Average rate for translation

Learning objectives

• Assess whether an average rate used to translate income and expenses is reasonable (judgement, no threshold).L1, L2, L3
• Calculate, from the case data, the translated amount or the exchange difference relating to the concept “Average rate simplification (40)”.L1, L2, L3

Normative references

• IAS 21 §40Simplification: 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 expenses; it is inappropriate if exchange rates fluctuate significantly (a matter of judgement, no threshold prescribed).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

3 questions

• For practical reasons, a rate that approximates the rates at the dates of the transactions, for example an average rate for the period, is often used to translate income and expenses.L1
• The American subsidiary of Marchal earns income of {revenue} and incurs expenses of {expenses} over the year. Case convention: rates fluctuated little during the year and the average rate of 0.91 euro per 1 dollar approximates the transaction-date rates. Calculate income and expenses translated into euros.L2
• Fontan's subsidiary earns 70% of its annual revenue in December, while the rate of its currency varied sharply during the year. Management proposes to use the simple average of the January to December rates to translate all income. Write a note assessing this choice, separating case facts, rule and judgement.L3