IAS 21 — Foreign exchange restrictions and hyperinflation

Date recorded:

The project manager introduced the paper based on a request received by the IC for guidance on the translation and consolidation of the results and financial position of foreign operations in Venezuela under IAS 21 The Effects of Changes in Foreign Exchange Rates. The issue arises because of strict foreign exchange controls over the exchange of the Venezuelan Bolivar Fuerte (VEF) combined with Venezuela’s hyperinflationary economy.

The staff has identified two issues from the outreach activities:

  1. Issue 1: which rate should be used to translate the entity’s net investment in the foreign operation when there are multiple exchange rates?
  2. Issue 2: what rate should be used when there is a longer-term lack of exchangeability?

The staff has concluded that there was no diversity in the application of the principle of IAS 21 (issue 1), that is the rate used was that at which the entity would be able to remit funds from its foreign operations in Venezuela (i.e. the rate at which future cash flows could be settled when viewing the net investment as a whole). Instead of there being diversity over the principle to apply under IAS 21, outreach indicated that diversity in practice arose because of different, changing, and often unclear, facts and circumstances, and a lack of exchangeability (which is considered in Issue 2). The staff recommended not taking this issue into the agenda.

In relation to issue 2, the staff recommended adding a clarification in the agenda decision notice that disclosures should be given by those entities where the impact of foreign exchange restrictions was material as already required by existing Standards.

Issue 1


One IC member indicated that he agreed with the staff recommendation. Another IC member indicated that there were currently different exchange rates depending on the goods to be imported. There was an issue with the interaction between IAS 21 and IAS 29 Financial Reporting in Hyperinflationary Economies. If there was a fixed exchange rate set artificially low then by applying IAS 29 assets would be overstated. He understood that there was a presumption in IAS 29 that that standard only worked if there was a free floating exchange rate. The Chairman pointed out that currently exchange rates were not real and price level adjustments needed to be consistent with currency adjustment. He suggested involving the Board to discuss how they understand IAS 29 working in such an environment.

One IC indicated that he agreed with the staff recommendation because the principle of IAS 21 was understood. The issue with the interaction between IAS 21 and IAS 29 had been going on for many years and companies had dealt with it - fixing the issue would require major changes in IAS 29.  Another IC also agreed, stating that the agenda decision should state that the standard was not clear. Another IC pointed out that it could be challenging to provide a solution because the situation changed on a daily basis. Another IC indicated that he believed that there was no diversity in practice because the determination of the exchange rate was a management decision in applying the principle of IAS 21.


The Chairman concluded that there was agreement with the staff recommendation not to add this issue to the agenda.

Issue 2


The Chairman indicated that there was an additional issue to consider as to whether the situation described should trigger impairment. One IC member responded that since the entity continued to generate cash flows and can operate in the country there should be no impairment. Also it was difficult to impair cash balances. Another IC member pointed out that in South Africa entities stopped consolidating their investments in Zimbabwe because an entity did not have control of the assets in that environment. Another IC member said that it was difficult to issue guidance because the situation kept changing, and it also depended on the industry. Also it was difficult to determine what the trigger indicator would be.

Several IC members expressed agreement with the staff recommendation, and acknowledged that the issue of continuing consolidation was being triggered in many jurisdictions. The Chairman asked the implementation director to discuss the comments raised today at the next IFRIC update to be provided to the Board.

On the issue of the interaction between IAS 21 and IAS 29, one IC member stated that IAS 29 was not voluntary and the IC did not have the authority to prevent entities from applying IAS 29 for specific circumstances. The Chairman indicated that there was pressure to apply more inflation adjustment and not less.


The Chairman concluded that there was agreement with the staff recommendation.

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