LONG-TERM LIABILITIES

In the case of long-term liabilities, although any translation gains must be

recognised in profit or loss, and treated as part of reported profit, in
some jurisdictions, these gains are treated as unrealised for the purpose
of computing distributable profit.
The reasoning is that there is a greater likelihood in the case of long-
term liabilities that the favourable fluctuation in the exchange rate will
reverse before repayment of the liability falls due.
As stated already, IAS 21 requires all foreign currency monetary
amounts to be reported using the closing rate; non-monetary items
carried at historical cost are reported using the exchange rate at the date
of the transaction and non-monetary items carried at fair value are
reported at the rate that existed when the fair values were determined.
As monetary items are translated at the closing rate, although the items
are not stated at fair value, the use of the closing rate does provide
some fair value information. However, this principle is not applied to non-
monetary items as, unless an item is measured at fair value, the
recognition of a change in the exchange rate appears not to provide
useful information.
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. Thus the definition of a foreign
operation is quite restrictive. It is possible to conduct operations in other
ways; for example, using a foreign broker. Therefore, the definition of a
foreign operation needs to be based upon the substance of the
relationship and not the legal form.
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. The date of a transaction is the date
on which the transaction first qualifies for recognition in accordance with
International Financial Reporting Standards. For practical reasons, a rate
that approximates to the actual rate at the date of the transaction is often
used. For example, an average rate for a week or a month might be
used for all transactions in each foreign currency occurring during that
period. However, if exchange rates fluctuate significantly, the use of the
average rate for a period is inappropriate.

AVERAGE EXCHANGE RATE

A question arises as to which exchange rate to use and therefore it
would be useful to have more specific guidance on the use of the
average exchange rate. IAS 21 allows a certain amount of flexibility in
calculating the average rate. The determination of the average rate
depends upon factors such as the frequency and value of transactions,
the period over which the rate will apply and the nature of the entitys
systems. There are a large number of methods that can be used to
calculate the average rate, but no guidance is given in IAS 21 as to how
such a rate is determined.
The IASB has completed its initial assessments on this project and
decided that narrow scope amendments were unnecessary. In May
2015, it had no plans to undertake any additional work and is to remove
this project from the research programme, subject to feedback in the
next agenda consultation.