a very simple structure with operations having only two functional currencies, a short
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history and few (external and internal) equity transactions. Whilst entities should strive for
a theoretically perfect restatement, in practice it is unlikely to be such an easy exercise.
As noted above, where an accounting policy is changed, IAS 8 requires retrospective
application except to the extent that this is impracticable, in which case an entity should
adjust the comparative information to apply the new accounting policy prospectively
from the earliest practicable date. A similar approach is, in our view, appropriate when
an entity changes its presentation currency. In this context the most important
component of equity to determine correctly (or as near correctly as possible) is normally
the foreign exchange reserve because that balance, or parts of it, has to be reclassified
from equity to profit or loss in the event of any future disposal of the relevant foreign
operation, and could therefore affect future earnings.
Where an entity applies the direct method of consolidation, it could be impracticable to
determine precisely the amount of exchange differences accumulated within the
separate component of equity relating to each individual entity within the group. In
these circumstances, approximations will be necessary to determine the amounts at the
beginning of the earliest comparative period presented, although all subsequent
exchange differences should be accumulated in accordance with the requirements of
IAS 21. For an entity that set its foreign exchange reserve to zero on transition to IFRS
(see Chapter 5 at 5.7) it may be able to go back to that date and recompute the necessary
components of equity. This should be less of an issue for entities applying the step-by-
step method.
BBA Aviation changed its presentation currency in 2011 and included the following
explanation in its accounting policies.
Extract 15.5: BBA Aviation plc (2011)
Accounting policies [extract]
Presentation currency
The Group’s revenues, profits and cash flows are primarily generated in US dollars, and are expected to remain
principally denominated in US dollars in the future. During the year, the Group changed the currency in which it
presents its consolidated financial statements from pounds sterling to US dollars, in order to better reflect the
underlying performance of the Group.
A change in presentation currency is a change in accounting policy which is accounted for retrospectively. Statutory
financial information included in the Group’s Annual Report and Accounts for the year ended 31 December 2010
previously reported in sterling has been restated into US dollars using the procedures outlined below:
–
assets and liabilities denominated in non-US dollar currencies were translated into US dollars at the closing
rates of exchange on the relevant balance sheet date;
–
non-US dollar income and expenditure were translated at the average rates of exchange prevailing for the
relevant period;
–
the cumulative hedging and translation reserves were set to nil at 1 January 2004, the date of transition to IFRS,
and these reserves have been restated on the basis that the Group has reported in US dollars since that date.
Share capital, share premium and the other reserves were translated at the historic rates prevailing at 1 January
2004, and subsequent rates prevailing on the date of each transaction;
–
all exchange rates were extracted from the Group’s underlying financial records.
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8
INTRODUCTION OF THE EURO
From 1 January 1999, the effective start of Economic and Monetary Union (EMU), the
euro became a currency in its own right and the conversion rates between the euro and
the national currencies of those countries who were going to participate in the first
phase were irrevocably fixed, such that the risk of subsequent exchange differences
related to these currencies was eliminated from that date on.
In October 1997, the SIC issued SIC-7 which deals with the application of IAS 21 to the
changeover from the national currencies of participating Member States of the
European Union to the euro. Consequential amendments have been made to this
interpretation as a result of the IASB’s revised version of IAS 21.
Although the Interpretation is no longer relevant with respect to the national currencies
of those countries that participated in the first phase, SIC-7 makes it clear that the same
rationale applies to the fixing of exchange rates when countries join EMU at later stages.
[SIC-7.3].
Under SIC-7, the requirements of IAS 21 regarding the translation of foreign currency
transactions and financial statements of foreign operations should be strictly applied to
the changeover. [SIC-7.3].
This means that, in particular:
(a) Foreign currency monetary assets and liabilities resulting from transactions should
continue to be translated into the functional currency at the closing rate. Any
resultant exchange differences should be recognised as income or expense
immediately, except that an entity should continue to apply its existing accounting
policy for exchange gains and losses related to hedges of the currency risk of a
forecast transaction. [SIC-7.4].
The effective start of the EMU after the reporting period does not change the
application of these requirements at the end of the reporting period; in accordance
with IAS 10 – Events after the Reporting Period – it is not relevant whether or not
the closing rate can fluctuate after the reporting period. [SIC-7.5].
Like IAS 21, the Interpretation does not address how foreign currency hedges should
be accounted for. The effective start of EMU, of itself, does not justify a change to
an entity’s established accounting policy related to hedges of forecast transactions
because the changeover does not affect the economic rationale of such hedges.
Therefore, the changeover should not alter the accounting policy where gains and
losses on financial instruments used as hedges of forecast transactions are initially
recognised in other comprehensive income and reclassified from equity to profit or
loss to match with the related income or expense in a future period; [SIC-7.6]
(b) Cumulative exchange differences relating to the translation of financial statements
of foreign operations recognised in other comprehensive income should remain
accumulated in a separate component of equity and be reclassified from equity to
profit or loss only on the disposal (or partial disposal) of the net investment in the
foreign operation. [SIC-7.4].
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The fact that the cumulative amount of exchange differences will be fixed under
EMU does not justify immediate recognition as income or expenses since the
wording and the rationale of IAS 21 clearly preclude such a treatment. [SIC-7.7].
9
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 to which IAS 12 applies. [IAS 21.50]. The
requirements of IAS 12 are discussed in Chapter 29. In broad terms the tax effects of
exchange differences will follow the reporting of the exchange differences, i.e. they will
be recognised in profit or loss except to the extent they relate to exchange differences
recognised in other comprehensive income, in which case they will also be recognised
in other comprehensive income. [IAS 12.58].
The tax base of a non-monetary asset such as property, plant or equipment, will
sometimes be determined in a currency other than the entity’s functional currency.
Consequently, changes in the exchange rate will give rise to temporary differences
that result in a recognised deferred tax liability or asset (subject to recoverability).
The resulting deferred tax should be recognised in profit or loss [IAS 12.41] and
presented with other deferred taxes rather than with foreign exchange gains or
losses (see Chapter 29 at 10.1.1).20
10 DISCLOSURE
REQUIREMENTS
10.1 Exchange
differences
IAS 21 requires the amount of exchange differences recognised in profit or loss (except
for those arising on financial instruments measured at fair value through profit or loss in
accordance with IFRS 9) to be disclosed. [IAS 21.52]. Since IAS 21 does not specify where
such exchange differences should be presented in the income statement entities should
apply judgement in the light of the requirements of IAS 1 – Presentation of Financial
Statements – to determine the appropriate line item(s) in which exchange differences
are included. For example, an entity which has an operating and a financing section
within its income statement might include exchange differences arising on operating
items (such as trade payables and receivables) in other operating income or expense and
exchange differences on financing items (such as loans and borrowings) in the financing
section. In the light of this, we recommend that entities in disclosing the amount of such
exchange differences indicate the line item(s) in which they are included. Further, the
classification of exchange differences (both gains and losses) arising from transactions
of a similar nature should be classified consistently throughout the periods presented.
The standard also requires disclosure of the net exchange differences recognised in
other comprehensive income and accumulated in a separate component of equity, and
a reconciliation of such amounts at the beginning and end of the period. [IAS 21.52].
1172 Chapter 15
10.2 Presentation and functional currency
When the presentation currency is different from the functional currency, that fact
should be stated, together with disclosure of the functional currency and the reason for
using a different presentation currency. [IAS 21.53]. For this purpose, in the case of a
group, the references to ‘functional currency’ are to that of the parent. [IAS 21.51].
When there is a change in the functional currency of either the reporting entity or a
significant foreign operation, that fact and the reason for the change in functional
currency should be disclosed. [IAS 21.54].
10.3 Convenience translations of financial statements or other
financial information
Paragraph 55 of IAS 21 indicates that when an entity presents its financial statements in
a currency that is different from its functional currency, it should describe the financial
statements as complying with IFRS only if they comply with all the requirements of each
applicable standard and interpretation of those standards, including the translation
method set out in IAS 21 (see 6.1 above). [IAS 21.55].
However, the standard recognises that an entity sometimes presents its financial
statements or other financial information in a currency that is not its functional currency
without meeting the above requirements. Examples noted by IAS 21 are where an entity
converts into another currency only selected items from its financial statements or
where an entity whose functional currency is not the currency of a hyperinflationary
economy converts the financial statements into another currency by translating all items
at the most recent closing rate. Such conversions are not in accordance with IFRS;
nevertheless IAS 21 requires disclosures to be made. [IAS 21.56].
The standard requires that 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 paragraph 55 are not met, it should:
[IAS 21.57]
(a) clearly identify the information as supplementary information to distinguish it from
the information that complies with IFRS;
(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.
For the purpose of these requirements, in the case of a group, the references to
‘functional currency’ are to that of the parent. [IAS 21.51].
10.4 Judgements made in applying IAS 21 and related disclosures
IAS 1 requires disclosure of the significant judgements that management has made in the
process of applying the entity’s accounting policies and that have the most significant
effect on the amounts recognised in the financial statements (see Chapter 3 at 5.1.1.B).
[IAS 1.122]. The application of IAS 21 can, in certain circumstances, require the exercise
of significant judgement, particularly the determination of functional currency (see 4
above) and assessing whether intragroup monetary items are permanent as equity
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1173
(see 6.3.1 above). Where relevant, information about these particular judgements should
be disclosed.
Whilst considering a number of issues associated with the Venezuelan currency
(see 5.1.4.C and 6.1.3 above), the Interpretations Committee drew attention to a number
of disclosure requirements in IFRS that might be relevant when an entity has material
foreign operations subject to extensive currency controls, multiple exchange rates
and/or a long-term lack of exchangeability. In particular, the committee highlighted the
importance of providing information that is relevant to an understanding of the entity’s
financial statements. [IAS 1.122].
In addition to disclosing the significant judgements in applying an entity’s accounting
policies, the committee also considered the following disclosures to be important:21
• significant accounting policies applied; [IAS 1.117-121]
• sources of estimation uncertainty that have a significant risk of resulting in a
material adjustment to the carrying amounts of assets and liabilities within the next
financial year, which may include a sensitivity analysis; [IAS 1.125-133] and
• the nature and extent of significant restrictions on an entity’s ability to access or
use assets and settle the liabilities of the group, or its joint ventures or associates.
[IFRS 12.10, 13, 20, 22].
Finally, the following may also be
relevant:22
• the nature and extent of risks (including foreign exchange risk) arising from
financial instruments (from a qualitative and quantitative perspective and including
sensitivity analyses); [IFRS 7.31-42, B6-B24]
• significant cash held by the entity that is not available for use by the group,
including due to exchange controls; [IAS 7.48, 49] and
• the amount of foreign exchange differences recognised in profit or loss and other
comprehensive income. [IAS 21.52].
11 FUTURE
DEVELOPMENTS
IAS 21 has caused a degree of concern in recent years, especially in certain emerging
economies. In particular, some have criticised IAS 21 as designed for companies that
operate in a reserve currency, e.g. the US dollar or euro; and volatility in exchange rates,
including during the financial crisis, led some to ask the IASB to reconsider IAS 21.
However, after performing research and outreach as part of its periodic agenda
consultations, the IASB decided in May 2016 not to include in its work plan any further
work on the topic.23
Therefore it seems unlikely there will be any significant changes to the standard in the
foreseeable future, although it is possible that narrow-scope amendments or
interpretative guidance will be considered. In fact, at the time of writing, the
Interpretations Committee had tentatively decided to research possible narrow-scope
standard-setting aimed at addressing the matters considered in respect of the
Venezuelan currency (see 5.1.4.C and 6.1.3 above).24
1174 Chapter 15
References
1 After applying IFRS 9 an entity can actually
10 IFRIC Update, November 2014 and Staff Paper
continue applying some or all of the hedge
(Agenda reference
16), Foreign exchange
accounting requirements of IAS 39. These
restrictions and hyperinflation, IASB, July 2014.
options are considered further in Chapter 40
11 IFRIC Update, March 2008, p.2.
at 1.4 and in Chapter 49 at 13.3 but are not dealt
12 IFRIC Update, March 2008, p.2.
with any further in this chapter.
13 IASB Update, February 2003, p.5.
2
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