MFRS 121, also known as The Effects of Changes in Foreign Currency, is a standard under the Malaysian Financial Reporting Standards (MFRS) that outlines how companies should account for transactions and balances denominated in foreign currencies.
This standard helps ensure consistency and transparency in financial reporting by providing guidance on:
- Translating foreign currency transactions: This involves converting foreign currency amounts into the company's functional currency, which is the currency used in the primary economic environment where the company operates.
- Converting foreign currency financial statements: This involves converting the financial statements of foreign operations into the reporting currency of the parent company.
Key Concepts of MFRS 121:
- Functional Currency: The currency of the primary economic environment in which the entity operates.
- Reporting Currency: The currency in which the entity presents its financial statements.
- Spot Rate: The exchange rate at the date of the transaction.
- Closing Rate: The exchange rate at the end of the reporting period.
- Average Rate: The average exchange rate during the reporting period.
Practical Applications of MFRS 121:
- Foreign Currency Transactions: When a company makes a purchase or sale in a foreign currency, it must translate the transaction into its functional currency using the spot rate on the date of the transaction.
- Foreign Currency Balances: At the end of the reporting period, the company must translate any foreign currency balances using the closing rate.
- Foreign Operations: When a company has subsidiaries or branches in foreign countries, it must convert their financial statements into the reporting currency of the parent company. This conversion typically uses the closing rate.
Examples:
- A Malaysian company imports goods from the United States. The company must translate the US dollar invoice into Malaysian Ringgit using the spot rate on the date of the invoice.
- A Malaysian company has a subsidiary in Singapore. The company must convert the Singapore dollar financial statements of the subsidiary into Malaysian Ringgit using the closing rate at the end of the reporting period.
MFRS 121 provides a framework for companies to account for foreign currency transactions and balances in a consistent and transparent manner, ensuring that financial statements accurately reflect the company's financial position.
