6.4 IAS 21 Foreign Currency Transactions & IAS 33 Earnings Per Share

ACCA Applied Skills — Financial Reporting FR

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1 Chapter 1: The Conceptual Framework & Qualitative Characteristics

1.1 Purpose of Financial Reporting & The Conceptual Framework 1.2 Qualitative Characteristics, Materiality & Prudence 1.3 Elements of Financial Statements, Recognition & Measurement Bases

2 Chapter 2: Regulatory Framework, Standard Setting & IFRS 18 Foundations

2.1 The Regulatory Framework, IASB Standard Setting & Due Process 2.2 Presentation and Disclosure Foundations & IFRS 18 2.3 Concepts and Principles of Groups & Consolidated Accounts 2.4 When Consolidation Is Required, Exemptions and Uniform Group Policies 2.5 The ISSB and IFRS S1 Sustainability-Related Financial Disclosures

3 Chapter 3: Tangible Non-Current Assets

3.1 IAS 16 Property, Plant and Equipment — Recognition and Cost 3.2 IAS 16 Revaluation Model & Asset Disposals 3.3 IAS 23 Borrowing Costs & IAS 20 Government Grants 3.4 IAS 40 Investment Property

4 Chapter 4: Intangibles, Impairment & Inventories

4.1 IAS 38 Intangible Assets — Research & Development 4.2 IAS 36 Impairment of Assets — Principles and Testing 4.3 Cash-Generating Units (CGUs) and Goodwill Impairment 4.4 IAS 2 Inventories & IAS 41 Biological Assets

5 Chapter 5: Leases and Revenue from Contracts

5.1 IFRS 16 Leases — Lessee Accounting 5.2 IFRS 16 Lessor Accounting & Sale and Leaseback 5.3 IFRS 15 Revenue from Contracts with Customers — The 5-Step Model 5.4 IFRS 15 Contract Costs and Specific Revenue Transactions

6 Chapter 6: Financial Instruments, Provisions, Tax & Currency

6.1 IFRS 9 & IAS 32 Financial Instruments 6.2 IAS 37 Provisions, Contingent Liabilities & IAS 10 Events After Reporting Period 6.3 IAS 12 Income Taxes — Current and Deferred Tax 6.4 IAS 21 Foreign Currency Transactions & IAS 33 Earnings Per Share 6.5 Factoring of Receivables and Derecognition of Financial Assets

7 Chapter 7: Financial Analysis & Ratio Performance

7.1 Profitability and Efficiency Ratios 7.2 Liquidity and Working Capital Management Ratios 7.3 Gearing, Solvency and Investor Ratios 7.4 Analytical Interpretation, Context & Reporting Limitations 7.5 EPS as a Performance Indicator: Trends and Limitations 7.6 Interpreting Not-for-Profit and Public Sector Financial Statements

8 Chapter 8: Cash Flows and Group Analysis

8.1 IAS 7 Statement of Cash Flows — Operating Activities 8.2 IAS 7 Cash Flows — Investing and Financing Activities 8.3 Analysing Cash Flows & Group Financial Statements

9 Chapter 9: Preparation of Single-Entity Financial Statements

9.1 Single-Entity Statement of Profit or Loss and OCI under IFRS 18 9.2 Statement of Financial Position and Statement of Changes in Equity 9.3 Comprehensive Single-Entity Trial Balance Adjustments 9.4 IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations 9.5 IAS 8 Accounting Policies, Estimates and Errors, and Disclosing Material Items

10 Chapter 10: Consolidated Statement of Financial Position

10.1 Group Concepts, Control & The Consolidation Framework 10.2 Working 2: Net Assets of the Subsidiary & Fair Value Adjustments 10.3 Working 3 Goodwill & Working 4 Non-Controlling Interest 10.4 Working 5 Group Retained Earnings & Intra-Group Adjustments

11 Chapter 11: Consolidated Profit or Loss and Associates

11.1 Consolidated Statement of Profit or Loss & OCI 11.2 Mid-Year Acquisitions and Non-Controlling Interest Allocation 11.3 IAS 28 Investments in Associates & The Equity Method 11.4 Consolidated Statement of Changes in Equity & Group Disclosures 11.5 Disposal of a Subsidiary and Loss of Control

12 Chapter 12: ACCA FR CBE Exam Strategy and Technique

12.1 CBE Tools, Spreadsheets and Word Processing Response Technique 12.2 Section A & B Objective Test Case Strategy 12.3 Section C Constructed Response Mastery

6.4 IAS 21 Foreign Currency Transactions & IAS 33 Earnings Per Share

Key Takeaways Explain This Topic AI

Under IAS 21, an entity's functional currency is determined by primary indicators (currency influencing sales prices and input costs); foreign currency transactions are initially recorded at the spot rate on the transaction date.

At subsequent reporting dates, foreign currency monetary items (cash, receivables, payables, debt) are retranslated at the closing exchange rate with differences recognized in P&L, whereas non-monetary items measured at historical cost remain at historical spot rates.

For non-monetary items measured at fair value (e.g. revalued PPE), foreign exchange gains or losses are recognized in the same component of comprehensive income as the underlying fair value gain or loss (OCI for IAS 16 revaluations).

Under IAS 33, Basic EPS divides profit attributable to ordinary parent equity holders by the weighted average number of ordinary shares; bonus issues require retrospective restatement of prior period shares, while rights issues require adjustment by the bonus fraction based on the Theoretical Ex-Rights Price (TERP).

Diluted EPS reflects the maximum potential dilution from convertible instruments and share options; convertible debt requires adding back post-tax interest to earnings and conversion shares to the denominator, while share options are treated under the treasury stock method with only free/bonus shares added, subject to an anti-dilution test.

Last updated: September 2026

6.4 IAS 21 Foreign Currency Transactions & IAS 33 Earnings Per Share

Core Principle: Global commerce and public capital markets demand rigorous consistency across foreign currencies and share capital structures. In the ACCA Financial Reporting (FR) examination, this section addresses two vital standards:

IAS 21 The Effects of Changes in Foreign Exchange Rates: Governs how foreign currency transactions are recorded, retranslated, and reported in financial statements.

IAS 33 Earnings Per Share: Establishes standardized rules for calculating and presenting historical profitability per share (Basic EPS) and potential future dilution (Diluted EPS).

1. IAS 21: Functional Currency vs. Presentation Currency
Definitions

Functional Currency: The currency of the primary economic environment in which the entity operates (IAS 21.8). It is the currency in which the entity primarily generates and expends cash.

Presentation Currency: The currency in which the financial statements are presented. An entity may present its financial statements in any currency.

Foreign Currency: Any currency other than the functional currency of the entity.

Determining Functional Currency (IAS 21.9–10)

An entity determines its functional currency using a hierarchy of indicators established by management: Determining Functional Currency

│
┌───────────────────────┴───────────────────────┐
▼ ▼
PRIMARY INDICATORS SECONDARY INDICATORS
1. The currency that MAINLY INFLUENCES 1. The currency in which funds from
SALES PRICES for goods and services FINANCING ACTIVITIES are generated
(and competitive market forces) (debt and equity instruments)
2. The currency that MAINLY INFLUENCES 2. The currency in which receipts from
LABOUR, MATERIAL, and OTHER costs of OPERATING ACTIVITIES are retained
providing goods or services

Hierarchy Rule: Management gives priority to the primary indicators . If primary indicators are mixed or ambiguous, management uses judgment to evaluate secondary indicators to reflect the underlying economic reality.

2. Foreign Currency Transactions (IAS 21)
Initial Recognition

Under IAS 21.21, a foreign currency transaction is recorded on initial recognition in the functional currency by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction .

An average rate for a week or month may be used for practical reasons if exchange rates do not fluctuate significantly.

Subsequent Reporting Dates: Monetary vs. Non-Monetary Items

At each subsequent balance sheet date, items must be classified and treated according to IAS 21.23: Subsequent Balance Sheet Retranslation

│
┌─────────────────────────┴─────────────────────────┐
▼ ▼
MONETARY ITEMS NON-MONETARY ITEMS
Right to receive/deliver fixed units • No contractual right to cash
of currency: Cash, Receivables, Payables, • Inventory, PPE, Intangibles, Share Capital
Loans, Bank Overdrafts │
│ ┌─────────────────┴─────────────────┐
▼ ▼ ▼
RETRANSLATE AT HISTORICAL COST FAIR VALUE
CLOSING RATE Do NOT Retranslate! Retranslate at
Exchange differences -> PROFIT OR LOSS Remain at HISTORICAL rate when fair
SPOT RATE value determined
Summary Table: Translation Rules for Balance Sheet Items

Classification Balance Sheet Items Year-End Retranslation Rate Accounting Treatment of Exchange Difference

Monetary Items Cash, Trade Receivables, Trade Payables, Loan Notes, Bank Loans Closing Spot Rate at reporting date Recognized immediately in Profit or Loss

Non-Monetary at Historical Cost PPE at cost, Inventory, Prepaid expenses, Intangible assets Historical Spot Rate at transaction date No retranslation ; remains at historical rate

Non-Monetary at Fair Value Revalued PPE (IAS 16), Investment Property at FV (IAS 40) Spot Rate at date Fair Value was determined Follows the underlying gain/loss: OCI for IAS 16 PPE; P&L for IAS 40

3. IAS 33: Purpose and Scope of Earnings Per Share

IAS 33 Earnings Per Share applies to entities whose ordinary shares are publicly traded or in the process of being issued in public securities markets.

Objective: Provides a standardized financial metric to compare the performance of different entities in the same reporting period and evaluate the performance of an entity over time.

Core Components: Public entities must present both Basic EPS and Diluted EPS with equal prominence on the face of the Statement of Profit or Loss.

4. Basic EPS Mechanics
The Fundamental Formula Basic EPS = Earnings / Weighted Average Number of Ordinary Shares (WANOS)
Earnings (The Numerator)

Profit or Loss attributable to ordinary equity holders of the parent entity from continuing operations (and total operations).

Mandatory Deductions:

Profit attributable to Non-Controlling Interests (NCI) in group accounts.

Preference Dividends:

Cumulative Preference Shares: Deduct the full dividend for the period, whether declared or not !

Non-Cumulative Preference Shares: Deduct only if formally declared during the period.

Weighted Average Number of Ordinary Shares (The Denominator)

Shares issued for full market price (full consideration) are time-weighted from the date consideration is receivable (usually cash subscription date).

5. Capital Adjustments: Bonus Issues and Rights Issues

When share capital changes without a corresponding change in corporate resources, special adjustments are mandatory to maintain comparability across periods.

A. Bonus Issue (Scrip / Capitalisation Issue)

Existing shareholders receive free shares in proportion to their existing shareholding; zero cash proceeds are received.

Because no new resources entered the entity, the bonus shares are treated as if they had always been in issue from the beginning of the earliest period reported!

Current Year Shares: Multiply shares in issue before the bonus date by the Bonus Fraction : Bonus Fraction = (Number of Shares AFTER Bonus Issue) / (Number of Shares BEFORE Bonus Issue)

Prior Year Comparative EPS: Restated retrospectively by multiplying prior year EPS by the reciprocal of the bonus fraction: Restated Prior Year EPS = Original Prior EPS x (Shares BEFORE Bonus / Shares AFTER Bonus)

B. Rights Issue (Issue at a Discount to Market Price)

A rights issue offers new shares to existing shareholders at a discount to current market price (e.g. "1 for 4 at $2.00 when market price is $3.00"). A rights issue contains a dual character: partly an issue at full price, and partly a free bonus issue. Rights Issue Step-by-Step

┌─────────────────────────────────────────────────────────────────────────────────┐
│ Step 1: Calculate Theoretical Ex-Rights Price (TERP) │
│ │
│ (Existing Shares x Cum-Rights Price) + (Rights Shares x Issue Price) │
│ TERP = ────────────────────────────────────────────────────────────────────── │
│ Total Post-Rights Shares │
├─────────────────────────────────────────────────────────────────────────────────┤
│ Step 2: Calculate the Bonus Fraction │
│ │
│ Cum-Rights Market Price │
│ Bonus Fraction = ──────────────────────── │
│ TERP │
├─────────────────────────────────────────────────────────────────────────────────┤
│ Step 3: Compute WANOS for Current Year │
│ • Pre-rights shares: Time-weight x Bonus Fraction │
│ • Post-rights shares: Time-weight (no fraction) │
├─────────────────────────────────────────────────────────────────────────────────┤
│ Step 4: Retrospectively Restate Prior Year EPS │
│ TERP │
│ Restated Prior EPS = Original Prior EPS x ───────────────────────── │
│ Cum-Rights Market Price │
└─────────────────────────────────────────────────────────────────────────────────┘
6. Diluted EPS: Principles and Potential Ordinary Shares
Objective of Diluted EPS

Diluted EPS warns investors of the maximum potential reduction in earnings per share (or increase in loss per share) that would occur if all potential ordinary shares were converted or exercised into ordinary shares.

Treatment of Potential Ordinary Shares
1. Convertible Instruments (Convertible Debt / Preference Shares)

Assumption: The instruments were converted at the beginning of the period (or date of issue if later).

Numerator Adjustment (Earnings): Add back the finance costs saved, net of tax (for debt): Earnings Add-Back = Gross Finance Cost Saved x (1 - Tax Rate) (For convertible preference shares, add back the full preference dividend with no tax deduction).

Denominator Adjustment (WANOS): Add the maximum number of ordinary shares issuable upon conversion.

2. Share Options and Warrants (The Treasury Stock Method)

Options do not generate finance costs, so the numerator remains unchanged .

Options bring cash into the entity (exercise price). Under the treasury stock method, that cash is assumed to be used to repurchase shares on the open market at the average fair value (market price) during the period.

Therefore, the only dilutive effect is the free (bonus) shares issued at zero consideration: Free / Dilutive Shares = Number of Options x [1 - (Exercise Price / Average Market Price)]

3. Test for Anti-Dilution (IAS 33.41)

Potential ordinary shares are dilutive only if their conversion would decrease profit per share (or increase loss per share) from continuing operations. If an instrument increases EPS, it is anti-dilutive and must be excluded from the calculation of diluted EPS!

7. Comprehensive Worked Example: Foreign Currency, Rights Issue & Diluted EPS
Scenario Details

Sterling plc (functional currency GBP £) presents the following transactions for the year ended 31 December 20X4:

Foreign Currency Sale:

On 1 October 20X4, Sterling sold manufactured goods to a US customer for $1,200,000 on 120 days credit. The spot rate on 1 October 20X4 was £1 = $1.50.

On 31 December 20X4 (reporting date), the receivable remained uncollected. The closing spot rate was £1 = $1.60.

On 28 January 20X5, the customer paid the $1,200,000 in full when the spot rate was £1 = $1.45.

Share Capital & Rights Issue:

Ordinary shares in issue on 1 January 20X4: 2,000,000 shares of £1 each.

On 1 April 20X4, Sterling conducted a 1 for 4 rights issue at an exercise price of £2.00 per share. The market price immediately prior to the rights issue (cum-rights price) was £3.00.

Profit attributable to ordinary parent equity holders for 20X4 was £950,000.

Reported Basic EPS for 20X3 was £0.40 (based on profit of £800,000 and 2,000,000 shares).

Potential Ordinary Shares for Diluted EPS:

Share Options: 200,000 share options outstanding throughout 20X4 with an exercise price of £1.80. The average market price of Sterling's shares during 20X4 was £3.00.

Convertible Debt: £1,000,000 of 6% convertible bonds in issue throughout 20X4. Each £100 bond is convertible into 40 ordinary shares. Corporate tax rate is 25%.

Step 1: Accounting for Foreign Currency Transaction (IAS 21)

Initial Recognition (1 October 20X4):

Recorded Revenue & Receivable = $1,200,000 / 1.50 = £800,000 Debit: Trade Receivables (Monetary Asset) £800,000

Credit: Revenue £800,000

Reporting Date Retranslation (31 December 20X4): Trade receivables is a monetary item and must be retranslated at the closing rate (£1 = $1.60):

Carrying Amount at 31 Dec 20X4 = $1,200,000 / 1.60 = £750,000

Exchange Loss in 20X4 P&L = £800,000 - £750,000 = £50,000 Debit: Operating Expenses (Exchange Loss in P&L) £50,000

Credit: Trade Receivables (SFP) £50,000

Settlement in Subsequent Period (28 January 20X5):

Cash Received = $1,200,000 / 1.45 = £827,586
Exchange Gain in 20X5 P&L = £827,586 - £750,000 = £77,586 Debit: Cash £827,586
Credit: Trade Receivables £750,000
Credit: Finance / Operating Income (Exchange Gain) £77,586
Step 2: Compute Basic EPS for 20X4 (IAS 33)

Rights Issue Mechanics:

Existing shares: 2,000,000; New rights shares issued = 2,000,000 / 4 = 500,000 shares.

Total post-rights shares: 2,500,000 shares.

Theoretical Ex-Rights Price (TERP): TERP = [(4 x £3.00) + (1 x £2.00)] / 5 = (£12.00 + £2.00) / 5 = £14.00 / 5 = £2.80

Bonus Fraction: Bonus Fraction = Cum-Rights Price / TERP = £3.00 / £2.80 = 1.0714 (or 15/14)

WANOS Calculation for 20X4:

1 Jan – 31 Mar (3 months pre-rights): 2,000,000 x (15/14) x (3/12) = 535,714 shares
1 Apr – 31 Dec (9 months post-rights): 2,500,000 x (9/12) = 1,875,000 shares
Total WANOS for 20X4: 535,714 + 1,875,000 = 2,410,714 shares
Basic EPS 20X4: Basic EPS 20X4 = £950,000 / 2,410,714 = £0.3941 (39.4 pence per share)

Restated Comparative Basic EPS for 20X3: Restated 20X3 EPS = £0.40 x (TERP £2.80 / Cum-Rights £3.00) = £0.40 x (14/15) = £0.3733 (37.3 pence per share)

Step 3: Compute Diluted EPS for 20X4 (IAS 33)

Share Options (Treasury Stock Method):

Free / Dilutive shares = 200,000 x [1 - (£1.80 / £3.00)] = 200,000 x 0.40 = 80,000 shares

Earnings effect: £0.

Convertible Debt:

Gross interest saved: £1,000,000 x 6% = £60,000
Net post-tax interest add-back: £60,000 x (1 - 0.25) = £45,000
Additional shares: (£1,000,000 / £100) x 40 = 400,000 shares

Combined Diluted EPS Calculation:

Adjusted Earnings: £950,000 + £45,000 = £995,000

Adjusted WANOS: 2,410,714 + 80,000 + 400,000 = 2,890,714 shares Diluted EPS 20X4 = £995,000 / 2,890,714 = £0.3442 (34.4 pence per share)

Anti-Dilution Test: Basic EPS is 39.4p; Diluted EPS is 34.4p. Because 34.4p < 39.4p, the potential ordinary shares are dilutive and correctly reported!

8. Exam Traps & ACCA Examiner Tips

Warning

ACCA Examiner Trap 1: Retranslating Non-Monetary Assets at Year-End Candidates frequently retranslate foreign plant or inventory at the closing rate. Inventory and PPE measured at historical cost remain at the spot rate on the acquisition date . Only monetary assets/liabilities (receivables, payables, bank loans) are retranslated at closing rate!

Warning

ACCA Examiner Trap 2: Forgetting Post-Tax Effect on Convertible Debt Interest When computing the numerator adjustment for convertible debt in Diluted EPS, you must multiply by (1 - tax rate) . Forgetting to deduct tax overstates the earnings add-back and produces an incorrect Diluted EPS.

Tip

ACCA Examiner Tip: Inverting the Bonus Fraction on Comparative EPS When restating prior year EPS for a rights issue, multiply by TERP / Cum-Rights, which is less than 1.0 . Prior year EPS must decrease to maintain comparability with the expanded share base!