Transcript: What closing rate should you apply when more rates are available?

Hi guys, this is Silvia of IFRSbox.com and welcome to the very first episode of IFRS Q&A or questions and answers with me.

I’m here for you, and each week I hope I’ll be featuring a brand new question from you, my audience, whether that’s someone who already follows my website IFRSbox.com, or someone who has recently discovered me through this show, doesn’t matter. What’s more important is that your questions get answered!

This episode is going to be quite different and a little bit longer from what you could normally expect because I’d like to explain what this is all about. At the end of this episode, you can listen to the first question from you get answered!

So, for those of you who are new here and don’t know IFRSbox and me at all: once again, I am Silvia and IFRSbox is the website that I created in back in 2009 while I was on maternity leave with my first baby.

Accounting and IFRS were always my passion, however strange this can sound and I worked as an auditor, CFO and IFRS consultant for many years before I decided to have children. Then when I finally got the first one, I needed to do something just to keep myself up to date and in contact with the profession.

So, whenever I had little time, I wrote an article, made some video, published it on YouTube and slowly grew IFRSbox. And I remember that few months after I started, there were only 30 or 50 people on the web monthly.

Anyway, I always wanted to help, so I published even more articles, videos, I responded to many of your questions in comments and e-mails and it was a hard work, but I really love to help.

Over time I developed also premium course – the IFRS Kit for the people who want to lift their IFRS skills to the higher level systematically so if you’re interested you might check that out on my website IFRSbox.com.

And I just went on and on.

Now, in the beginning of 2018, the website has tens of thousands visitors per month, lots of subscribers and lots of students. That’s much more that I could hope for and I’m so grateful for that.

The only thing that worried me was that I could not manage to respond to all e-mails and messages from my audience – from you. And I would love to because I know how hard it is to get some help out there these days. However, one day has just 24 hours and it’s totally beyond human capacity to respond to all questions.

That’s the reason why I’m coming up with this podcast. I noted that in the e-mails, the questions often repeat and the same or similar questions pop up again and again. So, I just decided to answer these questions here in the podcast and make it available for everyone. It’s simple as that – you ask and I give my answers.

Why podcast?

Well, I am a mom and I drive my kids to school and when I’m stuck in traffic, I like listening to something sensible and meaningful, so I thought – why not giving something for listening to you?

But if you’re more into reading, then you can just read the transcript of each episode, it will be published on my website ifrsbox.com.
OK, I think that’s enough talking and let’s get straight into the very first question.

IFRS Question 001

This is the question asked by Dipanjan from Botswana and let me read it:

Hi Silvia, greetings from Botswana. Which closing exchange rate to use for translation at the year-end: buy rate, mid rate, sell rate?

We have lots of assets and liabilities denominated in foreign currencies and we need to translate all monetary items with the closing rate at the end of the reporting period.

The question is – what closing rate shall we use? There is more than one closing exchange rate stated in our country: mid rate, buy rate, sell rate. The differences would be quite material.

This is a great question because that’s the very practical issue that many accountants face so let me answer that.

IFRS Answer 001

In some cases the differences in exchange rates are small and the total impact of using different rates would not be significant for your financial statements. You can use the mid rate in this case.

It’s the spot rate. In my own country, we use EUR and for the translating the year-end balances of monetary assets and liabilities, we use the closing spot rate of EUR to foreign currency as declared by the European Central Bank.

However, in other circumstances, when there’s more than one rate, the differences can affect your financial statements a lot.

In this case IAS 21 prescribes that 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 – that’s stated in the paragraph 26 of IAS 21.

Therefore, you always have to ask: if the foreign currency receivable is paid now at the reporting date, at what rate will it be converted on our bank account?

Your receivables and other monetary assets would be settled at the buy rate and your payables and other monetary liabilities and the sell rate.

Why?

Buy rate is the rate at which the bank buys the foreign currency from you and therefore, when you have the receivable in foreign currency, you will get the foreign currency and you will sell it to the bank – and the bank will buy it from you at the buy rate. That’s why you translate the assets at the buy rate.

On the other hand, the sell rate is the rate at which the bank sells the foreign currency to you. So, if you have payable in foreign currency, you need to buy that foreign currency from the bank first in order to pay that payable and the bank will SELL it to you at the sell rate.

If this is too hard to remember, just remember the simple help or mnemonic – it is always beneficial for the bank, not for you.

So, if you have 1 000 USD and you need EUR, the buy rate is 1.2 and the sell rate is 1.1 USD/EUR – which rate is OK to apply?

At the buy rate of 1.2, 1 000 USD is – let me calculate – 833 EUR, and at the sell rate of 1.1, 1 000 USD is 909 EUR – what amount would you get if you bring your 1 000 USD to the bank? The lower amount, of course – so you translate your asset of 1 000 USD with the buy rate of 1.2 at 833 EUR.

On the other hand, If you have to pay 1 000 USD to someone, but you have just EUR, how much you need to pay to the bank to get USD? The higher amount, 909 EUR – so you translate your liability of 1 000 USD with the sell rate of 1.1 at 909 EUR.

Let me warn you that here you should apply these rates consistently; i.e. always mid rate, or always buy-sell rates. You can’t just apply the mid rate once and then the buy-sell rate… you have to be consistent from period to period. Period.

Oh and I have one bonus question for today’s very first podcast – what if in your country, there’s some official exchange rate and an unofficial exchange rate? And, what if you’re using unofficial rate and that rate is widely and legally used?

In this case you can apply the unofficial rate for your translation, but only if you can strongly prove that the transactions can be, will be or were settled at that rate.

Before the end of this episode let me add a little disclaimer – that’s what my lawyers asked me to do – this podcast strives to provide the useful information, but you as a listener agree that this information is not a substitute from a professional judgment of CPA of your own situation and circumstances and you should consult CPA or other qualified professional.

So, thanks to Dipanjan for this great question and thank you for being here till the end. If any of you listening have a question about IFRS and its application, whatever, I’d love to answer that for you so leave me a message via Contact form on ifrsbox.com and if your question gets answered and featured in this podcast, I’ll let you know.

Thanks again for your support, this show and the whole website IFRSbox.com would not be possible without you. Thanks and bye!

Play the IFRS Q&A 001 here