Lack of Exchangeability (IAS 21)

Date recorded:

Amendments to IAS 21—Lack of Exchangeability (Agenda Paper 5)


In April 2021, the IASB published Exposure Draft ED/2021/4 Lack of Exchangeability, which proposed amendments to IAS 21. The purpose of the project is to assess the need to add requirements on how an entity determines whether a currency is exchangeable into another currency and the accounting requirements to apply when it is not. In January 2022, the IASB discussed a summary of the feedback and IASB members provided initial thoughts for the staff to consider in further analysing the feedback. In May 2022, the Emerging Economies Group (EEG) members provided their views on the staff’s preliminary suggestions on the possible ways forward on two proposals in the ED—(1) assessing exchangeability between two currencies, and (2) determining the spot exchange rate when exchangeability is lacking. To assist the staff in developing recommendations for the IASB, the staff asks Committee members for their views on one of the proposals in the ED—determining the spot exchange rate when exchangeability is lacking.

Staff analysis

Paragraph 19A of the ED set out conditions to meet in estimating the spot exchange rate when exchangeability between two currencies is lacking. A few respondents said, when exchangeability is lacking, meeting the conditions in paragraph 19A may be impracticable. One respondent questioned whether exchangeability would actually be lacking if the conditions were met. 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. The EEG members generally agreed with the proposed approach by the staff to amend to require an entity to best reflect, rather than meet, all the conditions. However, a few EEG members suggested changing ‘conditions’ to ‘indicators’ or ‘factors’ an entity considers. One EEG member said ‘best reflect’ would not necessarily clarify whether an entity is required to meet all the conditions. Considering this feedback, the staff proposed to amend 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 hypothetically would take place between market participants under prevailing economic conditions which is similar to the objective in IFRS 13.

Paragraph 19B sets out the criterion of when an entity may use an observable exchange rate as the estimated spot exchange rate and paragraph BC19 of the Basis for Conclusions (BC) to the ED explained the proposal to permit, but not require, an entity to use that rate. Some respondents said the wording in proposed paragraph 19B is unclear and some of them gave suggestions to the proposal including requiring an entity to use, or maximise the use of, observable exchange rates or specifying a required sequencing of using observable exchange rates. Although the staff acknowledged that these might increase comparability across entities affected by a lack of exchangeability, mandating a hierarchy of exchange rates may impose costs without providing more useful information for investors. EEG members had various suggestions on the staff’s view. After considering all feedback, the staff proposed to continue to permit, but not require, the use of observable exchange rates and further explain the reasons in the BC.

Although the ED does not have any requirements preventing the use of unofficial rates in estimating the spot exchange rate, it is silent on whether those rates could be used. Some respondents suggested clarifying that an entity cannot consider unofficial rates in assessing exchangeability between two currencies but, when those rates could be used to estimate the spot exchange rate when exchangeability is lacking. EEG members generally agreed with this. The staff therefore proposed clarifying that rates from exchange transactions that do not create enforceable rights and obligations can be used as a starting point for estimating the spot exchange rate when exchangeability is lacking.

Regarding the reference rates, some respondents suggested to permit the use of particular inputs, mechanisms or references rates and requested examples and application guidance while the EEG members had mixed viewed on this. The staff reaffirmed the reasons stated in BC18 of the ED to maintain the approach of not providing or describing detailed estimation requirements or particular estimation techniques because such determination is complicated and would depend on entity-specific and jurisdiction-specific facts and circumstances. Instead, the staff suggested revising Illustrative Example 4 in the ED and adding examples to illustrate how an entity might apply the requirements in estimating the spot exchange rate when exchangeability is lacking.

Staff questions

The staff ask whether Committee members agree with the preliminary views set out in the paper and whether the Committee members have any comments on the suggested illustrative examples outlined in Appendix B of the paper.

Committee discussion

Most of the Committee members agreed that the paper was useful and helpful in giving recommendations on finalising the ED to make it more practical. They said the ED made it clear that the same measurement principle applies in translating currencies, regardless of whether exchangeability is lacking or not. The ED gives more guidance on how this is achieved when exchangeability between two currencies is lacking. In addition to existing guidance in the paper, a few Committee members suggested to add disclosure requirements to the standard. The staff agreed that such disclosure is important but it is not intended to be covered in this paper.

The Committee members agreed with the proposed amendment to 19A to use an objective similar to that set out in IFRS 13 in measuring fair value. Some Committee members asked how to choose a rate when there is more than one way to derive the rate which could achieve such measurement objective in 19A of the ED. They suggested adding criteria to choose the rate that best reflects the objective. Another Committee member suggested adding guidance that is similar to IFRS 13 for what is considered as principal or most advantageous market when rates are available in several markets. However, one Committee member considered that the IASB should not leverage too much and instead give principles-based guidance or holistic requirements in the standard given it involves judgement.

One Committee member said that he struggled with the implication of the measurement requirement in paragraph 19A that when an observable exchange rate meets the conditions in paragraph 19A subsequently, the exchange rate would have to be adjusted to reflect that subsequent rate. The staff responded that this would involve judgment in interpreting it.

A few Committee members had comments on the use of “unofficial rate”. One Committee member said it does not equal to a “legal rate”. Another member requested giving guidance which could be a threshold or quality to consider in using an “unofficial rate”. The staff responded that it would be the rate “closest to observable”.

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