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IAS 21 Foreign currency translation of revenue

Date recorded:

The Project Manager introduced the agenda paper which related to a request for clarification received by the Interpretations Committee. The submitter asked what exchange rate should be used to translate a non-refundable cash payment received in advance for the sale of goods or services. She indicated that IAS 21 stated that a foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction (paragraph 21 of IAS 21). The date of a transaction was the date on which the transaction first qualifies for recognition in accordance with IFRSs (paragraph 22 of IAS 21). However, IAS 21 did not provide guidance as to how to identify the date of the transaction. She said that the submitter identified three views: a) View A: revenue would be recognised using the exchange rate at the date the contract was entered into or the date the contract become enforceable if later; (b) View B: revenue would be recognised using the exchange rate used to recognise the related deferred revenue on receipt of the cash prepayment and (c) View C: revenue would be recognised using the spot rate at the date of recognition of the revenue (i.e. on transfer of the goods or services). She said that based on their outreach they had identified mixed practice between views B or C. They had also raised the issue to the global preparers’ forum and they found similar concerns.  The staff had concluded that IAS 21 was not clear and they believed that view B was more appropriate because it reflected the economics of the situation; when an entity received an advanced payment it would not have further exposure to foreign exchange risks, it would also reflect that the obligation to transfer goods or services was created. The staff concluded that the issue should be added to its agenda to add an interpretation of IAS 21.

Several Committee members expressed agreement with the staff recommendation and agreed that View B reflected the economics of the transaction and acknowledged that there was diversity in practice.

One member said that he agreed with the staff recommendation because the standard was not clear, he also agreed that view B reflected better the economics of the transaction, he said at that point in time, the foreign exchange risks fell within the control of the entity. He said that it would be more challenging to apply view C. He also said that an additional issue could be if in the future there were requirements to disclose open performance obligations, it would not be clear what exchange rate should be applied.

Another Committee member said that they also had to address the presentation of foreign exchange differences.

Another Interpretation Committee member said that the staff should analyse whether a prepayment was variable consideration under IFRS 15. She said that it would also be necessary to analyse how view B would be applied to long term contracts. The Project Manager responded that in their view foreign exchange movements were not variable consideration.

Several Committee members indicated that the issue should be referred to the revenue TRG (Transition Resource Group for Revenue Recognition).

Some Committee members indicated that in the case presented there was only one transaction; while other members understood that there could be two transactions. One member said that an advance prepayment could be made as a hedging strategy to protect against foreign exchange issues, in his view an alternative solution could be between View B and C.

One Committee member said that the issue raised several questions, for example whether deferred revenue was a monetary item. He said that it could be addressed simply but there could be other issues with IFRS 15 which could be more complex.

The Chairman indicated that the issue should be referred to the TRG first because it was an IFRS15 issue. Some members asked whether the TRG would carry out outreach activities, one member said that he understood that the TRG publications were not binding. The Senior Director of Technical Activities agreed that the TRG publications were not binding but still they could identify other problems. He said that it would be important to determine what the transaction was.  One IASB Board member said that the TRG would carry out some outreach from its own members. 

The Chairman concluded that the staff should proceed, the focus should be on IAS 21, and if they found issues about IFRS 15 then the staff should refer them to the TRG. He also said that the starting point in developing an interpretation should be view B. The Implementation Director also clarified that they would contact the TRG to let them know of the issue.

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