- 4Non-monetary items at fair value
Rate at the date fair value was measured
- 5Exchange differences
Recognised in profit or loss
Example
An Indian company buys goods for US$ 10,000 on 1 March when ₹83/$, pays on 15 April at ₹84/$; year end 31 March rate ₹83.50/$. Purchase recorded at ₹8,30,000; payable restated to ₹8,35,000 (loss ₹5,000 in 2024–25); settlement at ₹8,40,000 (further loss ₹5,000 next year).
Topic 4
Hedging foreign exchange risk
- Exposures: transaction exposure (receivables/payables in foreign currency), translation exposure (consolidation of foreign subsidiaries), economic exposure (future cash flows and competitiveness).
- Hedging instruments: forward contracts, currency futures and options, currency swaps; natural hedges (matching foreign currency inflows and outflows).
- Hedge accounting (IFRS 9): fair value hedge — changes in both hedged item and instrument in P&L; cash flow hedge — effective portion in OCI and reclassified when the hedged transaction affects P&L; hedge of a net investment in a foreign operation — in OCI (foreign currency translation reserve).
Topic 5
Translation of foreign currency financial statements
Assets and liabilities
Closing rate at the reporting date
Income and expenses
Exchange rates at transaction dates (average rate as approximation)
Equity items
Historical rates
Resulting differences
Other comprehensive income — foreign currency translation reserve (FCTR)
On disposal of foreign operation
FCTR reclassified to profit or loss
- Hyperinflationary economies (IAS 29): restate financial statements in current units before translation.
Current rate method
All assets and liabilities
Used by IAS 21 for foreign operations
Temporal method
Monetary items; non-monetary at historical rates
Used when the foreign operation is an extension of the parent (US GAAP concept)
Monetary/non-monetary method
Monetary items only
Older method
Current/non-current method
Current items only
Older method
Key terms
- Joint control
- Contractually agreed sharing of control requiring unanimous consent
- Functional currency
- Currency of the primary economic environment
- Monetary item
- Units of currency held and assets/liabilities to be received or paid in fixed currency units
- Cash flow hedge
- Hedge of variability in cash flows
- Foreign currency translation reserve
- Equity reserve for translation differences
Quick revision
- IFRS 11: joint operation (own share) vs joint venture (equity method).
- IFRS 12: disclosures of judgements and interests.
- IAS 21: spot rate at transaction; closing rate for monetary items; differences to P&L.
- Hedging: transaction, translation, economic exposure; IFRS 9 hedge accounting.
- Translation: assets/liabilities at closing rate, income at average, differences to OCI.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Distinguish a joint operation and a joint venture.
- Q2.What does IFRS 12 require?
- Q3.Distinguish functional and presentation currency.
- Q4.How are monetary items translated at the reporting date?
- Q5.What is a cash flow hedge?
- Q6.What is FCTR?
Long-answer questions
- Q1.Explain accounting for joint arrangements under IFRS 11.
- Q2.Explain accounting for foreign currency transactions under IAS 21.
- Q3.Explain hedging of foreign exchange risk and hedge accounting.
- Q4.Explain the translation of foreign currency financial statements.
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