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IAS 21 — Lack of exchangeability

Date recorded:

IAS 21 The Effects of Changes in Foreign Currency Exchange Rates—Lack of exchangeability (Agenda Paper 8)

Background

In May 2018 the Committee discussed the difficulties in applying IAS 21 The Effects of Changes in Foreign Exchange Rates when a currency suffers from an extreme long-term lack of exchangeability and that foreign operation has not been able to access foreign currencies using the available legal exchange mechanisms, such as with the Venezuelan Bolivar. The matter was described as one that arises when: (i) an entity translates the results and financial position of a foreign operation into its presentation currency; and (ii) the functional currency of the foreign operation is subject to a longer-term lack of exchangeability with other currencies.

The stakeholders explained that differences in reporting practices have arisen with respect to Venezuelan operations. These included: (a) the use of an official exchange rate; and (b) the use of an estimated exchange rate, adjusted to reflect inflation in Venezuela. The staff have considered that the requirements in IAS 21 provide an adequate basis for an entity to determine the exchange rate to use in translating into its presentation currency the results and the financial position of a foreign operation when there is a long-term lack of exchangeability that is extreme.

The matter was discussed at the June 2018 meeting. The Committee decided, by a majority vote, to publish for public comment a tentative agenda decision that is narrow and states that, at the time of the Agenda Decision, Venezuela is a country that would meet the criteria the agenda decision is focusing on. In addition to publishing the agenda decision, the Committee decided to research possible narrow-scope standard-setting aimed at addressing the exchange rate a reporting entity uses when the spot exchange rate is not observable and the Committee will discuss this matter in the November meeting.

Staff analysis

The staff considered developing requirements on the exchange rate an entity uses in the limited circumstances such as Venezuela but that would only address extreme situations which do not occur frequently. Accordingly, the staff suggest that the Committee consider more broadly when a lack of exchangeability could arise and develop requirements on the exchange rate an entity uses in those circumstances. The staff has performed further research on analysis of, and preliminary views on:

  • a) defining 'lack of exchangeability' (both temporary and long-term) (in Agenda Paper 8A); and
  • b) requirements that could apply when a currency is subject to either a temporary or long-term lack of exchangeability (in Agenda Paper 8B).

Based on the staff's analysis, a currency would be exchangeable into another currency if an entity is able to exchange that currency for immediate delivery of another currency at a specified date. Accordingly, a lack of exchangeability would exist when an entity is unable to exchange a currency for immediate delivery of another currency at a specific date. The staff further analysed the exchangeability (or lack of exchangeability) by considering (i) the entity's ability or intention to exchange a currency; (ii) means of assessing foreign currency; (iii) purpose of obtaining foreign currency and (iv) what if an entity is able to exchange only some amounts of foreign currency. The staff analysed that lack of exchangeability generally arises when laws, regulations or specific controls prevent an entity from being able to obtain foreign currency and hence the an entity should consider the ability but not intention, as well as all exchange mechanisms or markets to which it is not legally prevented from having access. In assessing the exchangeability of foreign currency, the entity would assume the purpose of obtaining foreign currency is to settle individual foreign currency transactions when it reports foreign currency transactions in the functional currency or realise the entity's net assets when it uses a presentation currency other than the functional currency.  In assessing the exchangeability in quantitative terms, the staff analysed some alternatives and concluded that for situations in which an entity is able to obtain only some amounts of foreign currency, a lack of exchangeability exists when, for a particular purpose, an entity is unable to obtain more than an insignificant amount of foreign currency.

In terms of definition of 'lack of exchangeability' (both temporary and long-term), the staff is of the view that a temporary lack of exchangeability would be a situation in which a currency is not exchangeable at the end of the reporting period, thus preventing the reporting entity from observing a spot rate but the exchangeability of the currency is restored after the end of the reporting period and before the date on which the financial statements are authorised for issue. A long-term lack of exchangeability would be a lack of exchangeability that is other than temporary.

In considering what exchange rate should be used when there is a temporary lack of exchangeability, the staff has taken into account the complexity in estimating a spot rate and the short period of time between the reporting date and restoration of exchangeability, and concluded that an entity should use the first subsequent rate at which exchanges could be made when there is a temporary lack of exchangeability. On the other hand, when there is a long-term lack of exchangeability, an entity is unable to observe a spot rate either at, or after, the reporting date and therefore should estimate a spot rate. The staff have further analysed that no specific disclosure requirements is needed other than those already required in existing IFRS Standards when there is a temporary lack of exchangeability, but disclosures of information about the estimation process would be required for the situation of long-term lack of exchangeability.

Staff recommendation

The paper did not contain a staff recommendation. Instead, the staff were interested in the Committee’s advice on how best to proceed on this project.

Discussion

Most Committee members agreed with the narrow-scope standard-setting due to the urgency of the matter whenever it happens.

The "parallel markets" mentioned in the staff paper 8A should not be considered in assessing whether the currency is exchangeable if the jurisdictional authorities prohibit the existence of such markets and enforce such a prohibition. One Committee member pointed out that it is often difficult for the jurisdictional authorities to enforce such kind of prohibition and suggested to remove the term "and enforce".

Another Committee member pointed out that it is not appropriate to say that a temporary lack of exchangeability would be a situation which the exchangeability of the currency is restored after the end of the reporting period and before the date on which the financial statements are authorised for issue because the restoration sometimes may take years, and there would be concerns on preparation of interim or quarterly reports under IAS 34 if the lack of exchangeability only happens in the first half of the financial year.

During the meeting, some Committee members discussed about when a currency would be subject to a lack of exchangeability. The staff analysis is that it happens when an entity is unable to obtain "more than an insignificant amount of foreign currency" but some of the Committee members pointed out that "more than a significant amount of foreign currency" is also applicable.

In respect of estimation of exchange rate which is discussed in the staff paper 8B, one Committee member pointed out that allowing an estimated exchange rate is never allowed under traditional accounting and would only be applicable for exceptional or extreme situations. The Committee member is also supportive of the staff paper in the sense that there is no uniform method of estimation. Another Committee member suggested it is not necessary to provide any specific guidance on estimation of an exchange rate. Different models may be used under different facts and circumstances.

Most of the Committee members were supportive of the disclosure requirements as suggested in the staff paper. One Committee member had a view that disclosure related matter is within IAS 1 but additional guidance can be included in IAS 21 given that this is a unique situation. Another comment raised by that Committee member was that there should be disclosures about the timing of lack of exchangeability and the entity's judgement of whether it is long term lack of exchangeability or temporary lack of exchangeability. Another Committee member suggested to include in the disclosure requirements of the estimated exchange rate the significant assumptions (including the unobservable inputs) and significant information in making the estimation of the exchange rate, as well as the sensitivity analysis which can enhance the comparability among different entities. Majority of Committee members were supportive but a few considered this will cause information overload.

Another Committee member also raised the point that even for temporary lack of exchangeability, there should still be specific disclosure requirements to let the financial statements users to understand the entity's exposure to that currency.

The Chair has emphasized the importance of understanding the measurement objectives and disclosure objectives and to include disclosure requirements on what information are required to let users to understand the financial statements.

Decision

There was no decision made in the meeting.

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