International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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beginning after 15 December 2015 and interim periods within those fiscal years, with early
adoption permitted. While this exemption provides some relief for entities, they now have
additional disclosure requirements specific to investments that are measured using the
NAV practical expedient. These requirements are intended to help financial statement
users reconcile amounts reported to the face of the financial statements and better
understand the nature and risk of these investments, including whether the investments,
if sold, are probable of being sold at amounts different from their NAV.
IFRS 13 does not have a similar practical expedient. Nor does it provide a similar
disclosure exemption or requirements specific to such investments. Therefore, IFRS
preparers cannot presume that NAV, or an equivalent measure, will be the same as fair
value as measured in accordance with IFRS 13 (this is discussed further at 2.5.1 above).
In addition, entities will need to categorise such investments within the fair value
hierarchy and comply with the general disclosure requirements in IFRS 13.
At the time IFRS 13 was issued, the IASB believed it would be difficult to identify when
such a practical expedient would be applied, given the different practices entities across
the world use to calculate NAV. This difference was expected to be addressed as part
of the IASB’s project on Investment Entities. However, when the IASB issued
Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) in October 2012, a
footnote was added to paragraph 238(a) of the Basis for Conclusions to IFRS 13 which
confirmed it had reconsidered providing a net asset value practical expedient, but
decided against providing one for the reason outlined above and because it was outside
the scope of the Investment Entities project to provide fair value measurement guidance
for investments in investment entities. [IFRS 13.BC238(a)].
23.2.2
Fair value of liabilities with a demand feature
The guidance in IFRS on measuring the fair value of a financial liability with a demand
feature differs slightly from US GAAP. IFRS 13 states that the fair value of a liability with
a demand feature cannot be less than the present value of the amount payable on
demand, which is consistent with the existing requirements in IFRS. US GAAP has
specific industry guidance for banks and depository institutions.31 The industry specific
guidance states that the fair value of deposit liabilities with no defined maturities is the
amount payable on demand at the reporting date. Since deposit liabilities, withdrawable
on demand, of banks and depository institutions are excluded from the scope of the fair
value option guidance in ASC 825, the industry guidance in US GAAP around how to
fair value these liabilities is applicable to disclosure, only. [IFRS 13.BC238(b)].
23.2.3
Recognition of day-one gains and losses
While fair value is defined in IFRS 13 as an exit price (which can differ from an entry
price), the standard defers to other IFRSs on whether to recognise any difference
between fair value and transaction price at initial recognition, that is, day-one gains or
losses. IFRS 9 restricts the recognition of day-one gains and losses when fair value is
determined using unobservable inputs.
Fair value measurement 1103
US GAAP contains no specific threshold regarding the observability of fair value inputs.
As such, US GAAP does not specifically prohibit the recognition of day-one gains or
losses even when the fair value measurement is based on significant unobservable inputs
(i.e. a Level 3 measurement – see 16.2 above for further discussion regarding
categorisation within the fair value hierarchy).
23.2.4 Disclosures
IFRS 13 and ASC 820 have some differences in the disclosure requirements for fair value
measurements. For example, IFRS 13 does not provide exceptions to its disclosure
requirements for non-public entities, whereas ASC 820 does. The IASB believes that
IFRS for Small and Medium-Sized Entities addresses the accounting for entities that do
not have public accountability, and the disclosures about their fair value measurements.
[IFRS 13.BC238(c)].
Other examples of disclosure differences include:
(a) quantitative sensitivity analysis disclosures for Level 3 financial instruments –
IFRS 13 currently requires a quantitative sensitivity analysis disclosure for Level 3
financial instruments. That is, if different inputs could have reasonably been used in
place of one or more of the unobservable inputs used to measure fair value (and
those inputs would have significantly changed the fair value measurement), entities
are required to state that fact, disclose the effect on their fair value measurements
and describe how they calculated those effects (note, this disclosure was previously
required by IFRS 7). No similar disclosure is currently required under US GAAP;
(b) other Level 3 disclosures – IFRS generally does not allow for derivative assets and
liabilities to be presented on a net basis. As such, amounts disclosed for fair value
measurements categorised within Level 3 might differ between US GAAP and IFRS
because US GAAP allows a net presentation in some cases;
(c) retirement benefit plan investments measured at fair value in accordance with
IAS 26 – As discussed at 2 above, retirement benefit plans that measure their
investments at fair value in accordance with IAS 26 are required to measure fair
value in accordance with IFRS 13 but are exempt from IFRS 13’s disclosure
requirements. Instead, the disclosure requirements in IAS 26 apply. Under US
GAAP, retirement benefit plans have no similar exemption from ASC 820’s
disclosure requirements; and
(d) a
disclosure
exemption and additional disclosure requirements for investments
measured using the NAV practical expedient, as discussed at 23.2.1 above.
References
1 Request for Information: Post Implementation
3 Website of the IFRS Foundation and IASB,
review – IFRS 13 Fair Value Measurement,
https://www.ifrs.org/projects/work-plan/
May 2017.
(accessed 23 August 2018).
2
IASB Update, March 2018.
4
IFRIC Update, July 2014.
1104 Chapter 14
5 Exposure Draft ED/2014/4 Measuring Quoted 19 A credit support annex (CSA) is a legal
Investments in Subsidiaries, Joint Ventures and
document that regulates the credit support
Associates at Fair Value (Proposed amendments
(collateral) for derivative transactions and
to IFRS 10, IFRS 12, IAS 27, IAS 28, IAS 36
forms part of an ISDA Master Agreement.
and Illustrative Examples for IFRS 13), IASB,
20 Proposed illustrative example 13A, paragraphs
September 2014.
IE47A-IE47G, Exposure Draft ED/2014/4
6
IASB Update, January 2016.
Measuring Quoted Investments in Subsidiaries,
7
Agenda Paper 7B, Post-implementation
Joint Ventures and Associates at Fair Value
Review of IFRS 13 Fair Value Measurement:
(Proposed amendments to IFRS 10, IFRS 12,
&n
bsp; Background-Detailed analysis of feedback
IAS 27, IAS 28, IAS 36 and Illustrative
received and Agenda Paper 7D, Post-
Examples for IFRS 13), IASB, September 2014.
implementation Review of IFRS 13 Fair Value
21 IASB Staff Paper, Agenda Paper reference 6 for
Measurement: Background – Prioritising Level
the February 2014 IASB meeting – Measuring
1 inputs or the unit of account, IASB meeting,
Quoted Investments in Subsidiaries, Joint
March 2018.
Ventures and Associates at Fair Value
8 Website of the IFRS Foundation and IASB,
(Proposed amendments to IFRS 10, IFRS 12,
http://www.ifrs.org/projects/work-plan/
IAS 27, IAS 28 and IAS 36 and Illustrative
(accessed 23 August 2018).
Examples for IFRS 13) – Illustrative Example
9 FASB Accounting Standards Update 2011-04,
for IFRS 13 – Portfolios.
Amendments to Achieve Common Fair Value
22 IASB Update, April 2015.
Measurement and Disclosure Requirements 23 IFRIC Update, January 2015.
in U.S. GAAP and IFRSs.
24 IASB Update, March 2018.
10 Exposure Draft ED/2014/4 Measuring Quoted
25 IASB Update, Paper 7B, March 2018.
Investments in Subsidiaries, Joint Ventures and
26
Financial Accounting Foundation, Post-
Associates at Fair Value (Proposed amendments
Implementation Review Report – FASB Statement
to IFRS 10, IFRS 12, IAS 27, IAS 28, IAS 36
No. 157, Fair Value Measurements (Codified in
and Illustrative Examples for IFRS 13), IASB,
Accounting Standards Codification Topic 820,
September 2014.
Fair Value Measurements and Disclosures),
11 IASB Update, April 2015.
February 2014.
12 IASB Update, Paper 7B, March 2018.
27 FASB, Response to FAF Post-implementation
13 European Securities and Markets Authority public
Review Report of FAS 157 on Fair Value
statement Sovereign Debt in IFRS Financial
Measurement, dated 10 March 2014.
Statements issued in November 2011.
28 Website of the FASB,
14
Decision ref EECS/0115-03, European
https://www.fasb.org/jsp/FASB/FASBContent_C/
Securities and Markets Authority report 17th
ProjectUpdateExpandPage&cid=1176170626479
Extract from the EECS’s Database of
(accessed 7 August 2018).
Enforcement, July 2015, pp.7-8.
29
FASB Accounting Standards Codification
15
Decision ref EECS/0115-03, European
Topic 820 – Fair Value Measurements and
Securities and Markets Authority report 17th
Disclosures – sections 10-35-59 – 10-35-62.
Extract from the EECS’s Database of 30 FASB Accounting Standards Codification
Enforcement, July 2015, pp.7-8.
Topic 820 – Fair Value Measurements and
16 Website of the IFRS Foundation and IASB,
Disclosures – section 10-35-54B, which is
http://www.ifrs.org/projects/work-plan/ (accessed
added by ASU
2015-07 – Fair Value
21 August 2017).
Measurement (Topic
820): Disclosures for
17 Website of the IFRS Foundation and IASB,
Investments in Certain Entities That Calculate Net
http://www.ifrs.org/projects/work-plan/ (accessed
Asset Value per Share (or Its Equivalent).
24 August 2018).
31
FASB Accounting Standards Codification
18 The International Swaps and Derivatives
Topic 825 – Financial Instruments and Topic 942
Association (ISDA) agreement is part of a
– Financial Services – Depository and Lending.
framework of documents designed to enable
OTC derivatives to be documented fully and
flexibly. The ISDA master agreement sets out
the standard terms that apply to all transactions
and is published by the International Swaps and
Derivatives Association.
1105
Chapter 15
Foreign exchange
1 INTRODUCTION ........................................................................................... 1109
1.1
Background .......................................................................................................... 1109
1.2 Relevant
pronouncements
.................................................................................
1110
2 IAS 21: OBJECTIVE, SCOPE AND DEFINITIONS .......................................... 1110
2.1
Objective of the standard ................................................................................... 1110
2.2 Scope
...................................................................................................................... 1110
2.3
Definitions of terms .............................................................................................. 1111
3 SUMMARY OF THE APPROACH REQUIRED BY IAS 21 ................................ 1112
4 DETERMINATION OF AN ENTITY’S FUNCTIONAL CURRENCY................... 1112
4.1
General ................................................................................................................... 1112
4.2 Intermediate
holding
companies or finance subsidiaries ............................ 1114
4.3
Investment holding companies ......................................................................... 1116
4.4 Branches
and
divisions ....................................................................................... 1116
4.5 Documentation
of
judgements made ............................................................... 1117
5 REPORTING FOREIGN CURRENCY TRANSACTIONS IN THE
FUNCTIONAL CURRENCY OF AN ENTITY .................................................... 1117
5.1
Initial recognition ................................................................................................ 1117
5.1.1
Identifying the date of transaction ................................................... 1118
5.1.2
Deposits and other consideration received or paid in
advance .................................................................................................. 1119
5.1.3
Using average rates ............................................................................. 1120
5.1.4
Practical difficulties in determining exchange rates ..................... 1121
5.1.4.A
Dual rates ......................................................................... 1122
5.1.4.B
Suspension of rates: temporary lack of
exchangeability .............................................................. 1122
5.1.4.C
Suspension of rates: longer term lack of
exchangeability .............................................................. 1122
1106 Chapter 15
5.2
Reporting at the ends of subsequent reporting periods .............................. 1123
5.3
5.3.1
Monetary items ................................................................................... 1124
5.3.2 Non-monetary
items
..........................................................................
1126
5.4
Determining whether an item is monetary or non-monetary .................... 1127
5.4.1
Deposits or progress payments ......................................................... 1127
5.4.2
Investments in preference shares.................................................... 1128
5.4.3
Foreign currency share capital ........................................................ 1128
5.4.4 Deferred
tax
.........................................................................................
1129
5.4.5
Post-employment benefit plans – foreign currency assets ....... 1130
5.4.6
Post-employment benefit plans – foreign currency plans ........ 1130
5.5
Change in functional currency .......................................................................... 1131
5.6
Books and records not kept in functional currency ..................................... 1133
6 USE OF A PRESENTATION CURRENCY OTHER THAN THE
FUNCTIONAL CURRENCY ............................................................................ 1133
6.1
Translation to the presentation currency ...................................................... 1134
6.1.1
Functional currency is not that of a hyperinflationary
economy ................................................................................................ 1135
6.1.2
Functional currency is that of a hyperinflationary
economy ............................................................................................... 1139
6.1.3
Dual rates, suspension of rates and lack of exchangeability ....... 1141
6.1.4 Calculation
of
average rate ............................................................... 1142
6.1.5
Accounting for foreign operations where sub-groups exist ...... 1144
6.2
Translation of equity items ............................................................................... 1144