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IAS 21 — The effects of changes in foreign exchange rates

Date recorded:

The Project manager introduced the agenda paper.  She indicated that the issue was discussed in November 2014 and in that meeting the Interpretations Committee tentatively decided to develop guidance on identifying the date of the transaction for revenue transactions denominated in a foreign currency, as an interpretation of paragraph 22 of IAS 21. She said that IAS 21 required that a foreign currency transaction should be recorded on initial recognition in the functional currency, by applying the spot exchange rate at the date of the transaction. She said that in November the majority of the Interpretations Committee members supported recognising revenue using the exchange rate at the date of the non-refundable advance payment or at the date that the advance payment is due, if earlier (i.e. the date that the contract liability (or deferred revenue) is initially recognised) (‘View B’).  She said that the Interpretations Committee also tentatively agreed to develop guidance on this topic.  She said that the objective of the meeting was to develop that view and to consider (i) the scope of any proposed guidance; (ii) how to apply the principle to other more complex transactions; and (iii) effective date and transition.  She then started to explain the scope of the interpretation and said that any guidance should not be restricted to just revenue transactions, and should also include any transaction affected by the issue. She said that the interpretation would not be applied to (i) business combinations; (ii) financial instruments or other contracts that are accounted for in accordance with IFRS 9 or IAS 39; (iii) cash-settled share-based payments; (iv) insurance contracts; and (v) income taxes. She then opened the discussion to the Interpretations Committee members.

One Interpretations Committee member said that he agreed with the staff analysis and recommendation. However, he said that he was concerned about scoping out IFRS 3. He also asked the staff to include some examples in the draft interpretation; particularly for complex transactions.

Another member said that the agenda paper did not explore the presentation of those effects in the P&L. He said that, particularly for revenue transactions, it was not clear whether the effects should be presented as “other revenue”, or in another line item in the income statement.  He then asked about the foreign exchange effect when the pre-payment is firstly invoiced but paid at a later date.  The project manager responded that they did not want to explore in detail those transactions and just give general guidance about the point in time for recognition. The Chairman also said that in the first stage (issuance of an invoice) an entity would not record a prepayment because there was no prepayment. He said that the issuance of an invoice would not give automatically an entity an unconditional right to be paid. Other members disagreed with that statement.

Another member said that he would prefer to define scope as to what was being included rather than what was being excluded. He also said that biological assets under IAS 41 should also be excluded because they are measured initially at fair value. The Chairman and other Interpretations Committee members indicated that they had the same concern and asked about whether a general principle could be identified for scoping out items from the interpretation (primarily items valued at fair value). One Interpretations Committee member also said that he disagreed with scoping out IAS 12 just because the standard was too complex.

One Interpretations Committee member said that the interpretation needed to place more focus on the determination of the transaction date rather than listing the items that were scoped in or out.

The Chairman concluded that that staff would need to continue working to articulate the underlying principle and said that it should not be based on scoping out specific items.

The Project manager then introduced other scenarios: (i) only part of the consideration is paid or received in advance; (ii) the advance consideration is a monetary item; and (iii) the advance consideration is denominated in a foreign currency but in a form other than cash (e.g. shares denominated in a foreign currency). She said that in the first case, the date of the transaction would be applicable only to that part of the consideration received in advance. In the second case she clarified that those transactions are not in the scope of this analysis and in the last case, she said that to avoid any unintended consequences, they recommended that the proposed guidance should only deal with circumstances in which the advance consideration was cash that was denominated in a foreign currency.

One Interpretation Committee member said that he agreed with the staff recommendations; he also said that there could be some operational complexities.

Another member said that the transactions should not be limited to cash transaction because IAS 21 is more comprehensive. The Project manager responded that they had tried not to interpret underlying principles of other standards.

The project manager then moved to the last topic which related to the effective date and transition. She said that the staff was proposing to have an effective date no earlier than the IFRS 15 effective date which would be 1 January 2017 and earlier application should be permitted. As regards transition they were proposing similar transition to IFRS 15. She said that applying full retrospective application to all purchases would be too costly. Further, she said that they were not proposing any special transition requirements for first-time adopters.  The Chairman asked why the effective date would be similar to IFRS 15 although the amendments would cover transactions that go beyond IFRS 15. The Project manager responded that the main issue was related to revenue contracts.

One Interpretation Committee member commented that there should be further relief for first-time adopters.

The chairman concluded that the staff would provide a draft interpretation to be discussed at the next meeting and asked whether any member would object to this interpretation. No member replied that they would object.

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