Historical rate
Definition
The exchange rate on the date a transaction took place or an item arose. It is used to record a foreign currency transaction and for the equity of a foreign subsidiary at the date it arose.
Why does it matter in a group?
Some items are not retranslated each month. A foreign subsidiary’s share capital is carried at the historical rate, the rate when it was issued, so it does not move with the closing rateClosing rateThe spot exchange rate on the last day of the reporting period, used to translate a foreign subsidiary's assets and liabilities.Open the glossary entry. A non-monetary item that a company holds at cost, such as a building bought abroad, is also kept at the rate on the date it was recorded.1 Everything else moves with the closing rate, and the difference goes to the translation reserveTranslation reserveThe part of group equity that holds exchange differences from translating a foreign subsidiary into the group's currency.Open the glossary entry.
A small example
Palmridge issued AED 1,000,000 of share capital when the rate was 0.1950, which is GBP 195,000. It stays at that figure in group equity. At the closing rate of 0.2040 it would be 204,000, and the 9,000 difference sits in the translation reserve.
Sources
- IAS 21 The Effects of Changes in Foreign Exchange Rates, paragraph 23.