IAS 21 – Foreign Exchange restrictions and hyperinflation

The Project manager introduced the agenda paper which related to a request for guidance received by IFRS Interpretations Committee (IC) on the translation and consolidation of the results and financial position of foreign operations in Venezuela when applying IAS 21 The Effects of Changes in Foreign Exchange Rates. The issue was due to strict foreign exchange controls over the exchange of the Venezuelan Bolivar Fuerte (VEF) combined with Venezuela’s hyperinflationary economy. The IC decided in July 2014 not to take the issue into its agenda but considered necessary to raise the issue to the Board because the issue was too broad. The IC believed that the current practice was using one of the existing official exchange rates to translate foreign operations in Venezuela into the Group’s presentation currency, even if that rate was available for limited operations and did not reflect the local rate of inflation. The IC was concerned that by applying this practice, the entities’ operations would not be faithfully represented. The IC further observed that entities were unable to repatriate funds and the long-term lack of exchangeability was not addressed by IAS 21. The Project manager indicated that the objective of this session was to obtain feedback from the Board and would not ask for any decision.

One Board member indicated that she agreed with the IC conclusion for not taking the issue onto its agenda because the issue related to the confluence of multiple exchange rates plus lack of exchangeability, and interaction with hyperinflation was very specific to Venezuela. However, she was concerned for not raising a warning flag in the agenda decision about the consequences of applying the current practice because the financial information would not faithfully represent the operations of the entity. She believed that disclosure would not be enough to solve the issue.

Another Board member indicated that he believed it was an issue to be considered in the Conceptual Framework project. Currently, the Conceptual Framework project was not clear as to whether the translation into a reporting currency was part of measurement. He did not believe that the translation was part of measurement, but he would like this topic to be clarified because it was a conceptual issue. He indicated that in the case of Venezuela the exchange rate was something like fiction; however, IAS 21 required using it. He then provided an example of an entity that had PPE that would be require applying the historical exchange rate to record the transaction. However, for translation of the foreign operations, the spot rate should be used.

Another Board member believed that something should be done. He said that IAS 1 required that the financial statements should present fairly the financial position of an entity. He was concerned as to how a financial position could be fairly presented when, for example, cash was being reported at a value that was completely unrealistic. The Director of Implementation Activities responded that this was the core of the concern. IAS 21 required applying a spot rate, which meant that one of the official exchange rates should be used. However, this case added the lack of exchangeability even with operations at the official exchange rate. Accordingly, he believed that the main question was whether it would be possible to depart from the official exchange rate. The Board member responded that in this case, it would be necessary to apply common sense, and that would not mean applying literarily the wording of IAS 21.

The Chairman indicated that it would not be surprising to see entities getting into trouble for not applying IAS 21. He acknowledged that the information would not be faithfully presented, and that was probably the reason for which users had asked for guidance.

Another Board member recalled that this situation also applied in Zimbabwe. He asked the staff to provide more information on the outreach activities conducted, particularly whether they had looked at other countries.

The Project manager confirmed that the outreach included standard-setters and accounting firms. Only one response referred to a country in Africa, but they could not find diversity in practice.

Several Board members indicated that they did not have a solution for this situation where the exchange rate did not represent the economics of that country, and that it was even more difficult with a country with more than one exchange rate. They agreed that IAS 21 did not provide an answer; hence, they could only suggest requesting more disclosure. A Board member suggested (as proposed in the agenda paper) to analyse the comments that would be received on the agenda decision in November 2014. He would also suggest that the IC emphasise the IAS 1 aspect mentioned by another Board member previously by disclosing in detail the situation of that country, otherwise they should amend IAS 21. The Director of Implementation Activities confirmed that the tentative agenda decision included a requirement to add more disclosure.

Another Board member indicated he did not believe that more disclosures would be sufficient because the information was not being presented faithfully, and it would be necessary for the Board to analyse the issue and provide clarification.

The Director of Implementation Activities concluded that he would update the IC from the comments provided today by the Board and that the Board would receive an update from the comments letters on the agenda decision.

IFRIC Update

The Director of Implementation Activities highlighted the following items from the IFRIC Update:

• IAS 12 Income Tax – measurement of current income tax on uncertain tax position. The Director indicated that in an earlier meeting, the IC had analysed as to whether IAS 12 or IAS 37 would apply in uncertain tax positions. The IC concluded that IAS 12 was the relevant standard. However, the IC would like to provide clarification on how to measure uncertain tax positions, including detection risk (whether an entity should assume full knowledge from the tax authorities of the entity’s tax situation). He indicated that the IC was still working on that and they were analysing the possibility of providing some guidance. He would update the Board on the progress made by the IC at future meetings.
• IFRIC 14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction – availability of refunds from a defined benefit plan managed by an independent trustee. The Director indicated that the IC had decided at its May meeting to amend IFRIC 14. He summarised that the issue was about a trustee that had the unilateral right to use a surplus to make alternative use of that surplus by augmenting the benefits payable to members, by winding up the plan, or both. The IC had concluded that this was an issue related to measurement and was not related to the existence of a surplus. Based on additional staff analysis and feedback obtained, the IC had reached a different conclusion: If an entity cannot prevent a trustee from its right, then the entity should not recognise an asset. The IC had also analysed whether there would be unintended consequences, and having found no unintended consequences the Committee would propose an amendment to IFRIC 14. The Board would be provided with details at a future meeting.
• Finalisation of agenda decisions.The Director then indicated that the IC had finalised six agenda decisions. He highlighted the agenda paper on the classification of a hybrid financial instrument by the holder. The IC decided not to take the issue onto its agenda given that this issue was not widespread. The IC had received some concerns from constituents who requested further guidance and asked to address similar instruments.One Board member asked if there had been concerns raised by enforcers. If that were the case, she would prefer to provide some feedback. The Director of Implementation Activities indicated that there were no concerns raised by enforcers.Another Board member asked about whether EITF had issued some guidance. The Director of Implementation Activities responded that they had analysed this issue and had taken a particular approach that the EITF described as a whole instrument approach. According to that approach, the EITF would require analysing all facts and circumstances, determine whether the instrument was predominantly equity or liability and then identify the derivative that could require bifurcation. The Board member asked if they could not take the same approach. Another Board member responded that there were slight differences between U.S. GAAP and IFRS on the framework for classifying equity vs liabilities, and that decision would not be relevant for IFRSs.
• IAS 16 Property, Plant and Equipment and IAS 2 Inventories – Core inventories. The Director of Implementation Activities indicated that in previous meetings the IFRS IC had decided to develop an interpretation. However, after having conducted further analysis the IFRS IC had decided not to take issue onto its agenda.

Narrow-scope amendment: IAS 1 Presentation of Financial Statements – Classification of liabilities – summary of due process

The Project manager asked the Board to confirm whether they had any additional questions and whether the due process requirements were completed. The Board approved the following without any objections:

1. The amendments would be applied retrospectively and earlier application would be permitted;
2. No additional relief would be provided to first time adopters;
3. Due process requirements had been complied with;
4. No member intended to dissent;
5. Permission was given to ballot the Exposure Draft; and
6. The comment period would be 120 days.

No additional comments were raised by the Board.

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors – Distinction between a change in accounting policy and a change in accounting estimate

The Project manager introduced the agenda paper which related to a request for clarification received by the IC from the European Securities and Markets Authority (ESMA) regarding the criteria for distinguishing between a change in accounting policy and a change in accounting estimate. The submitter had identified divergent practices. The IC noted that both definitions seemed to overlap and that the threshold and related disclosure requirements were different; however, they noted that the issue was too fundamental to be addressed by them. The IC also considered that if a change in accounting policy was a change in method used to develop an accounting estimate, then it would be an important change and a more robust threshold and more disclosures should be required – similar to a change in estimate under IFRS 13. Accordingly, the IC recommended considering an amendment as part of the Disclosure Initiative.

Some Board members did not agree with the staff recommendation to incorporate this issue in the Disclosure Initiative. They mentioned that despite the fact that it related to disclosure, it would not mean that they should just automatically move it to the Disclosure Initiative. One Board member indicated that all differences in accounting methods were likely to trigger differences in disclosures; however, it would not mean that it was a disclosure issue. He believed that the IC should clarify the issue.

The Senior Director for Technical activities indicated that he believed that this was not an issue about lack of clarity. Rather, the overlap was too great, so he agreed that it had to be analysed. However, they did not have the staff available and the Principle of Disclosure project was expected to analyse the disclosure requirement that relate to a change in accounting policy and a change in accounting estimate. In relation to the current overlap, for example, he mentioned that in their discussions they had different views as to whether a change from LIFO to FIFO would only be a change in an accounting estimate or also a change in accounting policy. He considered that they were making progress as fast as possible on the Disclosure Initiative. Further, he believed that in order to help obtaining consistency and comparability, that project would be the appropriate path to analyse this issue.

Another Board member pointed out that it would be necessary to be cautious about developing general principles because there could be unintended consequences. She would prefer to analyse disclosures on a standard-by-standard basis. The Senior Director for Technical activities responded that if the concerns raised by ESMA were directed to a particular standard, then it would be appropriate for the IC to analyse that particular standard. The Project manager responded that ESMA raised specific examples, which covered four different standards. The Senior Director for Technical activities responded that if those were real examples, then it would be appropriate to address those particular cases instead of changing the definition of accounting policies and changes in estimates.

There was further discussion as to whether or not the staff should require more information from ESMA. There were concerns as to whether the request from ESMA was related to real examples (whether companies were changing criteria year after year) or whether it was just an intellectual exercise. Another Board member asked whether the IC had agreed on what the answer would be for each of the five examples raised by ESMA. The project manager responded that they had not because it was very difficult for them to draw a clear line between a change in estimate and a change in accounting policy.

Another Board member pointed out that it could be that the underlying concern for ESMA was to prevent engineering and that ESMA was asking for additional requirements (including more disclosure). She agreed with the staff recommendation (provided that they followed closely the progress of the disclosure initiative), and she believed that it would be a better solution rather than going standard by standard.  

The Chairman indicated that he believed that it would be necessary that the same teams should deal with this issue and other disclosure projects, so in his view the staff proposal was logical. The Board agreed with his conclusion.