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IAS 21, The Effects of Changes in Foreign Exchange Rates

Date recorded:

Matters discussed and tentative decisions reached:

1. Whether to eliminate the allowed alternative in paragraph 21 of IAS 21 to capitalise certain foreign exchange differences.

The Board agreed that capitalisation should be eliminated. Capitalisation of exchange differences is to overcome hyperinflation, but because of the provisions in IAS 29, capitalisation is not appropriate, as it would double-count for the hyperinflation.

2. Whether to eliminate the choice of IAS 21.33 to translate goodwill and fair value adjustments to assets and liabilities that arise on the acquisition of a foreign entity at either (a) the closing rate or (b) the historic transaction rate.

The Board agreed that the choice should be eliminated. A closing rate method should be used because the assets and liabilities belong to the acquired entity, and the closing rate method fits in more appropriately with the subsequent cash flow test proposals for goodwill. Board members also felt that goodwill should be treated like all other assets. This issue will be discussed further in connection with the business combinations project.

3. A possible inconsistency between IAS 21 and IAS 39 regarding translation of foreign currency derivatives such as forward contracts.

The Board proposed to remove all derivatives that are covered by IAS 39 from the scope of IAS 21, leaving IAS 21 to cover just a few remaining derivatives. This would remove any inconsistencies.

4. Various issues to do with the measurement currency, the presentation currency, and convenience translations. This includes whether to incorporate the approach set out in SIC 19 and the proposals in SIC D30 into IAS 21.

This issue was discussed at length, starting with clarifying the following terms:

  • Measurement currency is the currency in which daily transactions are recorded. Monetary items in other currencies will therefore give rise to foreign exchange differences when translated into the measurement currency. The US representatives in the meeting preferred to refer to this as the functional currency and wanted the IASB to use this term in its Standard.
  • Presentation currency is the currency in which the financial statements are produced.
  • Convenience translation is the currency into which financial statements may be translated for the convenience of their users. It was agreed that the Board is not concerned about clarifying this definition.
The Board noted that IAS 21 currently appears to assume that the measurement currency is the same as the presentation currency, which is clearly not the case when a company has overseas listing. As a result, SIC 19 was issued to provide guidance for choosing the appropriate measurement currency.

The Board addressed how a company should determine the measurement currency. The Board agreed that measurement currency should not be a matter of choice but, rather, should bv the currency of the country whose economy drives the business. It is the measurement currency that determines the gains and losses that the company will recognise.

The Board discussed measurement currency in the context of a group of companies whose subsidiaries are in different countries to the parent. It was agreed that the measurement currency of each subsidiary in the group is the currency of the country that drives that subsidiary's economy (usually the country it is incorporated in). The Board's tentative conclusion was that the group financial statements can use any of the currencies used by the other group companies as their measurement currency and can present the consolidated financial statements in any of those currencies as well.

The Board then discussed whether the group could present its financial statements in any other world-wide currency that is not a measurement currency within the group. This is something that SIC 19 currently allows. It was concluded that free choice of currency presentation should be allowed and IAS 21 translation rules should be followed.

SIC D30 proposals are to be incorporated into IAS 21 which means that if a simple conversion was done into any currency (i.e. using closing rate for everything) rather than a proper translation, extra disclosure would need to be given as the conversion is not in compliance with IAS 21.

5. Whether, if the Board adopts SIC 19's approach to defining a measurement currency, to eliminate the present distinction in IAS 21 between integral foreign operations and foreign entities and instead require that all foreign operations are translated using a single method.

The Board's tentative conclusion is that no change in this area should be proposed.

6. Whether all discussion of hedging that is presently in IAS 21 should be moved to IAS 39.

This was agreed.

7. Whether SIC 7, SIC 11, SIC 19, and SIC 30 should be incorporated into IAS 21?

The Board decided that SIC 7 on the Euro should remain in place as countries may still wish to join the Euro in the future. SIC 11 on capitalisation of foreign exchange differences was already addressed in issue 1 above and therefore will not be merged into IAS 21. SIC 19 and 30, as discussed above, will be brought into IAS 21.

8. Whether to provide specific transitional provisions to the revised standard.

No transitional provisions are proposed although it may be appropriate to issue an Interpretation until the amended Standard is produced.

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