Topic 106 - Foreign Currency Translation

IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 29 Financial Reporting in Hyperinflationary Economies

IFRIC 16 Hedges of a Net Investment in a Foreign Operation

IFRIC 22 Foreign Currency Transactions and Advance Consideration

SIC 7 Introduction of the Euro 

• 106.2.1.1

• IFRIC Agenda Decision - Determination of functional currency of an investment holding company

• 106.7.1.1

• IFRIC Agenda Decision - Foreign exchange restrictions and hyperinflation

• 106.7.1.2

• IFRIC Agenda Decision - Determination of the exchange rate when there is a long-term lack of exchangeability

• 106.7.1.3

• IFRIC Agenda Decision - Cumulative Exchange Differences before a Foreign Operation becomes Hyperinflationary

• 106.7.1.4

• IFRIC Agenda Decision - Presenting Comparative Amounts when a Foreign Operation first becomes Hyperinflationary

• 106.7.1.5

• IFRIC Agenda Decision - Translation of a Hyperinflationary Foreign Operation—Presenting Exchange Differences

• 106.8.1.1

• IFRIC Agenda Decision - Repayments of investments and foreign currency translation reserve

• 106.10.1.1

• IFRIC Agenda Decision - Applicability of the concept of financial capital maintenance defined in terms of constant purchasing power units

• 106.11.1.1

• IFRIC Agenda Decision - Translation of assets and liabilities at the transition date—Transition issues under IFRS 1

106.2.1.1

IFRIC Agenda Decision - Determination of functional currency of an investment holding company

March 2010 - The IFRIC received a request for guidance on whether the underlying economic environment of subsidiaries should be considered in determining, in its separate financial statements, the functional currency of an investment holding company.

IAS 21 paragraphs 9⁠–⁠11 provide factors to be considered in determining the functional currency of an entity. Paragraph 12 states that when the ‘indicators are mixed and the functional currency is not obvious, management uses its judgement to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions’. In addition, paragraph 17 of IAS 21 requires an entity to determine its functional currency in accordance with paragraphs 9⁠–⁠14 of the standard. Therefore, paragraph 9 should not be considered in isolation when determining the functional currency of an entity.

Consequently, how an entity applies IAS 21 for the purpose of determining its functional currency—whether it is an investment holding company or any other type of entity—requires the exercise of judgement. IAS 1 Presentation of Financial Statements requires disclosure of significant accounting policies and judgements that are relevant to an understanding of the financial statements.

The IFRIC noted that any guidance it could provide would be in the nature of application guidance rather than an interpretation. Therefore, the IFRIC decided not to add the issue to its agenda.

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106.7.1.1

IFRIC Agenda Decision - Foreign exchange restrictions and hyperinflation

November 2014 - The Interpretations Committee received a request for guidance on the translation and consolidation of the results and financial position of foreign operations in Venezuela. The issue arises because of strict foreign exchange controls in Venezuela. This includes the existence of several official exchange rates that may not fully reflect the local rate of hyperinflation and of restrictions over the amount of local currency that can be exchanged.

Concerns were raised that using an official exchange rate to translate an entity’s net investment in a foreign operation in Venezuela appeared not to appropriately reflect the financial performance and position of the foreign operation in the group’s consolidated financial statements.

The Interpretations Committee identified two primary accounting issues:

With respect to the first issue, the Interpretations Committee observed very little diversity in the application of IAS 21 regarding the principle to use when determining which rate, out of multiple rates, to use to translate an entity’s net investment in a foreign operation. The Interpretations Committee noted that predominant practice is to apply the principle in paragraph 26 of IAS 21, which gives guidance on which exchange rate to use when reporting foreign currency transactions in the functional currency when several exchange rates are available. Hence, despite the issue’s widespread applicability, the Interpretations Committee decided not to take the first issue onto its agenda.

With respect to the second issue, the Interpretations Committee observed that a longer-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 Interpretations Committee thought that addressing this issue is a broader-scope project than it could address. Accordingly, the Interpretations Committee decided not to take this issue onto its agenda.

However, the Interpretations Committee noted that several existing disclosure requirements in IFRS would apply when the impact of foreign exchange controls is material to understanding the entity’s financial performance and position. Relevant disclosure requirements in IFRS include:

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106.7.1.2

IFRIC Agenda Decision - Determination of the exchange rate when there is a long-term lack of exchangeability

September 2018 - The Committee considered the determination of the exchange rate an entity uses to translate the results and financial position of a foreign operation into its presentation currency applying IAS 21. The Committee considered this matter in the following circumstances:

The Committee observed that those circumstances currently exist in Venezuela.

The Committee discussed whether, in those circumstances, an entity is required to use an official exchange rate(s) in applying IAS 21.

The Committee observed that an entity translates the results and financial position of a foreign operation into its presentation currency applying the requirements in paragraphs 39 and 42 of IAS 21. Those paragraphs require an entity to translate:

The closing rate and the rates at the dates of the transactions

Paragraph 8 of IAS 21 defines (a) the ‘closing rate’ as the spot exchange rate at the end of the reporting period; and (b) the ‘spot exchange rate’ as the exchange rate for immediate delivery. In the light of those definitions, the Committee concluded that the closing rate is the rate to which an entity would have access at the end of the reporting period through a legal exchange mechanism. Accordingly, the Committee observed that in the circumstances described above an entity assesses whether the official exchange rate(s) meets the definition of the closing rate—ie is it the rate to which the entity would have access at the end of the reporting period? Similarly, if the foreign operation’s functional currency is not the currency of a hyperinflationary economy, the entity also assesses whether the official exchange rate(s) represents the exchange rates at the dates of the transactions in applying paragraph 39(b) of IAS 21.

Continuous assessment of facts and circumstances

In the circumstances described above, economic conditions are in general constantly evolving. Therefore, the Committee highlighted the importance of reassessing at each reporting date whether the official exchange rate(s) meets the definition of the closing rate and, if applicable, the exchange rates at the dates of the transactions.

Disclosure requirements

An entity is required to provide information that is relevant to an understanding of an entity’s financial statements (paragraph 112 of IAS 1 Presentation of Financial Statements). The Committee highlighted the importance of disclosing relevant information in the circumstances described above. In particular, the Committee observed that the following disclosure requirements may be relevant to an understanding of an entity’s financial statements:

The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to assess whether, in the circumstances described above, it uses the official exchange rate(s) to translate into its presentation currency the results and financial position of a foreign operation. Consequently, the Committee decided not to add this matter to its standard-setting agenda.

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106.7.1.3

IFRIC Agenda Decision - Cumulative Exchange Differences before a Foreign Operation becomes Hyperinflationary

March 2020 - The Committee received a request about the application of IAS 21 and IAS 29. In the fact pattern described in the request, the entity:

Before the foreign operation becomes hyperinflationary, IAS 21 requires an entity to:

The request asked whether the entity reclassifies within equity the cumulative pre-hyperinflation exchange differences once the foreign operation becomes hyperinflationary⁠–⁠–that is, whether the entity transfers the cumulative pre-hyperinflation exchange differences to a component of equity that is not subsequently reclassified to profit or loss.

Paragraph 41 of IAS 21 requires an entity to present the cumulative amount of exchange differences recognised in OCI in a separate component of equity ‘until disposal of the foreign operation’. Further, paragraphs 48 and 48C of IAS 21 require an entity to reclassify the cumulative amount of those exchange differences—or a proportionate share of that cumulative amount—from equity to profit or loss on disposal—or partial disposal—of a foreign operation (except as specified in paragraph 48C).

Accordingly, the Committee concluded that, in the fact pattern described in the request, the entity presents the cumulative amount of the exchange differences as a separate component of equity (to which paragraph 48 or 48C of IAS 21 applies) until disposal or partial disposal of the foreign operation. The entity does not reclassify within equity the cumulative pre-hyperinflation exchange differences once the foreign operation becomes hyperinflationary.

The Committee concluded that the principles and requirements in IAS 21 provide an adequate basis for an entity to determine how to present the cumulative pre-hyperinflation exchange differences once a foreign operation becomes hyperinflationary. Consequently, the Committee decided not to add the matter to its standard-setting agenda.

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106.7.1.4

IFRIC Agenda Decision - Presenting Comparative Amounts when a Foreign Operation first becomes Hyperinflationary

March 2020 - The Committee received a request about the application of IAS 21 and IAS 29. In the fact pattern described in the request, the entity:

The request asked whether the entity restates comparative amounts presented for the foreign operation in:

On the basis of responses to outreach, comment letters received and additional research, the Committee observed little diversity in the application of IAS 21 with respect to the questions in the request⁠–⁠–in applying paragraph 42(b) of IAS 21, entities generally do not restate comparative amounts in their interim or annual financial statements in the situations described above. Therefore, the Committee has not obtained evidence that the matter has widespread effect. Consequently, the Committee decided not to add the matter to its standard-setting agenda.

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106.7.1.5

IFRIC Agenda Decision - Translation of a Hyperinflationary Foreign Operation—Presenting Exchange Differences

March 2020 - The Committee received a request about the application of IAS 21 and IAS 29. In the fact pattern described in the request, the entity:

Paragraph 43 of IAS 21 requires an entity to restate the results and financial position of a hyperinflationary foreign operation applying IAS 29 before applying the translation method set out in paragraph 42 of IAS 21 (restate/translate approach). The application of the restate/translate approach may result in a change to the entity’s net investment in the hyperinflationary foreign operation. This change would include two effects:

To illustrate this using a simple example, assume at the beginning of the reporting period that an entity has a 100% interest in a hyperinflationary foreign operation that has a non-monetary asset of 1,000 in local currency (LC), no other assets and no liabilities. Therefore, the foreign operation has net assets (and equity) of LC1,000. The change in the general price index of the hyperinflationary economy during the reporting period is 200%. The entity could, for example, calculate:

The request asked how the entity presents the restatement and translation effects in its statement of financial position.

Do the restatement and translation effects meet the definition of an exchange difference?

Paragraph 8 of IAS 21 defines an exchange difference as the difference ‘resulting from translating a given number of units of one currency into another currency at different exchange rates’. The Committee concluded that, in the fact pattern described in the request, either the translation effect alone meets the definition of an exchange difference, or the combination of the restatement and translation effects meets that definition.

How does an entity present any exchange difference arising from translating a hyperinflationary foreign operation?

The Committee observed that all requirements in IAS 21 that specify the recognition (or presentation) of exchange differences require an entity to recognise (or present) exchange differences in profit or loss or other comprehensive income (OCI). IAS 21 requires the recognition of exchange differences in profit or loss or OCI—with no reference to equity—because exchange differences meet the definition of income or expenses. Accordingly, the Committee concluded that an entity does not recognise exchange differences directly in equity.

Paragraph 7 of IAS 1 Presentation of Financial Statements states that components of OCI include ‘gains and losses arising from translating the financial statements of a foreign operation’. Paragraph 41 of IAS 21 explains that exchange differences arising from translating the financial statements of a non-hyperinflationary foreign operation are recognised in OCI⁠–⁠–and not in profit or loss⁠–⁠–because ‘the changes in exchange rates have little or no direct effect on the present and future cash flows from operations’. The Committee observed that this explanation is also relevant if the foreign operation’s functional currency is hyperinflationary. Accordingly, the Committee concluded that an entity presents in OCI any exchange difference resulting from the translation of a hyperinflationary foreign operation.

Applying the requirements in IFRS Standards to the restatement and translation effects

The Committee concluded that, in the fact pattern described in the request, the entity presents:

In the light of its analysis, the Committee considered whether to add a project on the presentation of exchange differences resulting from the restatement and translation of hyperinflationary foreign operations to its standard-setting agenda. The Committee has not obtained evidence that a project with that scope—undertaken in isolation of other aspects of the accounting for hyperinflationary foreign operations—would result in an improvement in financial reporting that would be sufficient to outweigh the costs. Consequently, the Committee decided not to add the matter to its standard-setting agenda.

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106.8.1.1

IFRIC Agenda Decision - Repayments of investments and foreign currency translation reserve

September 2010 - The Committee received a request for guidance on the reclassification of the foreign currency translation reserve (FCTR) when a repayment of a foreign investment occurs. The request specifically sought guidance on whether FCTR should be recycled for transactions in which there is a reduction in:

• the investor’s percentage equity ownership in the investee (a relative reduction); or
• the absolute investment in the investee, even if there is no reduction in the proportionate equity ownership interest. A reduction in ownership may be relative, absolute or both.

The Committee noted that paragraph 48D of IAS 21 requires that an entity must treat ‘any reduction in an entity’s ownership interest in a foreign operation’ as a partial disposal, apart from those reductions in paragraph 48A that are accounted for as disposals. How an entity applies the requirements in paragraph 48D is largely dependent on whether it interprets ‘any reduction in an entity’s ownership interest in a foreign operation’ to mean an absolute reduction, a proportionate reduction, or both.

The Committee considers that different interpretations could lead to diversity in practice in the application of IAS 21 on the reclassification of the FCTR when repayment of investment in a foreign operation occurs. However, the Committee decided neither to add this issue to its agenda nor to recommend the Board to address this issue through Annual Improvements because it did not think that it would be able to reach a consensus on the issue on a timely basis. The Committee recommends that the IASB should consider this issue within a broad review of IAS 21 as a potential item for its post‑2011 agenda.

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106.10.1.1

IFRIC Agenda Decision - Applicability of the concept of financial capital maintenance defined in terms of constant purchasing power units

January 2014 - The Interpretations Committee considered the following two questions:

• whether an entity is permitted to use the financial capital maintenance concept defined in terms of constant purchasing power units that is described in the Conceptual Framework for Financial Reporting when the entity’s functional currency is not the currency of a hyperinflationary economy as described in IAS 29 Financial Reporting in Hyperinflationary Economies; and
• if such use is permitted, whether the entity needs to apply IAS 29 to its financial statements prepared using a specific model of that concept of financial capital maintenance when it falls within the scope of IAS 29.

The Interpretations Committee observed that the guidance in the Conceptual Framework is written to assist the IASB in the development of Standards. It is also used in the development of an accounting policy only when no Standards specifically apply to a particular transaction, other event or condition, or deal with similar and related issues. Consequently the guidance in the Conceptual Framework relating to the use of a particular capital maintenance concept cannot be used to override the requirements of any Standard, and an entity is not permitted to apply a concept of capital maintenance that conflicts with the existing requirements in a particular Standard, when applying that Standard.

In addition, the Interpretations Committee noted that the results of the outreach indicate that these issues are not widespread. For this reason the Interpretations Committee decided not to add these issues to its agenda.

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106.11.1.1

IFRIC Agenda Decision - Translation of assets and liabilities at the transition date—Transition issues under IFRS 1

October 2004 - The IFRIC considered two issues regarding first-time adoption of IFRSs. ... The second issue was whether a specific exception should be granted to first-time adopters to permit entities to translate all assets and liabilities at the transition date exchange rate rather than applying the functional currency approach in IAS 21 The Effects of Changes in Foreign Exchange Rates. The IFRIC agreed that the position under IFRS 1 and IAS 21 was clear, and that there was no scope for an Interpretation on this topic that would provide any relief.

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