Lack of Exchangeability (Proposed amendments to IAS 21)—Cover paper (Agenda Paper 12)

The purpose of this meeting was to provide the IASB with the staff’s analysis and recommendations on how to address matters raised in the feedback on the Exposure Draft (ED) Lack of Exchangeability; and ask the IASB whether it agrees with the staff’s recommendations.

Staff recommendations

The staff recommended that the IASB proceed with its proposals in the ED with the following changes:

• For factors to consider when assessing exchangeability:
  • Clarify that an entity does not consider ‘unofficial markets’ in assessing exchangeability but, when exchangeability is lacking, it can use exchange rates from these markets to estimate the spot exchange rate
  • Develop an example of the ‘aggregate method’ either as application guidance or an illustrative example
  • Clarify that all factors are to be considered holistically when assessing exchangeability, and the absence of one factor would indicate a lack of exchangeability
• For determining the spot exchange rate—amend proposed paragraph 19A to state that an entity’s objective in estimating the spot exchange rate is to reflect at the measurement date the rate at which an orderly exchange transaction would take place between market participants under prevailing economic conditions

This paper was not discussed.

Lack of Exchangeability (Proposed amendments to IAS 21)—Assessing exchangeability between two currencies (Agenda Paper 12A)

This paper provided the staff’s analysis of the main comments received on Question 1 in the ED, i.e. assessing exchangeability between two currencies.

Respondents’ feedback

Many respondents agreed with the proposed definition of ‘exchangeable’ and the factors an entity is required to consider in assessing whether a currency is exchangeable. Some disagreements were noted from several responders.

Time frame

Some respondents suggested providing guidance on applying ‘normal administrative delay’, such as by providing indicators or factors to consider. Some respondents said in the absence of such guidance, it would be difficult to determine what ‘normal’ is, especially when—in some jurisdictions— the range of ‘normal’ timing of approval of exchange transactions may be very wide. Other respondents suggested adding clarity on specific points.

Ability to obtain the other currency

A few respondents said the meaning of being able to obtain the other currency ‘indirectly’ is unclear, or suggested that transactions—beyond currency-to-currency transactions—can provide evidence of exchangeability. One respondent suggested using a ‘more likely than not’ threshold when assessing the ability to obtain the other currency and adding a rebuttable presumption that an entity has the ability to exchange a currency when it has a legal right and means to do so, unless there is evidence to the contrary.

Markets or exchange mechanisms

Some respondents supported the proposed requirements. These respondents suggested clarifying that an entity not consider unofficial (or ‘parallel’ or ‘black’) markets in assessing exchangeability but, when exchangeability is lacking, the exchange rates from these markets can be used to estimate the spot exchange rate. Some EEG members commented on challenges in referring to unofficial rates in IFRS Accounting Standards.

Purpose of obtaining the other currency

A few respondents said it is unclear how to apply the requirements related to ‘purpose’, such as in situations in which there is no actual need to exchange one currency for another. These situations include, for example, translating on initial recognition non-monetary assets that will be recovered through use rather than sale and balances always settled in local currency.

Ability to obtain only limited amounts of the other currency

Some respondents requested additional guidance on how to apply ‘no more than an insignificant amount’.

Holistic consideration of factors

Feedback indicates that some respondents read the proposals to say that, in assessing exchangeability, each of the factors would be considered individually or separately, instead of holistically. If considered individually or separately, questions then arise about the interaction between the factors.

Staff recommendations

The staff recommended that the IASB:

• Proceed with its proposed approach to set out factors an entity would consider in assessing exchangeability and specify how those factors affect the assessment
• Retain the notion of a normal administrative delay
• Make no change with regard to the ability to obtain the other currency
• Clarify that an entity does not consider ‘unofficial markets’ in assessing exchangeability but, when exchangeability is lacking, it can use exchange rates from these markets to estimate the spot exchange rate
• Refer to ‘rates from exchange transactions that do not create enforceable rights and obligations’ rather than ‘unofficial rates’ or ‘black market rates’
• Make no change to further define or describe ‘enforceability of rights and obligations’
• Make no change with regard to purpose of obtaining the other currency
• Develop an example of the ‘aggregate method’ either as application guidance or an illustrative example
• Clarify that all factors are to be considered holistically when assessing exchangeability, and the absence of one factor would indicate a lack of exchangeability

IASB discussion

In general, IASB members agreed with the staff’s recommendations. One member emphasised the importance that reporting entities should be consistent in their approach with others as well as consistent in subsequent reporting periods. In general, those who apply the standard should reach the same conclusions.

Concerns were raised by several members with regard to issuing guidance on ‘normal administrative delays’. One concern expressed was that the ED could be overengineered and that if clarification was attempted for this it could be more of a material issue. One IASB member commented that there needs to be some guidance as otherwise it will be sought for and if not included would result in a gap in the amendments. Another IASB member stated that the customary speed of an exchange varies between countries and the IASB member therefore stated that caution should be exercised when drafting the amendments. This IASB member also agreed with a previous comment that the provided guidance was going to be significant to the understanding of the amendments.

Several IASB members agreed that the lack of exchangeability would likely most often occur in one direction and therefore offered the suggestion that the wording should anticipate the case where a currency could be bought but not sold.

The staff acknowledged these points and agreed with the caution required around the administrative delay and with avoiding a specific timeline.

IASB decision

IASB members voted unanimously in favour of the proposals.

Lack of Exchangeability (Proposed amendments to IAS 21)—Determining the spot exchange rate when exchangeability is lacking (Agenda Paper 12B)

This paper provided the staff’s analysis of the main comments received on Question 2 in the ED, i.e. determining the spot exchange rate when exchangeability is lacking.

Respondents’ feedback

Most respondents to the ED agreed with the proposal to require an entity to estimate the spot exchange rate when exchangeability between two currencies is lacking. Some respondents agreed fully with the proposed requirements on how to estimate the spot exchange rate; most asked for further clarification or suggested changes. Some respondents disagreed with or expressed concerns about an entity estimating the spot exchange rate when there is a lack of reliable market data.

Estimated rates meeting the objective in paragraph 19A

Some respondents suggested revising the proposal to specify that the conditions are objectives an entity aims to meet when estimating the spot exchange rate, rather than requirements to be met.

Observable exchange rates in paragraph 19B

Some respondents said that the wording in proposed paragraph 19B is unclear and suggested:

• Requiring an entity to use observable exchange rates, including a rebuttable presumption to this effect, or requiring the disclosure of reasons for not using an observable exchange rate
• Maximising the use of observable exchange rates, similar to the fair value hierarchy in IFRS 13
• Specifying a required sequencing of using observable exchange rates—respondents had differing views on what the sequence should be

Reference rates, examples and application guidance

Some respondents suggested permitting the use of particular inputs, mechanisms or reference rates in estimating the spot exchange rate—for example, purchase parity indices, implied rates and methods based on bonds traded on foreign markets.

Some respondents requested examples and application guidance on aspects of the proposals, including to support application of proposed paragraphs 19A and 19B and on techniques and inputs to use in estimating the spot exchange rate.

Staff recommendations

The staff recommended that the IASB:

• Amend proposed paragraph 19A to state that an entity’s objective in estimating the spot exchange rate is to reflect at the measurement date the rate at which an orderly exchange transaction would take place between market participants under prevailing economic conditions
• Continue to permit, but not require, the use of observable exchange rates
• Make no change to specify detailed estimation requirements or the use of particular estimation techniques or reference rates for an entity to estimate the spot exchange rate

IASB discussion

One IASB member suggested that the word ‘hypothetical’ should be in the draft. This might help to understand what they are trying to achieve. The purpose was not to derive the actual exchange rate but approximate what it would be.

Regarding the requirements to permit but not require the use of observable rates, IASB members acknowledged that the IASB did not want to require entities to look for observable rates extensively. The staff said that there may be rates in the market which entities do not have access to. Requiring the use of observable rates could result in the use of rates which are not used for the same purposes as those of the reporting entity.

However, it was agreed that the standard should not encourage preparers to approximate their own rate in circumstances where there is a useable, appropriate observable rate available. Instead, prepares should first meet the criteria of lack of exchangeability before using the guidance as to which is the correct rate to apply.

IASB decision

All IASB members voted in favour of the staff recommendations.

Lack of Exchangeability (Proposed amendments to IAS 21) - Disclosure and transition (Agenda Paper 12C)

This paper provided the staff’s analysis of the main comments received on Questions 3 and 4 in the ED, i.e. disclosure and transition.

Respondents’ feedback

Many respondents agreed with the proposed disclosure requirements for the reasons explained while some respondents expressed concerns about those proposed requirements.

Some respondents requested additional disclosures to supplement those in the ED and in existing IFRS Accounting Standards. The staff summarise and analyse these comments in the Appendix to this paper.

Most respondents agreed with the proposed transition requirements for the reasons explained.

Staff recommendations

The staff recommended that the IASB:

• Proceed with requiring disclosures as proposed in paragraphs 57A and A16–A18 of the ED when an entity estimates the spot exchange rate because exchangeability between two currencies is lacking
• Proceed with the transition requirements as proposed in paragraphs 60L–60M of the ED

IASB discussion

One IASB member asked whether there was feedback on the proposal to require disclosure of potential future effects of exchange rate movements. This was seen as particularly relevant to the standard given the importance in circumstances when there is a lack of exchangeability. The staff responded that this was not a particular concern of those giving feedback. Instead, overall responses had been very positive and most feedback centred on the provision of clarity on certain matters.

IASB decision

All IASB members voted in favour of staff recommendations.