Lack of Exchangeability — Cover paper (Agenda Paper 12A)

In June 2019, the IFRS Interpretations Committee (the Committee) discussed the difficulties in applying IAS 21 when a currency suffers from an extreme long-term lack of exchangeability and when a foreign operation has not been able to access foreign currencies using the available legal exchange mechanisms, such as with the Venezuelan Bolivar. Accordingly, the Committee decided to research possible narrow-scope standard-setting aimed at addressing the matter.

The background to the project was explained and the Committee’s analysis and recommendation on how to define exchangeability (and lack of exchangeability) was presented. Further, the Committee’s recommendation on how an entity would determine the spot exchange rate when exchangeability is lacking was introduced.

Board discussion and voting

No Board discussion took place and there was no question for the Board.

Lack of Exchangeability — Possible narrow-scope standard-setting (Agenda Paper 12B)

Background

IAS 21 contains the definition of exchange rate, spot exchange rate and closing rate and provides guidance on when to use these rates and specifically when the presentation currency is different to the functional currency. IAS 21 includes some requirements in relation to lack of exchangeability but only for foreign currency transactions reported in the functional currency but it does not specify the circumstances in which exchangeability is temporarily lacking, nor does it provide requirements for a lack of exchangeability that is other than temporary.

In November 2014, the Committee observed that a long-term lack of exchangeability is not addressed by the guidance in IAS 21, and so it is not entirely clear how IAS 21 applies in such situations. However, the Committee thought that addressing this issue is a broader-scope project than it could address. Accordingly, the Committee decided not to take this issue onto its agenda.

In September 2018, the Committee discussed the determination of exchange rate when following circumstances exists:

• (a) Exchange mechanism incorporates the use of an exchange rate set by the authorities.
• (b) Foreign operation’s functional currency is subject to a long-term lack of exchangeability with other currencies
• (c) Inaccessibility to foreign currency using the exchange mechanism as described in (a) above.

The Committee observed that those circumstances exist in Venezuela. Consequently, in 2018 the Committee decided to research possible narrow-scope standard setting to address situations in which an entity might conclude that the spot rate is not observable due to long-term lack of exchangeability.

Staff analysis

The staff researched the accounting for different entities with Venezuelan foreign operations and identified that the matter had a material effect for some entities and may materially affect some others in the future. There was diversity in practice. The staff noted that a currency’s lack of exchangeability often arises when the economy of that currency is hyperinflationary. Further, entities apply diverse reporting methods (including using estimated exchange rates), which could hinder comparability and reduce the usefulness of information for users of financial statements. In the absence of requirements in this area, there is also a risk that entities might inappropriately estimate exchange rates in other situations by analogy. The Committee focused on identifying an approach that would avoid both reconsidering any fundamental principles and requirements in IAS 21 and addressing other aspects of IAS 21 or other Standards.

Staff recommendation

Based on the above analysis the staff concluded that:

• (i) this matter is widespread and could have a material effect on those affected; and
• (ii) it is necessary to amend IAS 21 to address the matter, thereby improving financial reporting given adequate basis for an entity to determine the exchange rate to use when exchangeability is lacking.

Further, the Committee recommended the following approach to address the issue more broadly and efficiently:

• (i) define what constitutes a currency’s exchangeability and, thus, a lack of exchangeability; and
• (ii) develop requirements that would apply in those circumstances.

Board discussion and voting

The majority of the Board members supported the recommended approach by the Committee. One of the Board members commented that ‘official rates’ should be clarified as in some jurisdictions there is more than one ‘official rate’ and the issues could also be related to other jurisdictions, with a similar situation to Venezuela. Another Board member commented that there might be certain issues that still need to be addressed which are currently not covered under this narrow-scope standard-setting project, however, this is an initial step as part of the improvement.

Board decision

All Board members voted in favour of the staff’s recommendation.

Lack of Exchangeability — Exchangeability and lack of exchangeability (Agenda Paper 12C)

This paper presents the Committee’s June 2019 analysis and recommendations on how to define exchangeability and, consequently, a lack of exchangeability. The staff are not asking the Board to make decisions on the definition of exchangeability, or a lack thereof. The staff think it would be helpful for the Board to first discuss and provide feedback on the Committee’s recommendations regarding exchangeability. They will use that feedback to refine the analysis and recommendations and then, at a future meeting, ask the Board whether it agrees with the updated recommendations.

Board discussion

The Board members participated actively in the discussion, provided various suggestions and asked staff to:

• make some editorial changes to make the guidance clearer and easier to understand;
• articulate accessibility of the rate in the context of legality and intention;
• consider the requirements as they relate to hyperinflation;
• clarify the definition of ‘more than insignificant’ as it falls somewhere between ‘insignificant’ and ‘significant’;
• clarify what constitutes enforceable rights in the market; and
• ensure consistency between Agenda Papers 12C and 12D as they are interrelated.

Lack of Exchangeability — The exchange rate when exchangeability is lacking (Agenda Paper 12D)

This paper presents the Committee’s June 2019 analysis and recommendations on the spot exchange rate an entity uses when exchangeability of a currency is lacking. The staff are not asking the Board to make decisions on determining the spot rate. They think it would be helpful for the Board to first discuss and provide feedback on the Committee’s recommendations regarding the spot rate. They will use that feedback to refine the analysis and recommendations and then, at a future meeting, ask the Board whether it agrees with the updated recommendations.

Board discussion

Some of the Board members participated in a brief discussion. One of the Board members emphasised the need for clarity on lack of exchangeability even when the full amount is not available to exchange. Other Board members suggested rephrasing paragraph 43 of the paper, relating to estimating exchange rate more than once, to make it consistent with IAS 21:26.

Annual Improvements to IFRS Standards 2018–2020 — Cover Paper (Agenda Paper 12E)

The Board published ED/2019/2 Annual Improvements to IFRS Standards 2018–2020 in May 2019. In this session, the staff will analyse the comment letters received on the proposals. An overview of the proposals can be found in our IFRS in Focus on the ED.

Annual Improvements to IFRS Standards 2018–2020 — Subsidiary as a First-time Adopter (Amendment to IFRS 1) (Agenda Paper 12F)

Some respondents suggested that the Board permit, rather than require, a subsidiary that applies IFRS 1:D16(a) to measure cumulative translation differences (CTD) using the amount reported by the parent. Similarly, one respondent also said there are situations in which it is easier for a subsidiary as a first-time adopter to recognise CTD at zero, instead of using the amount reported by the parent. The Board decided to require a subsidiary to measure CTD using the amount reported by the parent because:

• a) Doing so would be consistent with the existing requirement in IFRS 1:D16(a)
• b) The reason for any amendment to IFRS 1 would be to remove a potential difference in the amount of CTD reported by a subsidiary and its parent
• c) Providing an option is likely to be unnecessary

The staff noted that there could be some situations in which a subsidiary that applies IFRS 1:D16(a) might find it burdensome to measure CTD using the amount reported by its parent. Such a subsidiary might benefit from applying the exemption in IFRS 1:D13 to measure CTD for all foreign operations at zero at its date of transition to IFRS Standards. Further, it would appear inappropriate to potentially increase costs for some subsidiaries as a consequence of amending IFRS 1 to provide cost relief for others if the Board decides to require a subsidiary that applies IFRS 1:D16(a) to measure CTD using the amount reported by the parent.

Staff recommendation

The staff recommend that the Board permit, rather than require, a subsidiary applying IFRS 1:D16(a) to measure CTD for all foreign operations using amounts reported by the parent.

Board discussion and voting

One of the Board members agreed with the staff recommendation but highlighted that the recommendation is more beneficial to subsidiaries that do not prepare consolidated financial statements as compared to those that do. Other Board members also agreed with the staff recommendation citing that, in such situations, benefits would outweigh costs.

When asked to vote, all of the Board members voted in favour of the staff’s recommendation.

Annual Improvements to IFRS Standards 2018–2020—Fees Included in the ‘10 per cent’ Test for Derecognition of Financial Liabilities (Amendment to IFRS 9) (Agenda Paper 12G)

Almost all respondents explicitly agreed with the proposed amendment. Some respondents suggested the Board clarify the meaning of ‘fees paid or received by either the borrower or lender on the other’s behalf’. The reference to that term is not intended to capture transaction costs. The staff agreed that the cash flows paid to or received from parties other than the borrower and lender would go beyond assessing the difference between the old and new contractual terms could be confusing. As per the staff’s view, the Board should not include any examples of fees paid or received by either the borrower or lender on the other’s behalf.

Some respondents suggested the Board clarify the meaning of, and distinction between, the ‘fees’ described in the 10 per cent test. The staff clarified the fees included in the 10 per cent test are similar to ‘fees and points paid or received between the parties to the contract’. In contrast, the ‘costs’ are similar to ‘transaction costs’ (i.e. they are incremental costs directly attributable to the exchange or modification)

Staff recommendation

The staff recommend no change to the proposed amendment. Further, the staff continue to agree with the proposed transition requirements and recommended finalising these requirements.

Board discussion and voting

All Board members voted in favour of the staff’s recommendation.

Annual Improvements to IFRS Standards 2018–2020—Lease Incentives (Amendment to Illustrative Examples accompanying IFRS 16) (Agenda Paper 12H)

Staff analysis

Respondents to the proposal provided mixed comments, with some suggesting amending IFRS 16 to provide additional requirements on lease incentives. The staff found that inappropriate, as doing so would go beyond the scope of an Annual Improvement and would potentially be disruptive to the implementation of an already effective IFRS 16. Per the staff’s analysis the other option would be to amend IFRS 16:IE13 to illustrate a reimbursement that is not a lease incentive. However, as many respondents agreed with the proposal to remove the illustration, the staff did not favour that approach either. In their view, there is a risk of other questions arising if a new example was included.

Staff recommendation

The staff recommended that the Board finalise the proposed amendment to IFRS 16:IE13 with no changes (i.e. removing the illustration in IFRS 16:IE13).

Board discussion and voting

The majority of the Board members supported the staff recommendation on the basis that it might not be helpful to make any amendment at this point of time as it could lead to unintended consequences and alternatives discussed during staff analysis could be addressed in a post-implementation review.

13:1 votes were received in favour of the staff’s recommendation.

Annual Improvements to IFRS Standards 2018–2020—Taxation in Fair Value Measurements (Amendment to IAS 41) (Agenda Paper 12I)

Staff analysis

Almost all respondents explicitly agreed with the proposed amendment as in some jurisdictions it is important to use after-tax cash flows when measuring fair value. One respondent suggested a broader review of the requirements in IAS 41 on fair value measurements.

Staff recommendation

The staff recommended no change to the proposed amendment in this respect.

Board discussion and voting

One of the Board members suggested using the word “prospectively” to make the proposed amendment clearer. Staff responded by clarifying that they avoid the words “retrospectively” and “prospectively” as they could be interpreted differently by users, however, staff agreed to revisit the wording while finalising the draft. 

All Board members voted in favour of the staff’s recommendation.

Cryptoassets — Monitoring activities (Agenda Paper 12J)

The purpose of this paper was to provide the Board with a summary of information the staff has obtained by monitoring developments on holdings of cryptocurrencies or initial coin offerings. It therefore assists Board members in determining whether a project on some or all of these topics is necessary.

Holdings of cryptocurrencies

The staff identified 66 (2018 research: 26) entities who hold cryptocurrencies out of which 28 (2018 research: 4) are miners. The analysis comes from using financial search engines. Staff analysis of the carrying amount of cryptocurrencies held compared to the carrying amount of total assets and noted diversity in the accounting policies adopted by entities was provided along with the following accounting update:

• The Committee has published agenda decision on holdings of cryptocurrencies in June 2019
• The French standard-setter ANC presented its new standard (see Agenda Paper 1 of the April 2019 Accounting Standards Advisory Forum (ASAF) meeting)
• The European Financial Reporting Advisory Group (EFRAG) has a research project

In terms of regulatory developments, the staff provided a summary of the international organisations including tax authorises who have published statements on cryptoassets.

The staff also provided their analysis of ‘Stable’ coins, which are cryptocurrency-like cryptoassets, although these are backed by an amount of currency. Some investigations and law suits are in process against one of the Stable coins and some government ministers and central banks around the world criticised other form of stable coins as to how it will comply with anti-money laundering regulations.

Issuance of cryptoassets

Staff replaced the terminology ‘Initial Coin Offerings (ICO)’ with ‘Issuance of Cryptoassets’ due to developments in the way stakeholders refer to these transactions. The staff identified only four (2018 research: one) entities that issued cryptoassets and did not identify other accounting developments in relation to the issuance of cryptoassets in addition to those already addressed by ANC and EFRAG.

Some regulators have taken legal action against entities that have issued cryptoassets but failed to register those cryptoassets as securities. Staff also think that investors in ICOs aim to generate returns on their investment through capital appreciation in the short-term, rather than over a longer-term from the product being developed by the issuer.

Board discussion and voting

The Board members suggested continued monitoring of the progress in this area as the situation has not changed significantly since the previous discussion and there is no evidence in the research to suggest a change in the monitoring position. However, staff noted that as this area more develops in future it could be incorporated into other Standards.

The Board was not asked to vote.