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IAS 21 – Foreign exchange restrictions and hyperinflation

Date recorded:

The technical manager reminded the Committee that the topic had been discussed in July. The topic comprised two issues. The first issue was about the rate that should be used to translate an entity’s net investment in foreign operations when there were multiple exchange rates. The second issue regarded the rate that should be used when there was a long-term lack of exchangeability. The Committee had decided not to take these issues onto its agenda. This tentative agenda decision had received four comment letters. They did not provide any new information on the first issue and staff therefore recommended to finalise the tentative agenda decision on this issue without modifications. Two comment letters addressed the second issue, including a comment letter from the submitter of the issue. Both expressed disagreement with the tentative agenda decision. One respondent said that IAS 21 lacked guidance on when different items in the financial statements were potentially translated using different exchange rates. They also pointed out that applying a more advantageous official exchange rate could be treated similar to a government grant. Other issues included the introduction of a third official exchange rate. This had happened earlier in the year in Venezuela with the introduction of SICAD II. If this exchange rate was widely used, the issue at hand would be alleviated; however there was no evidence of this so far. Staff therefore recommended finalising the tentative agenda decision and that the IASB should consider addressing the issue through a narrow-scope amendment to IAS 21.

One Committee member agreed with the staff recommendation but disagreed with the reference in the agenda paper that use of SICAD II would alleviate the problem. She said that this exchange rate was not accessible. She also objected to the reference in the tentative agenda decision that paragraph 26 of IAS 21 was applied by extension. In her view paragraph 26 was applicable by itself and not by extension. The technical manager replied that paragraph 26 was applied on the local operations level and therefore the extension was to also apply it on a consolidation level. The Committee member said it should be ensured that it was not read as ‘by analogy’.

Another Committee member also expressed agreement with the staff recommendation. However, he believed that the issue was the interaction between IAS 21 and IAS 29 in his view. He said that IAS 29 worked for statutory accounts but not for consolidated accounts. He therefore recommended that the exchange rate in IAS 21 should be aligned with the exchange rate in IAS 29. As regards multiple exchange rates he said that economically there was only one exchange rate and all more advantageous exchange rates were subsidies in his view.

One Committee member disagreed with the last paragraph of the draft agenda decision. He said that the reference to disclosure requirements was not helpful to establish the argument why this item was not added to the agenda.

A fellow Committee member agreed and said that he was in favour of finalising the tentative agenda decision as there was no significant diversity in practice that was not justified by different circumstances. He agreed that there was an issue with the interaction of IAS 21 and IAS 29 but said that this would have to be addressed at the Board level.

An observing IASB member reported that a fellow Board member had thought that it might be helpful if the Committee acknowledged that paragraph 26 of IAS 21 could be extended to derive a solution for the issue.

When called to a vote 13 of the 14 Committee members were in favour of finalising the tentative agenda decision. He asked the Committee if they would prefer to keep the last paragraph in the draft agenda decision. 12 Committee members voted in favour of retaining the last paragraph.

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