Dedication

We dedicate this project to :

Our beloved country which our hearts is hung to

"Palestine"

Our beloved symbol of sacrifice, faith and giving our first teachers

"Our Fathers"

The moon is jealous from the light of their faces, God made paradise under their feet, their blessings the secret

of our success

"Our Mothers"

The fine hearts that our happiness can't be completed without them, those who shared us happiness and

sadness all our life

"Our Brothers and Sisters"

1

Acknowledgement

We want to thank everyone help and participated in making this study starting from our honorable:

Mr. Salah Shubair

Who put a lot of faith in our capabilities and encouraged us to complete this research ,

And all of our lecturers in the faculty of commerce.

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Research Plan

Week Title of the chapter

First WeekChapter 1

Research Proposal

Second WeekChapter 2

Introductory Chapter

Third WeekChapter 3

Recognition of changes in foreign exchange rates

Fourth weekChapter 4

Findings and Recommendations

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Table of Contents

Research Plan...........................................................................3

Chapter One....................................................................7

Abstract:................................................................................8

Introduction...........................................................................8

Statement of the problem....................................................10

Objectives............................................................................11

Main objective.....................................................................11

Specific objectives................................................................11

Significance of the project....................................................12

Scope and limitations of the project.....................................13

Methodology.......................................................................15

Overview of the current state of the art...............................16

Related works......................................................................17

John Ammer; Nathanael Clinton; Gregory P. Nini 2005-843 (October 2005).....................................................................17

Wadi study (2006)................................................................18

Al-Sharairi et al study (2007)................................................19

Gagnon study (2003)............................................................20

Nsman study (2008).............................................................20

Chapter Two..................................................................22

The general framework of the International Accounting Standards.............................................................................23

The importance of international accounting standards.........23

4

A Brief History and objectives of the International Accounting Standards.............................................................................24

The reasons for the emergence of international accounting standards.............................................................................25

Main reasons:......................................................................25

Historical development of IAS 21..........................................28

Chapter Three..............................................................30

Foreign currency accounting.................................................31

Foreign currency translation.................................................31

Exchange rate......................................................................32

Buying and selling rates of foreign currencies.......................33

Reporting foreign currency transactions in the functional currency...............................................................................34

Initial recognition:................................................................34

Reporting at the ends of subsequent reporting periods........35

Recognition of exchange differences....................................36

Change in functional currency..............................................41

Use of a presentation currency other than the functional currency...............................................................................42

Translation to the presentation currency..............................42

Translation of a foreign operation........................................44

Disposal or partial disposal of a foreign operation................46

Tax effects of all exchange differences..................................48

Disclosure............................................................................48

Chapter Four.................................................................51

Analysis of Bank of Palestine (BoP) Financial Statements......52

5

Research Findings.................................................................52

Recommendation.................................................................54

Bibliography.........................................................................55

Websites..............................................................................55

Internet................................................................................55

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Chapter One

7

Abstract:

We aim through this study to illustrate the importance of applying IAS 21, “The

Effects of Changes in Foreign Exchange Rates,” by Palestinian financial institutions,

from the viewpoint of financial statement preparers at banks, companies, auditors, and

investing institutions. We also aim to illustrate the effects of applying IAS 21 on the

fair preparation of statements, as well as on disclosure adequacy in relation to

financial instruments in the financial statements at Palestinian banks. To achieve the

objectives of this study, we will be analyzing the concept of the IAS 21 and how it

can be easily applied in Palestinian banks and companies.

This study will target a sample of financial statement preparers at Palestinian Banks,

auditors, and investors. Upon analyzing responses and examining hypotheses, we will

determine the emphasis on the importance of IAS 21 application at the Palestinian

banks. It will also attempt to clarify whether there are any significant differences

between the opinions of financial statement preparers at the studied Palestinian banks,

auditors, or investors, in the fact that application of IAS 21 considerably contributes

to the accuracy of statement presentation and adequacy of the disclosure of financial

instruments in the financial statements.

Introduction

A financial entity may conduct foreign activities using two approaches. It may carry

on transactions in foreign currencies or it may have foreign operations. also, it may

present its financial statements in a foreign currency. The objective of this standard is

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to prescribe how to include foreign currency transactions and foreign operations in the

financial statements of a financial entity and how to translate financial statements into

a presentation currency. The main problem here is which exchange rate/rates to use

and how to report the effects of changes in exchange rates in the financial statements?

In addition, this Standard does not apply to the presentation in a statement of cash

flows of the cash flows arising from transactions in a foreign currency, or to the

translation of cash flows of a foreign operation.

This model focuses on how to include foreign currency transactions and foreign

operations in the financial statements of financial entities, and how to translate

financial statements into a presentation currency that is different from the functional

currency according to Section 30 Foreign Currency Translation of the International

Financial Reporting Standard (IFRS) for Small and Medium-sized Entities (SMEs). It

introduces the learner to the subject, guides the learner through the official text.

In addition, the model includes questions developed to analyze the reader’s

knowledge of the requirements and case studies to develop the reader’s capabilities to

account for foreign currency transactions and to conduct foreign currency translations

in compliance with the IFRS for SMEs.

The objective of IAS 21 is to prescribe the basis for selecting an entity’s functional

currency and the accounting treatment for the recognition of, and subsequent

measurement of, transactions denominated in a foreign currency and the process of

9

translating financial statements denominated in a foreign currency.

Exchange differences arising when monetary items are settled or when monetary

items are translated at rates different from those at which they were translated when

initially recognized or in previous financial statements are reported in profit or loss in

the period, with one exception. The exception is that exchange differences arising on

monetary items that form part of the reporting entity's net investment in a foreign

operation are recognized, in the consolidated financial statements that include the

foreign operation, in other comprehensive income; they will be recognized in profit or

loss on disposal of the net investment.

As regards a monetary item that forms part of an entity's investment in a foreign

operation, the accounting treatment in consolidated financial statements should not be

dependent on the currency of the monetary item. Also, the accounting should not

depend on which entity within the group conducts a transaction with the foreign

operation. If a gain or loss on a non-monetary item is recognized in other

comprehensive income, any foreign exchange component of that gain or loss is also

recognized in other comprehensive income.

Statement of the problem

What are the requirements necessary to achieve stranded 21 " the effects of changes in

the foreign change rates " ?

10

Objectives

Main objective

To analyze the extent to which IAS 21 is applied in banks.

Specific objectives Objective 1: To identify the requirements needed to apply it in those which do not

already apply IAS 21.

Objective 2: Outline the importance of applying IAS 21 “The Effect of changes in

exchange rates.

Objective 3: Study the opinions of accounting professionals to identify the effect of

applying IAS 21 “The Effect of changes in exchange rates” on accurate presentation

of financial statements at Palestinian banks. In addition, analyze the adequacy of

disclosure in relation to financial instruments in the financial statements at the

Palestinian banks.

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Significance of the project

The importance of the study stems from the necessity of fair presentation of financial

statements according to IAS 21, where published financial statements present key

pieces of information of interest to different external parties and where disclosure is

made in a way that achieves adequacy of information and outlines its significance and

relevance. This is very important to serve the parties concerned with financial

statements as they make their relevant decisions according to the implications of IAS

21 . The disclosed information should be credible and reliable so that they help make

sound decisions related to credit, investment and other aspects. The IAS 21, “The

effect of changes in exchange rates” came to promote the further help financial

statement users understand the importance of financial instruments and the

requirements of presentation in income statement and determine the information to be

disclosed.

IAS 21 also indicates the importance of transition from historical to fair value cost, as

the latter provides great information for commercial purposes to determine the overall

financial position of a project, as well as for making decisions on the financial

instruments by users of financial statements, as it reflects in many cases an estimate

by financial markets for the present value of expected cash flows of financial

instruments. The standard also requires disclosure of concentrations of credit risk,

liquidity risk, cash flow risk, and market risk.

Accordingly, the importance of this study stems from the necessity to identify the

12

significance of applying IAS 21 and outline its effect on the fair presentation of

income statements.

Scope and limitations of the project

An entity that prepares and presents financial statements under the accrual basis of accounting

shall apply this Standard:

In accounting for transactions and balances in foreign currencies, except for those

Derivative transactions and balances that are within the scope of IPSAS 21, Financial

Instruments: Recognition and Measurement;

In translating the financial performance and financial position of foreign operations

that are included in the financial statements of the entity by consolidation

, proportionate consolidation, or by the equity method; and

In translating an entity’s financial performance and financial position into

a presentation currency.

IPSAS 21 applies to many foreign currency derivatives and, accordingly, these are

excluded from the scope of this Standard. However, those foreign currency

derivatives that are not within the scope of IPSAS 21 (e.g., some foreign currency

derivatives that are embedded in other contracts) are within the scope of this Standard.

In addition, this Standard applies when an entity translates amounts relating to

derivatives from its functional currency to its presentation currency.

This Standard does not apply to hedge accounting for foreign currency items,

including the hedging of a net investment in a foreign operation. IPSAS 21 applies to

hedge accounting.

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This Standard applies to all public sector entities other than Government Business

Enterprises.

The Preface to International Public Sector Accounting Standards issued by the

IPSASB explains that Government Business Enterprises (GBEs) apply IFRSs issued

by the IASB.

GBEs are defined in IPSAS 21, Presentation of Financial Statements.

This Standard applies to the presentation of an entity’s financial statements in a

foreign currency, and sets out requirements for the resulting financial statements to be

described as complying with IPSASs. For translations of financial information into a

foreign currency that do not meet these requirements, this Standard specifies

information to be disclosed.

This Standard does not apply to the presentation in a cash flow statement of cash

flows arising from transactions in a foreign currency, or to the translation of cash

flows of a foreign operation.

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Methodology

Methods of Data Collection

In addition to the general IAS and the specific IAS 21,, as well as the research and

studies published in periodicals and scientific journals related to the study subject, the

researchers prepared a special questionnaire for this study based on the theoretical

framework and results of previous studies and in consistence with the study

objectives. The study consists of four sections. In the first, personal information about

the three categories was gathered. The second section aims at measuring the

advocacy degree by respondents of the importance of applying IAS 21. The third

section incorporates the provisions stipulated in IAS 21 that have an impact on the

fair presentation of financial statements. The fourth section includes items that affect

the adequacy of disclosure regarding financial instruments in the financial statements

included in IAS 21

1. Methods of Data Analysis

For the purposes of realizing the study objectives, testing its hypotheses and

analyzing its results, two groups of statistical methods were used as follows:

Descriptive statistical methods: where the mean, standard deviation, certain

percentages and frequencies were calculated to identify the characteristics of the

study sample and the basic characteristics of the study variables, in addition to

calculating the t-value.

Using the non-parametric statistical test (Kruskal-Wallis) to examine the study

15

hypotheses, this is used to measure any substantive differences between several

categories.

Overview of the current state of the art

10 January 2008 : Some revisions of IAS 21 as a result of the Business Combinations Phase II

Project relating to disposals of foreign operations .

December 2005 : Minor Amendment to IAS 21 relating to net investment in a foreign

Operation .

16

Related works

Review of works, projects, papers, algorithms, approaches related to your project and used in

to solving the problem identified or similar problems.

Gagnon study (2003)

This study aimed to identify the impact of changes in exchange rates on wages and

the general level of prices and profits in the United Kingdom during the nineties of

the last century, and that the two main sectors, the first sector of production

represented by the suppliers, and the second distribution sector represented by the

importers. The main findings of the study is that the devaluation of the pound

sterling in 1992 led to increased profits producers and lower profits distributors, and

increase the pound sterling in 1996 led to adverse consequences, and that the

change in the exchange rate had an impact very little on the cost of the work.

John Ammer; Nathanael Clinton; Gregory P. Nini 2005-843 (October 2005)

Publicly traded financial firms within the European Union will be required to adhere

to International Accounting Standards (IAS) in their financial reporting beginning in

2005, which can entail a higher degree of financial disclosure than was previously

17

mandated under national accounting standards. A number of European financial firms

had previously subjected themselves to additional disclosure by listing their stock on

U.S. exchanges, which obligates them to reconcile their financial accounts to U.S.

GAAP (Generally Accepted Accounting Principles). Among national accounting

systems, U.S. GAAP is considered to be both among the strictest and the most similar

to International Financial Reporting Standards (IFRS). To test whether U.S. GAAP

reconciliation effectively enhances disclosure, we examine several measures of

transparency for the cross-listed firms, relative both to pre-listing measures and to a

control sample of firms that have not cross-listed. Our measures include bid-ask

spreads, earnings forecast errors, analyst coverage, dispersion in earnings

expectations, and disagreement between Moody’s and S&P’s bond ratings. We find

evidence that cross-listing increases transparency in at least some cases. Our cross-

sectional results also distinguish a handful of European financial firms that had

already adopted IFRS before the European Commission announced that IAS would be

required in the near future, with results similar to those of the cross-listed firms.

Accordingly, to the extent that commitment to increased transparency has been a

motivation for cross-listing, the adoption of IAS in Europe may reduce the incentives

for European firms to cross-list in the United States.

Wadi study (2006).

This study aimed to clarify the impact of the phenomenon of inflation (changes in

price levels) on the measurement and accounting disclosure in the financial statements

prepared and published in Palestine, and also to find out the impact of inflation on the

credibility and fairness of the financial statements, and to identify the extent to which

18

the application of accounting disclosure in the financial statements.

The study resulted in inflation that affects the financial statements are given

misleading results because the phenomenon of inflation of the most influential

economic phenomena on accounting data and information published financial

statements, and to show the impact of inflation on the financial statements is

necessary and possible to apply in practice.

The study recommended providing financial statements adjusted within the annual

report of the facility in the form of separate lists or in the form of numbers compared

with the traditional figures within the menus core with the need to include the report

of the auditor's opinion in the consolidated amended, and the extent of it disclosure

about fact Activity of the facility and its financial position, as presented study model

proposal to provide revised financial statements and consider additional lists

complementary and not essential to show the lists realistic figures disclose financial

statements.

Al-Sharairi et al study (2007)

This study aimed to demonstrate the commitment of the Jordanian banks requirements

of IAS 21) from the point of preparers the financial statements in Jordanian banks and

external auditors, and the statement of the differences between the perspective of

preparers the financial statements in Jordanian banks and the point of view of external

auditors in the commitment of Jordanian banks requirements of IAS (21), and to

identify the problems and difficulties and the implications of the application of the

international Accounting standard No. (21), and through the distribution of

19

questionnaires on preparers of financial statements in Jordanian banks, as well as the

external auditors who audit the banks under study.

As a result of the study that Jordanian banks committed to apply the requirements of

the standard and that from the viewpoint of preparers and auditors of financial

statements in connection with the translation of the financial statements, as well as

with regard to investment in foreign companies, Regarding translate items of the

financial statements of branches of foreign banks vantage from the study that some

preparers lists Finance did not deal with some of the requirements of the standard by

such as the elimination of foreign subsidiaries, as well as the management of banks do

not all exchange differences are classified as equity until the disposal of the net

investment, but is working on recorded in the profit and loss.

The study recommended that banks should Jordanian that the classification difference

translation of financial statements of foreign affiliates such as the rights of ownership

until the disposal of the net investment and not in profit or loss in order to complete

the compliance requirements of International Accounting Standard (21), as well as the

Jordanian banks to activate the skills and expertise of the authors of menus some of

the financial requirements of the international Accounting standard No. (21)

concerning the accounting treatment for the liquidation of its subsidiaries in order to

acquire the expertise to deal with all the requirements of the standard.

Nsman study (2008)

This study aimed to examine the measurement and analysis of the extent of the

commitment of companies listed on the Palestine Securities Exchange standard IAS

20

21 "Effects of changes in foreign currency exchange rates, from the viewpoint of the

authors of the financial statements and the external auditors of these companies to

apply the requirements of this standard.

The study found a range of results, including that the companies listed on the

Palestine Securities Exchange is committed to the requirements of International

Accounting Standard No. (21), from the point of view both of the authors of the

financial statements and the external auditors of these companies, and that

companies verify the advantages of the application of the requirements of the

standard include improve decisions for users of financial statements, and increase

the efficiency of the financial statements, solving the problems of companies that

have branches of foreign regarding translating the financial statements, and in spite

of the existence of constraints limiting the application of the standard and of the

lack of courses related to the standards of the International Accounting as well as

the lack of clarity of the role played by associations and professional bodies to

oversee the application of the standard.

The study recommended the need to work on activating the role of Palestinian

Accountants and Auditors on international accounting standards, as well as benefit

from the experiences of Arab countries with regard to International Accounting

Standards, and for issues a Palestinian national standards compatible with the

Palestinians economic and social realities.

21

Chapter Two

22

The general framework of the International Accounting Standards

International Accounting Standards are a major output of the International

accounting Standards Committee (IASC),which comprises Committee delegates to

the professional accounting experts, and International accounting standards

accepted by most of the organizations and professionals both in the developed

countries or developing countries, so they have become international accounting

standards as a reference guide professionals throughout The global world, due to

the lack of local standards governing developing countries then these standards are

considered as an incentive for regulators And supervisory accounting profession to

these countries, especially the Arab countries that oblige

companies ,banks ,Financial institutions and the application of international

accounting standards as the basis for the preparation and disclosure of financial

statements , Taking into account that the application is compatible with the local

economic statements , Taking into account that the application is compatible with

the local economic conditions of these countries.

The importance of international accounting standards

1- It defines the characteristics that must be available in accounting information .

23

2- It serves as the basic rule to be used to assess the quality of these information, so

you must specify the characteristics that make this information helpful in making

decisions .

3- Through the issuance of a set of accounting standards define methods for

measuring the impact of operations Events and conditions on the results of the

company, so the results are connected to the interested company.

A Brief History and objectives of the International Accounting Standards

The use of international accounting standards has become an urgent need when you

do the preparation and processing lists Since these financial statements no longer

serve one party represented in the project owners but became servers multiple

parties, and therefore the adoption and use of international accounting standards

became Urgent necessity, it improves the quality of the published financial

statements until the comparability larger, thereby increasing the credibility which

enhances its usefulness for all parties related to these financial statements ( Belkoui

2004 , 164 ) stated that the results of the financial statements interact through

three groups:

1- Company administration:

represents the foundation associated with accounting procedures is that set up

reports that’s by accountants and internal auditors of the company.

2- Users:

24

The second group represented as the production of accounting information affected

their interests and needs, this category includes existing shareholders and

prospective financial analysts and lenders and employees of the company and

government agencies.

3- the accountancy profession:

The third group of stakeholders and that can affect the Financial information and

verify that the data they contain financial statements conform with the principles

and accepted standards accounting even gaining the confidence of financial reports

external users.

The reasons for the emergence of international accounting standards

There are several reasons contributed effectively and directly in the emergence of

international accounting standards, From These reasons, there are differences

related to treatments and to the absence of definitive answers to many of the

problems faced by accountants, globalization has also contributed directly to

establish these standards ,so companies can easily work at global markets and

enable it to list its shares on the global stock markets.

Main reasons:

I :The need to develop accountancy

25

Due to the fact that accountancy is based on a set of assumptions, concepts,

principles and rules, policies and accounting traditions and customs which led to

multiple definitions and concepts and contradiction between principles and

therefore did not identify accounting concepts in a clear and understandable.

Some examples of the different Titles, conflicts and contradictions between the

principles and the accounting policies are as follows:

A - The agreement between the accountants in the preparation of periodic reports,

but they disagree about the accounting period as well as the dates of the interim

reports.

B -Conflict between the policy of caution and the use of cost as the basis for the

valuation of assets.

C -The lack of a unified processors for many similar events, such as multiple

processors for pricing inventory and methods of depreciation of fixed assets.

D -There is no specific answers on some of the problems faced by the accountant

such as a change in prices, and measurement of intangible assets, and measuring the

social cost and benefit.

II: Globalization

The phenomenon of globalization began with the growing economic power of

multinational corporations, these corporations are not subject to a certain

responsibility because they do not represent the official authority for any nation,

Due to the openness economic world and attract more foreign investment has

26

insisted the investment community International on the need to improve the

existing international standards and issue new standards develop and the level of

performance exchange in the capital markets.

Globalization is defined in Wikipedia as "an economic process in the first place then

political, followed by social and cultural aspects, (www.ar.wikipedia.org 15/6/2008)

notes on this definition, focusing on the link globalization economy on the grounds

that it the main reason for the spread of globalization on the international level.

The reasons for the emergence International Accounting Standard No. (21) "the effects of the change in foreign exchange rates

International Accounting Standard No. (21) deals with One of the most difficult

problems faced by accountants in Practical life, main problem of transactions that

are denominated in foreign currencies, as well as translation of financial statements

for the company's reporting currency, and the standard is a reflection of the

practices of the process of financial accounting, and the importance of this is

standard reflected on the positive role of the transactions made in a foreign currency

as a result of a lot of request stakeholders in the companies, as well as for the

practices of an active role in providing them with financial information that

contribute to the decision-making .

The importance of the issuance of this standard to the fluctuation of foreign

exchange rates on international level, and the tremendous progress in information

technology and the emergence of the Internet and the possibility of holding

27

transactions between dealers, whether they are individuals or companies through a

network of international information , this increased reliance on automated

payment methods there has been a necessary and urgent need for a way You may

accounting in which companies from conducting financial transactions in a way so

You can instant from the conversion of such transactions to the currency of the

country or to the currency in which financial reports are prepared.

International Accounting Standard No. (21) deals with How the accounting treatment

for companies that have foreign currency transactions or that have foreign

operations, and how the financial statements are presented transactions and foreign

operations carried out by the company and how to translate financial statements

reporting currency, The standard also addresses how to choose the exchange rate

used to demonstrate the impact of changes in prices exchange in the financial

statements .

Historical development of IAS 21

IAS 21 was reissued in December 2003 and applies to annual periods beginning on or

after 1 January 2005.

28

29

Chapter Three

30

Foreign currency accounting

The accounting and translation of foreign currency financial statements considered

as difficulties faced by companies, both national and local activities that have a

currency different from the currency financial reporting, or may have outside

activities are in the import and export of goods and services, or be multinational

companies are those companies that have branches and activities in foreign

countries, and given for multi-currency for those companies in carrying out its

activities and at the same time its commitment to the preparation of financial

reports currency may differ from trading currencies and may result in gains or losses

on the translation of financial statements.

Foreign currency translation

The problem of translation of foreign currency financial statements of the major

accounting problems faced by multinational companies and national companies that

have an activity or branches of foreign, many of these companies lead their daily

operations in different currencies, leading to appear assets and liabilities, income

and expenses denominated based on several currencies, the problem lies in the

foreign currency translation also that the companies may incur losses as a result of

changing currency exchange rates and therefore lead to a reduction in the profits

made by the company .

Foreign currency translation they include the following:

31

1- Measurement and recognition of transactions made in a foreign currency

undertaken by the company in national currency and then disclosure of the effects of

these transactions on the financial statements in the national currency, or currency,

which is the company's financial reports.

2- Translation of financial statements of operations, branches and foreign

subsidiaries to the parent company's currency the report of the State in which the

main branch of the company.

3- Selecting and applying appropriate exchange rate, and must be recognized in the

financial statements of the financial implications to changes in exchange rates.

In Palestine, the process of currency translation of the financial statements may

affect all companies operating due to the nonexistence of a national currency and

therefore the companies in the daily dealings of buying and selling the lending and

borrowing deal in more than one currency, which leads to the occurrence of

translation problems and you need to work on finding practical solutions so that

companies can demonstrate its financial statements.

Exchange rate

International Accounting Standard No. (21) defined exchange rate as "the exchange

rate between the two currencies “.

(Hermanson & Others, 1989: 532 ) explained that The exchange rate is determined

when there is a transfer of resources between two parties such as the purchase of

goods on the account, the price tracking accountant when submitting information

32

exchange, and that the diversion of resources requires registration price agreed

between the parties.

(Brighame & Gapenski, 1994: 1100 ) Identified the exchange rate as the number of

units of a particular currency through which the unit is purchased and one of the

other currency, and that currency exchange rate appears daily in the newspapers.

Buying and selling rates of foreign currencies

The presentation of foreign exchange rate requires the exchange have two prices :

Purchase rate

It is the rate at which the bank make his offer to buy the foreign currency.

selling rate

It is the rate at which the Bank make his offer to sell the foreign currency.

Note: Buying price and selling price is at those prices offered by the bank, and

therefore the purchase price of the currency from the point of view of the bank is

the selling price from the standpoint of currency seller, and vice versa for the sale

price, it is considered the purchase price from the standpoint of the buyer currency.

The difference between currency translation and currency conversion

Since it may be confused with the concept of currency translation and currency

conversion we must be clarify the difference between both concepts, translation is

showing foreign currencies in financial statements compared with those of the local

currency, the process of converting is the process that is journal any records

33

accounting only, without an exchange of cash, whereby the real exchange of cash

between the local currency and foreign currency .

Reporting foreign currency transactions in the functional currency

Initial recognition:

A foreign currency transaction is a transaction that is denominated or requires

settlement in a foreign currency, including transactions arising when an entity:

(a) buys or sells goods or services whose price is denominated in a foreign currency;

(b) borrows or lends funds when the amounts payable or receivable are

denominated in a foreign currency; or

(c) otherwise acquires or disposes of assets, or incurs or settles liabilities,

denominated in a foreign currency.

A foreign currency transaction shall be 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.

The date of a transaction is the date on which the transaction first qualifies for

recognition in accordance with Indian Accounting Standards. For practical reasons, a

rate that approximates 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

34

exchange rates fluctuate significantly, the use of the average rate for a period is

inappropriate.

Reporting at the ends of subsequent reporting periods

At the end of each reporting period:

(a) foreign currency monetary items shall be translated using the closing rate;

(b) non- monetary items that are measured in terms of historical cost in a foreign

currency shall be translated using the exchange rate at the date of the transaction;

and

(c) non- monetary items that are measured at fair value in a foreign currency shall

be translated using the exchange rates at the date when the fair value was

determined.

The carrying amount of an item is determined in conjunction with other relevant

Standards. For example, property, plant and equipment may be measured in terms

of fair value or historical cost in accordance with IAS 16 Property, Plant and

Equipment. Whether the carrying amount is determined on the basis of historical

cost or on the basis of fair value, if the amount is determined in a foreign currency it

is then translated into the functional currency in accordance with this Standard.

The carrying amount of some items is determined by comparing two or more

amounts. For example, the carrying amount of inventories is the lower of cost and

net realizable value in accordance with AS 2 Inventories. Similarly, in accordance

with AS 36 Impairment of Assets, the carrying amount of an asset for which there is

an indication of impairment is the lower of its carrying amount before considering

35

possible impairment losses and its recoverable amount. When such an asset is non-

monetary and is measured in a foreign currency, the carrying amount is determined

by comparing:

(a) the cost or carrying amount, as appropriate, translated at the exchange rate at

the date when that amount was determined (i.e. the rate at the date of the

transaction for an item measured in terms of historical cost); and

(b) the net realizable value or recoverable amount, as appropriate, translated at the

exchange rate at the date when that value was determined (e.g. the closing rate at

the end of the reporting period).

The effect of this comparison may be that an impairment loss is recognized in the

functional currency but would not be recognized in the foreign currency, or vice

versa.

When several exchange rates are available, the rate used is that at which the future

cash flows represented by the transaction or balance could have been settled if

those cash flows had occurred at the measurement date. If exchangeability between

two currencies is temporarily lacking, the rate used is the first subsequent rate at

which exchanges could be made.

Recognition of exchange differences

As noted in previous paragraphs (a) and 5, AS 39 applies to hedge accounting for

foreign currency items. The application of hedge accounting requires an entity to

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account for some exchange differences differently from the treatment of exchange

differences required by this Standard.

For example, AS 39 requires that exchange differences on monetary items that

qualify as hedging instruments in a cash flow hedge are recognized initially in other

comprehensive income to the extent that the hedge is effective.

Exchange differences arising on the settlement of monetary items or on translating

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:

(i) exchange differences arising on a monetary item that forms part of a reporting

entity’s net investment in a foreign operation as described in previous paragraphs.

(ii) where an entity exercises the option provided in paragraph 29A in respect of

long-term monetary items.

When monetary items arise from a foreign currency transaction and there is a

change in the Exchange rate between the transaction date and the date of

settlement, an exchange difference results. When the transaction is settled within

the same accounting period as that in which it occurred, all the exchange difference

is recognized in that period. However, when the transaction is settled in a

subsequent accounting period, the exchange difference recognized in each period up

to the date of settlement is determined by the change in exchange rates during each

period. Paragraph 29A provides an option to recognize unrealized exchange

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differences arising on translation of certain long-term monetary assets and long-

term monetary liabilities from foreign currency to functional currency.

An entity may exercise the option in respect of recognition of exchange differences

arising on translation of long-term monetary items from foreign currency to

functional currency as follows:

(i) Unrealized exchange differences arising on long-term monetary assets and long-

term-term monetary liabilities denominated in a foreign currency shall be recognized

directly in equity and accumulated in a separate component of equity. The amount

so accumulated shall be transferred to profit or loss over the period of maturity of

such long-term monetary items in an appropriate manner. The separate component

of equity shall be distinguished from any other component of equity representing

any other exchange difference recognized in other comprehensive income and

accumulated in equity.

(ii) The option provided in paragraph 29A(i) is not available for the long-term

monetary assets and long-term monetary liabilities during the period they are

classified as at fair value through profit or loss in accordance with AS 39, either

because they are held for trading or because of their designation as at fair value

through profit or loss.

(iii) The option provided in paragraph 29A(i) shall be exercised for the first time

when the exchange difference arising on a long-term monetary asset or a long-term

monetary liability mentioned in paragraph 29A(i) is recognized. The option, once

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exercised, shall be irrevocable and shall be exercised in respect of all the long-term

monetary assets and long-term monetary liabilities mentioned in paragraph 29A(i).

(iv) For the purpose of this paragraph, a monetary asset or a monetary liability shall

be treated as long-term, if that asset or liability has a maturity period of twelve

months or more from the date of the initial recognition of that asset or liability.

When a gain or loss on a non-monetary item is recognized in other comprehensive

income, any exchange component of that gain or loss shall be recognized in other

comprehensive income. Conversely, when a gain or loss on a non-monetary item is

recognized in profit or loss, any exchange component of that gain or loss shall be

recognized in profit or loss.

Other Indian Accounting Standards require some gains and losses to be recognized in

other comprehensive income. For example, AS 16 requires some gains and losses

arising on a revaluation of property, plant and equipment to be recognized in other

comprehensive income. When such an asset is measured in a foreign currency,

paragraph 23(c) of this Standard requires the revalued amount to be translated using

the rate at the date the value is determined, resulting in an exchange difference that

is also recognized in other comprehensive income.

Exchange differences arising on a monetary item that forms part of a reporting

entity’s net investment in a foreign operation shall be recognized in profit or loss in

the separate financial statements of the reporting entity or the individual financial

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statements of the foreign operation, as appropriate. In the financial statements that

include the foreign operation and the reporting entity (e.g. consolidated financial

statements when the foreign operation is a subsidiary), such exchange differences

shall be recognized initially in other comprehensive income and reclassified from

equity to profit or loss on disposal of the net investment in accordance with what

was mentioned above.

When a monetary item forms part of a reporting entity’s net investment in a foreign

operation and is denominated in the functional currency of the reporting entity, an

exchange difference arises in the foreign operation’s individual financial statements

in accordance with paragraph If such an item is denominated in the functional

currency of the foreign operation, an exchange difference arises in the reporting

entity’s separate financial statements in accordance with paragraph 28. If such an

item is denominated in a currency other than the functional currency of either the

reporting entity or the foreign operation, an exchange difference arises in the

reporting entity’s separate financial statements and in the foreign operation’s

individual financial statements in accordance with paragraph 28. Such exchange

differences are recognized in other comprehensive income in the financial

statements that include the foreign operation and the reporting entity (i.e. financial

statements in which the foreign operation is consolidated, proportionately

consolidated or accounted for using the equity method).

When an entity keeps its books and records in a currency other than its functional

currency, at the time the entity prepares its financial statements all amounts are

translated into the functional currency in accordance with paragraphs 20–26. This

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produces the same amounts in the functional currency as would have occurred had

the items been recorded initially in the functional currency. For example, monetary

items are translated into the functional currency using the closing rate, and non-

monetary items that are measured on a historical cost basis are translated using the

exchange rate at the date of the transaction that resulted in their recognition.

Change in functional currency

When there is a change in an entity’s functional currency, the entity shall apply the

translation procedures applicable to the new functional currency prospectively from

the date of the change.

As noted in previous paragraphs, the functional currency of an entity reflects the

underlying transactions, events and conditions that are relevant to the entity.

Accordingly, once the functional currency is determined, it can be changed only if

there is a change to those underlying transactions, events and conditions. For

example, a change in the currency that mainly influences the sales prices of goods

and services may lead to a change in an entity’s functional currency.

The effect of a change in functional currency is accounted for prospectively. In other

words, an entity translates all items into the new functional currency using the

exchange rate at the date of the change. The resulting translated amounts for non-

monetary items are treated as their historical cost. Exchange differences arising from

the translation of a foreign operation previously recognized in other comprehensive

income in accordance with paragraphs 32 and 39(c) are not reclassified from equity

to profit or loss until the disposal of the operation. When the option provided in

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paragraph 29A is exercised, exchange differences previously recognized directly in

equity and accumulated in a separate component of equity in accordance with that

paragraph are not transferred to profit or loss immediately on change of the entity's

functional currency. They shall continue to be transferred to profit or loss in the

manner stated in that paragraph.

Use of a presentation currency other than the functional currency

Translation to the presentation currency

An entity may present its financial statements in any currency (or currencies). If the

presentation currency differs from the entity’s functional currency, it translates its

results and financial position into the presentation currency. For example, when a

group contains individual entities with different functional currencies, the results and

financial position of each entity are expressed in a common currency so that

consolidated financial statements may be presented.

The results and financial position of an entity whose functional currency is not the

currency of a hyperinflationary economy shall be translated into a different

presentation currency using the following procedures:

(a) assets and liabilities for each balance sheet presented (ie including comparatives)

shall be translated at the closing rate at the date of that balance sheet;

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(b) income and expenses for each statement of profit and loss presented (ie

including comparatives) shall be translated at exchange rates at the dates of the

transactions; and

(c) all resulting exchange differences shall be recognized in other comprehensive

income.

For practical reasons, a rate that approximates the exchange rates at the dates of

the transactions, for example an average rate for the period, is often used to

translate income and expense items. However, if exchange rates fluctuate

significantly, the use of the average rate for a period is inappropriate.

The exchange differences result from:

(a) translating income and expenses at the exchange rates at the dates of the

transactions and assets and liabilities at the closing rate.

(b) translating the opening net assets at a closing rate that differs from the previous

closing rate.

These exchange differences are not recognized in profit or loss because the changes

in exchange rates have little or no direct effect on the present and future cash flows

from operations. The cumulative amount of the exchange differences is presented in

a separate component of equity until disposal of the foreign operation. When the

exchange differences relate to a foreign operation that is consolidated but not

wholly-owned, accumulated exchange differences arising from translation and

attributable to non-controlling interests are allocated to, and recognized as part of,

non-controlling interests in the consolidated balance sheet.

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The results and financial position of an entity whose functional currency is the

currency of a hyperinflationary economy shall be translated into a different

presentation currency using the following procedures:

(a) all amounts (i.e. assets, liabilities, equity items, income and expenses, including

comparatives) shall be translated at the closing rate at the date of the most recent

balance sheet, except that

(b) when amounts are translated into the currency of a non-hyperinflationary

economy, comparative amounts shall be those that were presented as current year

amounts in the relevant prior year financial statements (i.e. not adjusted for

subsequent changes in the price level or subsequent changes in exchange rates).

When an entity’s functional currency is the currency of a hyperinflationary economy,

the entity shall restate its financial statements in accordance with AS 29 before

applying the translation method set out in paragraph 42, except for comparative

amounts that are translated into a currency of a non- hyperinflationary economy.

When the economy ceases to be hyperinflationary and the entity no longer restates

its financial statements in accordance with AS 29, it shall use as the historical costs

for translation into the presentation currency the amounts restated to the price level

at the date the entity ceased restating its financial statements.

Translation of a foreign operation

The incorporation of the results and financial position of a foreign operation with

those of the reporting entity follows normal consolidation procedures, such as the

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elimination of intergroup balances and intergroup transactions of a subsidiary (see

AS 27 and AS 31 Interests in Joint Ventures). However, an intergroup monetary

asset or liability), whether short-term or long-term, cannot be eliminated against the

corresponding intergroup liability (or asset) without showing the results of currency

fluctuations in the consolidated financial statements. This is because the monetary

item represents a commitment to convert one currency into another and exposes

the reporting entity to a gain or loss through currency fluctuations.

Accordingly, in the consolidated financial statements of the reporting entity, such an

exchange difference is recognized in profit or loss or, if it arises from the

circumstances described in previous paragraphs, it is recognized in other

comprehensive income and accumulated in a separate component of equity until the

disposal of the foreign operation. When the option provided in paragraph 29A is

exercised, in the consolidated financial statements of the reporting entity, such an

exchange difference is directly recognized in equity and disposed of in the manner

prescribed in that paragraph.

When the financial statements of a foreign operation are as of a date different from

that of the reporting entity, the foreign operation often prepares additional

statements as of the same date as the reporting entity’s financial statements. When

this is not done, AS 27 allows the use of a different date provided that the difference

is no greater than three months and adjustments are made for the effects of any

significant transactions or other events that occur between the different dates. In

such a case, the assets and liabilities of the foreign operation are translated at the

exchange rate at the end of the reporting period of the foreign operation.

45

Adjustments are made for significant changes in exchange rates up to the end of the

reporting period of the reporting entity in accordance with AS 27. The same

approach is used in applying the equity method to associates and joint ventures and

in applying proportionate consolidation to joint ventures in accordance with AS 28

Investments in Associates and AS 31.

Any goodwill arising on the acquisition of a foreign operation and any fair value

adjustments to the carrying amounts of assets and liabilities arising on the

acquisition of that foreign operation shall be treated as assets and liabilities of the

foreign operation. Thus they shall be expressed in the functional currency of the

foreign operation and shall be translated at the closing rate in accordance with

previous paragraphs.

Disposal or partial disposal of a foreign operation

On the disposal of a foreign operation, the cumulative amount of the exchange

differences relating to that foreign operation, recognized in other comprehensive

income and accumulated in the separate component of equity, shall be reclassified

from equity to profit or loss (as a reclassification adjustment) when the gain or loss n

disposal is recognized (see AS 1 Presentation of Financial Statements).

A In addition to the disposal of an entity’s entire interest in a foreign operation, the

following are accounted for as disposals even if the entity retains an interest in the

former subsidiary, associate or jointly controlled entity:

(a) the loss of control of a subsidiary that includes a foreign operation;

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(b) the loss of significant influence over an associate that includes a foreign

operation; and

(c) the loss of joint control over a jointly controlled entity that includes a foreign

operation.

On disposal of a subsidiary that includes a foreign operation, the cumulative amount

of the exchange differences relating to that foreign operation that have been

attributed to the non-controlling interests shall be derecognized, but shall not be

reclassified to profit or loss.

On the partial disposal of a subsidiary that includes a foreign operation, the entity

shall re-attribute the proportionate share of the cumulative amount of the exchange

differences recognized in other comprehensive income to the non-controlling

interests in that foreign operation. In any other partial disposal of a foreign

operation the entity shall reclassify to profit or loss only the proportionate share of

the cumulative amount of the exchange differences recognized in other

comprehensive income.

A partial disposal of an entity’s interest in a foreign operation is any reduction in an

entity’s ownership interest in a foreign operation, except those reductions in

paragraph 48A that are accounted for as disposals.

An entity may dispose or partially dispose of its interest in a foreign operation

through sale, liquidation, repayment of share capital or abandonment of all, or part

of, that entity. A write-down of the carrying amount of a foreign operation, either

because of its own losses or because of an impairment recognized by the investor,

does not constitute a partial disposal. Accordingly, no part of the foreign exchange

47

gain or loss recognized in other comprehensive income is reclassified to profit or loss

at the time of a write-down.

Tax effects of all exchange differences

Gains and losses on foreign currency transactions and exchange differences arising

on translating the results and financial position of an entity (including a foreign

operation) into a different currency may have tax effects. AS 12 Income Taxes applies

to these tax effects.

Disclosure

An entity shall disclose:

(a) the amount of exchange differences recognized in profit or loss except for those a

rising on financial instruments measured at fair value through profit or loss in

accordance with AS 39;

(b) net exchange differences recognized in other comprehensive income and

accumulated in a separate component of equity, and a reconciliation of the amount

of such exchange differences at the beginning and end of the period; and

(c) net exchange differences recognized directly in equity and accumulated in a

separate component of equity in accordance with paragraph 29A, and a

reconciliation of the amount of such exchange differences at the beginning and end

of the period.

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When the presentation currency is different from the functional currency, that fact

shall be stated, together with disclosure of the functional currency and the reason

for using a different presentation currency.

When there is a change in the functional currency of either the reporting entity or a

significant foreign operation, that fact, the reason for the change in functional

currency and the date of change in functional currency shall be disclosed.

When an entity presents its financial statements in a currency that is different from

its functional currency, it shall describe the financial statements as complying with

Accounting Standards only if they comply with all the requirements of each

applicable Standard including the translation method set out in paragraphs 39 and

42.

An entity sometimes presents its financial statements or other financial information

in a currency that is not its functional currency without meeting the requirements of

previous paragraphs. For example, an entity may convert into another currency only

selected items from its financial statements. Or, an entity whose functional currency

is not the currency of a hyperinflationary economy may convert the financial

statements into another currency by translating all items at the most recent closing

rate. Such conversions are not in accordance with Indian Accounting Standards and

the disclosures set out in previous paragraphs are required.

When an entity displays its financial statements or other financial information in a

currency that is different from either its functional currency or its presentation

currency and the requirements of previous paragraphs are not met, it shall:

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(a) clearly identify the information as supplementary information to distinguish it

from the information that complies with International Accounting Standards;

(b) disclose the currency in which the supplementary information is displayed; and

(c) disclose the entity’s functional currency and the method of translation used to

determine the supplementary information.

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Chapter Four

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Analysis of Bank of Palestine (BoP) Financial Statements

Bank of Palestine uses the U.S. dollar as the currency of financial reports. But

certainly there are a lot of processes and transactions that are denominated in a

currency other during the year, such as the Israeli shekel and the Jordanian dinar and

others. Accordingly, the Bank records the transactions that are denominated in

foreign currencies during the year at the exchange rates prevailing at the date of the

transaction. And are converted balances of financial assets and financial liabilities at

the foreign exchange rates prevailing at the date of the consolidated financial

statements. The bank has made a profit during the year 2012 worth $ 2,449,043 as a

result of changes in currency exchange rates, as shown in the statement of

comprehensive-income.

Research Findings

Data collection and financial information are essential for decision making,

therefore, it was necessary to find a way through which to measure the effects of

fluctuations in foreign currency exchange rates, especially multinational companies

that are directly affected by exchange rate fluctuations, due to the fact that these

companies have great reliance on international economic relations, and their

practices are affected by various political policies, and they are facing pressure from

groups that are affected by its activities, which resulted in the need for more useful,

relevant, and most importantly recent information for decision-making, that can be

reliably used to measure the effects caused by changes in the value of currency, and

communicate that information to interested parties.

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Thus, the aim of translating transactions in foreign currency as well as the translation

of the financial statements is to provide information consistent with the possible

effects of changes in exchange rates for the cash flows of the companies that affect

property rights, and stressing on the fact that the financial statements provide truly

useful information, and the financial statements reflect accurate financial results

that have been measured in foreign currency financial statements during the current

period.

According to the text of the standard, the objective of the standard is to clarify that

companies can conduct foreign activities in two ways:

To conduct transactions in foreign currencies

To conduct foreign operations

In order to cover foreign currency transactions and foreign operations in the

financial statements of the company, it must be expressed in transaction currency of

the company that prepared the statements, it also must translate the financial

statements of foreign operations into the currency of the company that prepared

the report, and are basic items mentioned by the standard in determining the

exchange rate to be used and how to recognize the impact of changes in exchange

rates in the financial statements. (International Accounting Standards.

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Recommendation

The following recommendations are suggested to avoid the negative implications of

changes in exchange rates, and to provide a more accurate representation of

financial statements:

1. We recommend applying IAS 21.

2. Accounting departments should take special care when dealing with foreign Currency exchange rates.

3. A law should be issued to force companies to apply IAS 21 for better financial disclosures.

4. Using IAS 21 will provide a more accurate and reliable presentation of financial statements

5. Banks which do not apply IAS 21 should either train their employees in that area, or hire specialists in that field.

6. Banks should optimize their data collection methods in order to collect the most Relevant, reliable, and useful information.

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Bibliography

1. International Accounting, Frederick D. S. Choi, Gerhard G. Mueller .

2. International Accounting Standards: From UK Standards to IAS, an Accelerated Route to Understanding the Key Principles of International Accounting Rules .

3. Indian Accounting Standards, Bhattacharyya .

4. International Accounting/Financial Reporting Standards Guide 2009, David Alexander, Simon Archer.

5- Accounting theory , Ahmed Riahi-Belkaoui .

Websites

1. www.accaglobal.com .

2. www.bdointernational.com .

3. www.fesaconsol.com .

4. www.cpaireland.ie .

Internet

1. www. ias plus.com/en/standards/ ias / ias21 .

2. www.ifrs.org/Documents/ IAS21 .

3. http://www.icaew.com/en/library/subject-gateways/accounting-standards/ ifrs/ias-21 .

4. www.slideshare.net/achawla/ ias - 21 -foreign-currencies .

5. www.ifrsclass.com/gaap/ ias / ias - 21 .htm .

6. http://www.iasplus.com/en/standards .

7. www.Ifrs.org/updates .

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