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IAS 21 The effects of changes in Foreign Exchange Rates and IAS 29 Financial Reporting in Hyperinflationary Economies—Translation of a hyperinflationary foreign operation (Agenda Paper 4)

Date recorded:

Background

The Committee received a submission about the application of IAS 21 and IAS 29 in respect of certain areas of presentation matters where the reporting entity (with a non-hyperinflationary presentation currency) has a foreign operation which is hyperinflationary. The specific questions are:

  • how does the entity present the differences which arose on restating and translating the results and financial position of a hyperinflationary foreign operation—whether the amount should be presented in other comprehensive income (OCI) or equity or both? (Agenda Paper 4A);
  • how does the entity present the cumulative amount of exchange differences that have arisen from the translation of a foreign operation before the foreign operation became hyperinflationary—whether the amount should be reclassified within equity (no recycling to profit or loss upon disposal of that foreign operation) or retained in that separate component of equity (recycling to profit or loss upon disposal of that foreign operation)? (Agenda Paper 4B);
  • whether the entity should restate comparative amounts presented in its annual and interim financial statements for a foreign operation whose functional currency becomes hyperinflationary (Agenda Paper 4C).

Staff analysis—Agenda Paper 4A

The staff analyse the issue using a worked example. After applying the restatement and translation requirements in IAS 29 and IAS 21, an item of 'consolidation differences' arose on the consolidated statement of financial position. The 'consolidation difference' includes (i) the effects of restatement of the non-monetary items in the foreign operation by applying a general price index that reflects changes in general purchasing power of the functional currency and (ii) the effects of translation of the equity of the foreign operation (excluding IAS 29 restatement) at the opening and closing rates.

The staff consider the overall principles and requirements in IAS 21 and conclude that the exchange differences arising on translating the results and financial position of a hyperinflationary foreign operation should be presented in OCI. Next the staff consider whether the entire 'consolidation difference' is an 'exchange difference'. The staff observe two views: only the translation effects are considered as 'exchange difference' because the restatement effects arose from the restatement requirements in IAS 29 (View A); or the entire consolidation difference is considered as 'exchange difference' because the difference reflects the change in the currency unit of the foreign operation's equity to reflect the inflation (i.e. change in purchasing power) at the closing rate (View B).

The staff consider both approaches are acceptable depending on the entity's view of whether all or part of the 'consolidation difference' meets the definition of an exchange difference in IAS 21.

Staff analysis—Agenda Paper 4B

IAS 21 does not specify whether a reporting entity is permitted (or required) to reclassify within equity the pre-hyperinflation translation reserve when the foreign operation becomes hyperinflationary. However, the staff analyse the requirements in IAS 21 and consider the requirements in IAS 29 or IFRIC 7 do not extend to IAS 21—the restatement requirements of IAS 29 (based on IAS 21:43) are only applied when the functional currency is hyperinflationary and not before the currency became hyperinflationary. There are no requirements allowing an entity to reverse the accounting treatment applied before the functional currency was hyperinflationary. Accordingly, the staff conclude that the reporting entity should present the pre-hyperinflationary translation reserve as a separate component of equity.

Staff analysis—Agenda Paper 4C

Based on the responses to outreach and additional research performed, the staff observe little diversity in the application of IAS 21 with respect to the matters described in the submission. Therefore, the staff have not obtained evidence that the matter has a widespread effect.

Staff recommendation

For all three issues, the staff do not recommend adding the matter to the Committee's standard-setting agenda but to instead publish a separate tentative agenda decision for each issue.

Discussion

With regards to Agenda Paper 4A, most Committee members agreed it is an accounting policy choice. A Committee member was concerned that either View A or View B may contradict IAS 1:88. Another Committee member had concerns about View A because the restatement effect includes the translation effect. He said that it may create ambiguity. One Committee member suggested that it would be helpful if more explanation on why the translation effect meets the definition of an exchange difference were added to the tentative agenda decision. The staff and Chair agreed with that approach.

One Committee member was concerned about whether the accounting policy choice approach would create more diversity in practice. Another Committee member said that he did not rule out the possibility of View C (recognising both restatement effect and translation effect in equity) because that was permitted by IAS 29, while IAS 21 is referring to non-hyperinflationary foreign operations. A few Committee members questioned why it was necessary to refer to "diversity in practice" in the agenda decision. The staff and Chair agreed to remove it.

A Committee member found it difficult to understand the meaning of the restatement effect and translation effect without a worked example and suggested adding an example to the tentative agenda decision. The staff did not agree with adding an example to an agenda decision. A Committee member instead suggested that an example could be included in educational material accompanying the agenda decision.

The Committee decided, by a majority of votes, not to add the matter to its standard-setting agenda and to instead publish a tentative agenda decision. The staff will make amendments to the proposed tentative agenda decision based on Committee member comments made in the meeting.

With regards to Agenda Paper 4B, most Committee members thought the Standard was clear. The Committee decided, by a majority of votes, not to add the matter to its standard-setting agenda and to instead publish the tentative agenda decision as proposed in the agenda paper.

With regards to Agenda Paper 4C, Committee members struggled with the fact that the proposed tentative agenda decision stated that there was little diversity in practice, but did not state what the observed practice is. Committee members questioned this approach and suggested either to answer the question asked or not to issue an agenda decision. The Chair responded that the question could not be answered without a proper staff analysis. As the matter was not widespread in the staff’s view, the staff did not perform this analysis. Also, the fact pattern was not entirely clear. However, the Chair conceded that the tentative agenda decision could state what has been observed in practice, neither confirming nor rejecting the observed approach. With this addition, the Committee decided, by a majority of votes, not to add the matter to its standard-setting agenda and to instead publish a tentative agenda decision.

 

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