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IAS 21, para 30 and 31
06-24-2009, 04:01 PM
Post: #1
IAS 21, para 30 and 31
Dear experts,

I am having some difficulty in understanding the below para.
Can anyone explain it with some example or give me the name of summary where it is explained in detail. Thanks !

<font color="green">30. When a gain or loss on a non-monetary item is recognised directly in equity, any exchange component of that gain or loss shall be recognised directly in equity. 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.

31. Other Standards require some gains and losses to be recognised directly in equity. For example, IAS 16 requires some gains and losses arising on a revaluation of property, plant and equipment to be recognised directly in equity. When such an asset is measured in a foreign currency, paragraph 23© of this Standard requires the revalued amount to be translated using the rate at the date the value is determined, resulting in an exchange difference that is also recognised in equity.</font id="green">
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06-24-2009, 04:08 PM
Post: #2
 
I mean how exchange differences arise in non-monetary items ?
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06-24-2009, 04:51 PM
Post: #3
 
The gain or loss on revaluation of Property, plant and equipment is a non-monetary item as it does not involve any transfer of economic resources.

e.g a piece of land (treated according to IAS16 NOT IAS 40)at a NBV of <b>$5m</b> is owned by a Pakistani company in USA, when the exchange rate was <b>$1=Rs 60</b>.
The entity decides to revalue the property, after a significant decline in the US property prices, to <b>$3m</b>. The exchange rate at the time of revaluation was <b>$1= Rs 80</b>. The functional currency of the entity is Rupees.

Before the revaluation, the entity would have recorded the Land in its books at <b>Rs300m</b> ($5m x 60).
After the revaluation the the value of the land would be recorded at <b>Rs240m</b> ($3 x 80).
This loss on revaluation of <b>Rs60m</b> ( Rs300m - Rs 240m) would be recognized directly in equity.
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06-24-2009, 11:59 PM
Post: #4
 
Thanks for the reply.

In Rs.60m, there must be some portion of exchange difference and some portion of revaluation loss. Fine to recognize in equity but where to classify Rs.60 m

1) Whole amount In revaluation loss ?
2) Whole amount in exchange difference ?
3) Some portion in exchange difference and some in revaluation loss ?

Can you prepare journal entry both $ and Rs.

Thanks
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06-25-2009, 04:00 AM
Post: #5
 
An excellent observation....
You are correct to point out that the loss of Rs60m resulted because of two factors
1) Revaluation of the land from $5m to $3m
2) A change in the exchange rate from $1=60 to $1=80

It is however impossible to separate the effects of revaluation and changes in exchange rate in the amount of Rs60m.

The entry in the above mentioned case is fairly simple

<b>Dr Revaluation Reserve ----- Rs 60m
Cr Land---------------------------------Rs 60m</b>

Since the changes are directly taken into equity, NO adjustment is required in the Statement of Comprehensive Income.
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06-25-2009, 12:34 PM
Post: #6
 
Finally resulting exchange difference will be classified in revaluation reserves.

Your example depicts revaluation decrease which had to be taken in Profit or loss rather than in equity and the exchange component would have been adjusted in profit or loss. (16.40)

Anyhow, Can you help with some other examples where exchange differences arise in non-monetary items ?

Thanks
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06-25-2009, 04:51 PM
Post: #7
 
I suggest everyone to visit this site
http//www.accountingstandards.com.au/pdfs/AASB121extract.pdf
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06-25-2009, 08:35 PM
Post: #8
 
The assumption i had taken was that a revaluation reserve for the asset already existed.... which is consistent with IAS 16.40 according to which a decrease arising as a result of a revaluation should be recognized as an expense <b>to the extent that it exceeds any amount previously credited to the revaluation surplus</b> relating to the same asset.

After reading from the link u hav provided, i hav realized that I clearly had a wrong understanding regarding the separation of the revaluation element and the gain/loss on foreign exchange component.

If i separate the revaluation and foreign exchange component (as presented in the link u hav provided)...then in my example given above ...The Net Loss on Revaluation of Rs 60m would comprise of a Loss on Revaluation of Rs120m and a Foreign exchange Gain of Rs60m.

It is clear that the Loss on Revaluation of Rs120m would be deducted directly from the Revaluation Reserve(assuming revaluation reserve for the asset exists)...but the Foreign exchange gain of Rs60m cannot be taken in Profit and Loss as IAS 21.30 specifically states that <b>"When a gain or loss on a non-monetary item is recognised directly in equity, any exchange component of that gain or loss shall be recognised directly in equity."</b>

If the Revaluation Reserve for the asset doesn't exist, then u r correct to point out that the decrease in revaluation would be taken into P&L along with the Exchange component.

An interesting question is that what would be the treatment according to IAS 21.30-31 if the Revaluation Reserve does not have sufficient funds to account for the Loss in Revaluation? In such a case Revaluation Reserve for the asset would be completely eliminated and the remaining amount would be taken into P&L. But what will be the treatment for the Exchange component of the Net Loss in Revaluation? Will it be taken into equity or P&L? As a part of the loss on non-monetary item is recognised in equity(the amount eliminated in the Revaluation Reserve) and the remaining amount in P&L...will we recognize the Exchange component of the loss in Equity or P&L? My guess is that we would pro-rate the exchange component of the loss according to the amounts of the Revaluation component of the loss recognized in equity and P&L.... what do u think?
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