Normally, dividends are declared and paid in an entity’s functional currency. However, in certain cases, such as when an economy is highly inflationary, or when the functional currency is other than the currency of the economy in which the operation is domiciled, dividends may be declared and paid in a currency other than the functional currency.
Keywords: Mazars, Thailand, Accounting, TFRS for NPAEs, TFAC, Dividends
20 October 2021
Company A (or the “Company”) is incorporated in Thailand and the majority shareholder is incorporated in Japan.
Company A prepares its financial statements under the Thai Financial Reporting Standards for Non-Publicly Accountable Entities (“TFRS for NPAEs”), presented in Thai baht. Therefore, dividends are normally declared and paid to its shareholders in Thai baht.
During 2020, Company A evaluated Thailand's economy and determined that the Thai Baht exchange rate might fluctuate significantly. Therefore, dividends will be declared and paid in Japanese yen in March 2021.
The schedule for dividend payment is as follows:
- How should Company A record the payment of dividends in its financial statements in the scenario set out above?
- Should Company A convert the dividend payable which has not yet been paid to its shareholders in a foreign currency using the closing rate at the end of 2020?
- Dividends in foreign currency are measured and recorded in the functional currency. In this case, this is in Japanese Yen, using the exchange rate valid on the declaration date. When dividends are not paid on the declaration date, a dividend payable is considered a monetary liability. Accordingly, the dividends payable account should be converted to Thai Baht using the exchange rate in effect at the end of each reporting period, with an offsetting entry to the income statement.
- Paragraphs 382, 384 and 386 of the TFRS for NPAEs state the following:
- Foreign currency is a currency other than Thai baht.
- A foreign currency transaction should be recorded, upon initial recognition, in Thai baht, by applying to the foreign currency amount the spot exchange rate between Thai baht and the foreign currency as at the date of the transaction.
- At the end of each reporting period:
- Foreign currency monetary items shall be converted using the closing rate.
- Non-monetary items that are measured in terms of historical cost in a foreign currency shall be converted using the exchange rate at the date of the transaction.
As indicated above, it can be concluded that:
- TFRS for NPAEs does not allow entities to prepare their financial statements using a functional currency other than Thai baht.
- Company A must specify the type of dividends payable in foreign currency, and this is considered a monetary item.
In this case, the dividend payable of JPY 30 million is a monetary item. Therefore, the dividend in foreign currency must be recognised in Thai Baht using the foreign exchange rate on the date of the transaction.
Company A will record the following transactions in the financial statements:
A. On the date of the Board of Directors Meeting in which it declares a JPY 60 dividend for each of the company's 500,000 shares outstanding:
B. Convert the dividend payable using the closing rate on 31 December 2020:
C. Dividend payment to shareholders:
References: TFRS for NPAEs and TFAC