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IAS 21 – Net Investment in a Foreign Operation – Paragraph 32 of

Date recorded:

IAS 21

The Board discussed whether different accounting treatments should apply to exchange differences on monetary items denominated in different currencies. The Board also discussed whether funding provided to a foreign operation by a group entity that is not the reporting entity may be considered to be part of the reporting entity's net investment in that foreign operation in the context of paragraph 32 of IAS 21.

The Board agreed that the intention should be to treat third-currency denominated monetary items that form a part of the net investment in a foreign operation similar to when the monetary item is denominated in the functional currency of either the reporting entity or the foreign operation.

The staff proposed to delete paragraph 33 of IAS 21 in order to remove the inconsistency. However the Board indicated a preference to delete only the last two sentences of that paragraph and include additional guidance. The sentences that may be deleted are as follows:

IAS 21.33 "... However, a monetary item that forms part of the reporting entity's net investment in a foreign operation may be denominated in a currency other than the functional currency of either the reporting entity or the foreign operation. The exchange differences that arise on translating the monetary item into the functional currencies of the reporting entity and the foreign operation are not reclassified to the separate component of equity in the financial statements that include the foreign operation and the reporting entity (ie they remain recognised in profit or loss)."

The Board agreed that the ability to account for exchange differences in equity as provided for by paragraph 32 of IAS 21 should only be available where the lender is in a control relationship (i.e. parent or subsidiary lends to a foreign operation). Monetary amounts outstanding between fellow subsidiaries would qualify for equity treatment, but this would not extend to trade receivables or trade payables. The Staff proposed amending paragraph 15 of IAS 21 as follows:

IAS 21.15 A reporting entity or an entity that is consolidated, proportionately consolidated, or accounted for using the equity method in the reporting entity's consolidated financial statements An entity may have a monetary item that is receivable from or payable to a foreign operation. Such aAn item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, a part of the reporting entity's net investment in that foreign operation, and is accounted for in accordance with paragraphs 32 and 33. Such monetary items may include long-term receivables or loans. They do not include trade receivables or trade payables.

Some Board members expressed concern whether the above amendment is not sufficiently restrictive to limit its application to a situation where the lender is in a control relationship.

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