An examination of whether IAS 21 needs amending

In order to be awarded CPD units you must answer the following five random questions correctly. If you fail the test, please re-read the article before attempting the questions again.

  1. IFRS 7 Financial Instruments; Disclosure requires disclosure of market risk which is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects, in part, currency risk. Which of the following statements is true?

  2. IFRS 7 and IAS 21 have a different conceptual basis. Foreign currency risk is little mentioned in IAS 21 and on applying the definition in IFRS 7 to IAS 21, non-financial instruments could be interpreted as carrying no foreign currency risk. What causes the potential confusion between IAS21 and IFRS 7?

  3. There is an argument that consideration should be given as to whether foreign exchange gains or losses should be recognised in profit or loss or in other comprehensive income (OCI) based on the distinction between current items and non-current items. What would be the effect of this change in accounting policy?

  4. A foreign operation is defined in IAS 21 as a subsidiary, associate, joint venture, or branch whose activities are based in a country or currency other than that of the reporting entity. Why is this definition a little restrictive?

  5. Although the exchange rate at the transaction date is required to be used for foreign currency transactions at initial recognition, an average exchange rate may also be used. What issue can arise with the use of the average rate?

  6. IAS 21 does provide some guidance on non-monetary items by stating that 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. How are the translation gains on long-term liabilities treated in some jurisdictions?

  7. Monetary items are translated at the closing rate, and ,although the items are not stated at fair value, the use of the closing rate does provide some fair value information. Why does IAS 21 not apply this principle to non-monetary items?

  8. IAS 21 states that exchange differences arising from monetary items are reported in profit or loss in the period. What is the exception to this rule?

  9. There is an argument that the current accounting standards might not reflect the true economic substance of long-term monetary assets and liabilities denominated in foreign currency. Why has this argument been raised by preparers of financial statements?

  10. IAS 21 was issued in 1983 with the objective of prescribing 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. What are the key requirements of IAS 21?

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