Items of Statement of Profit or Loss And Other Comprehensive Income are given and described shortly below.
• Income and expenses. In common, these are converted at the rates current at the dates the applicable transactions occur. For items that relate to non-monetary items, such as depreciation and amortization, the rates used are those used to convert the related non-monetary items.
• Dividends paid. These are converted at the rate current at the date of payment.
• Dividends declared. These are converted at the rate current at the date of declaration.
• Transfers to/from reserves. As mentioned previously, if internal transfers are made, the rates applicable are those existing when the amounts transferred were originally recognized in equity.
The application of these rules will cause exchange differences. Exchange differences happen mainly from converting the foreign operation’s monetary items at current rates in the same way as for the foreign currency monetary items of the entity. As the non-monetary items are converted using a historical rate that is the same for year to year, no exchange differences arise in relation to the non-monetary items. In addition, items in the statement of profit or loss and other comprehensive income such as sales, purchases and expenses give rise to monetary items such as cash, receivables and payables. Therefore, the exchange difference over the period can be explained by examining the movements in the monetary items over the period.
Exchange differences arising on the settlement of monetary items or on converting 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 recognized in profit or loss in the period in which they arise, except as described in paragraph 32 of IAS 21.
The exchange differences are then taken to the current period’s statement of profit or loss and other comprehensive income in the same way as movements in the exchange rates on an entity’s own foreign currency monetary items.
The application of the fundamental principles of the conversion method means that when an entity keeps its records in a currency other than its functional currency all amounts are re-measured in the functional currency. This produces the same amounts in that currency as would have occurred had the items been recorded initially in the functional currency.
