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Accounting for Derivatives

21 includes some primary indicators that must be given a priority in determining an entitys
functional currency, and also some secondary indicators. The primary indicators are:
1) The currency that mainly influences sales prices for goods and services, and of the country
whose competitive forces and regulations mainly determine the sale prices of its goods and
services.
2) The currency that mainly influences labour, material and other costs of providing goods or
services.
If these primary indicators do not provide an obvious answer, then the entity need to turn to
the secondary indicators, as follows:
1) The currency in which funds from financing activities (i.e., from issuing debt and equity
instruments) are generated; and
2) The currency in which receipts from operating activities are usually retained.
IAS 21 also describes some other factors to consider in determining whether the functional
currency of a foreign operation is the same as that of the parent company. For example, this
would apply where a foreign subsidiary is used to market goods from the parent company and
its cash is all remitted back to the parent.
In reality, most functional currencies used by each subsidiary throughout a group are generally the subsidiarys local currency (i.e., the currency of the country of its location). However,
the group sometimes has a functional currency that differs from its local currency. This is
often the case of oil companies and high-tech companies. For example, STMicroelectronics
the semiconductor French-Italian company used the USD as its functional currency as the
reference currency for the semiconductor industry is the U.S. dollar, and product prices are
mainly denominated in U.S. dollars.
3.2.2 Relevant Dates
Three different dates are relevant in a foreign currency transaction:
1) The transaction date: the date on which the transaction is recorded initially on the books.
2) The financial reporting dates: the financial reporting dates between the transaction date and
the settlement date.
3) The settlement date: the date on which the payment or receipt is made.

3.3 SUMMARY OF IAS 21 TRANSLATION RATES

All the items in the financial statements denominated in a currency different to the entitys
functional currency are translated using specific exchange rates.
3.3.1 Monetary versus Non-Monetary Items
In order to determine the appropriate translation exchange rate to use, IAS 21 groups assets
and liabilities, that are not part of the financial statements of the groups foreign operations,
into monetary accounts and non-monetary accounts. Monetary items are items that are settled
in a fixed or determinable number of units of currency. All other assets and liabilities are
non-monetary. Equity and income statement accounts are neither monetary nor non-monetary