(I)
assets and liabilities for each statement of financial position presented are translated at the applicable closing
rate at the respective reporting date;
(II)
income and expenses for each statement of profit or loss and statement of other comprehensive income are
translated either at the rates prevailing at the dates of the transactions or at average exchange rates (in case
this average is a reasonable approximation of the cumulative effect of the rates prevailing on the transaction
dates).
The results and financial position of an entity whose functional currency is the currency of a hyperinflationary
economy shall be translated into a different presentation currency using the following procedure: all amounts (i.e.
assets, liabilities, equity items, income and expenses, including comparatives) shall be translated at the closing rate
at the date of the most recent statement of financial position.
When amounts are translated into the currency of a non-hyperinflationary economy, comparative amounts shall be
those that were presented as current year amounts in the relevant prior year financial statements (i.e. not adjusted for
subsequent changes in the price level or subsequent changes in exchange rates).
Exchange differences arising on the translation of results and financial position of each of the Group’s consolidated
entities are included in Net foreign currency translation effect in other comprehensive income and taken to a separate
component of equity – Foreign currency translation reserve.
6.1.3
Dual rates, suspension of rates and lack of exchangeability
The problems of dual rates, suspensions of rates and lack of exchangeability in relation
to the translation of foreign currency transactions and balances into an entity’s
functional currency and the related requirements of IAS 21 dealing with such issues
have already been discussed in 5.1.4 above. However, the standard makes no reference
to them in the context of translating the results and financial position of an entity into a
1142 Chapter 15
different presentation currency, particularly where the results and financial position of
a foreign operation are being translated for inclusion in the financial statements of the
reporting entity by consolidation or the equity method.
Where the problem is one of a temporary suspension of rates, the predominant practice
noted by the Interpretations Committee is for the requirement in IAS 21 relating to
transactions and balances to be followed; i.e. by using ‘the first subsequent rate at which
exchanges could be made’. In this context the rate will be the one at which future cash
flows could be settled when viewing the net investment as a whole.10 This approach is
broadly consistent with US GAAP which states that the rate to be used to translate
foreign financial statements should be, in the absence of unusual circumstances, the rate
applicable to dividend remittance.
The standard does not address the situation where there is a longer-term lack of
exchangeability. In these circumstances the discussion at 5.1.4.C above, including the
Interpretations Committee’s consideration of this issue in the context of the Venezuelan
currency, will be relevant. Determining the appropriate exchange rate(s) to use will
require the application of judgement. The rate(s) selected will depend on the entity’s
individual facts and circumstances, particularly its legal ability to convert currency or to
settle transactions using a specific rate and its intent to use a particular mechanism,
including whether the rate available through that mechanism is published or readily
determinable. The disclosure requirements highlighted by the committee and covered
at 10.4 below will also be relevant in these circumstances.
6.1.4
Calculation of average rate
When translating the results of an entity whose functional currency is not that of a
hyperinflationary economy, for practical reasons, the reporting entity may use a rate
that approximates the actual exchange rate, e.g. an average rate for the period, to
translate income and expense items. [IAS 21.40].
The standard does not give any guidance on the factors that should be taken into
account in determining what may be an appropriate average rate for the period – it
merely says that ‘if exchange rates fluctuate significantly, the use of the average rate for
the period is inappropriate’. [IAS 21.40]. What methods are, therefore, available to entities
to use in calculating an appropriate average rate? Possible methods might be:
(a) mid-year
rate;
(b) average of opening and closing rates;
(c) average of month end/quarter end rates;
(d) average of monthly average rates;
(e) monthly/quarterly
results
at
month end/quarter end rates; or
(f) monthly/quarterly
results
at monthly/quarterly averages.
Example 15.11: Calculation of average rate
A Spanish entity has a foreign subsidiary and is preparing its consolidated financial statements for the year
ended 30 April 2019. It intends to use an average rate for translating the results of the subsidiary. The relevant
exchange rates for €1=FC are as follows:
Foreign
exchange
1143
Average
Average
Average
Month Month
end
for month
for quarter
for year
April 2018
1.67
May 2018
1.63
1.67
June 2018
1.67
1.64
July 2018
1.64
1.65
1.65
August 2018
1.67
1.64
September 2018
1.70
1.63
October 2018
1.67
1.68
1.65
November 2018
1.65
1.70
December 2018
1.66
1.66
January 2019
1.64
1.67
1.68
February 2019
1.60
1.65
March 2019
1.61
1.63
April 2019
1.61
1.62
1.63
1.65
Average of month end rates – 1.65
Average of quarter end rates – 1.64
The results of the subsidiary for each of the 12 months to 30 April 2019 and the translation thereof under each
of the above methods (using monthly figures where appropriate) are shown below:
Method (a)
FC31,050 @ 1.67 = €18,593
Method (b)
FC31,050 @ 1.64 = €18,933
Method (c) – monthly
FC31,050 @ 1.65 = €18,818
Method (c) – quarterly
FC31,050 @ 1.64 = €18,933
Method (d)
FC31,050 @ 1.65 = €18,818
(e)
(e)
(f)
(f)
quarterly
monthly
quarterly
monthly
Month FC
€
€
&nb
sp; €
€
May 2018
1,000
613
599
June 2018
1,100
659
671
July 2018
1,200
2,012
732
2,000
727
August 2018
1,300
778
793
September 2018
1,300
765
798
October 2018
1,350
2,365
808
2,394
804
November 2018
1,400
848
824
December 2018
1,400
843
843
January 2019
2,000
2,927
1,220
2,857
1,198
February 2019
5,000
3,125
3,030
March 2019
10,000
6,211
6,135
April 2019
4,000
11,801
2,484
11,656
2,469
Total 31,050
19,105
19,086
18,907
18,891
It can be seen that by far the simplest methods to use are the methods (a) to (d).
In our view methods (a) and (b) should not normally be used as it is unlikely in times of
volatile exchange rates that they will give appropriate weighting to the exchange rates
which have been in existence throughout the period in question. They are only likely
to give an acceptable answer if the exchange rate has been static or steadily increasing
or decreasing throughout the period.
1144 Chapter 15
Method (c) based on quarter end rates has similar drawbacks and therefore should not
normally be used.
Method (c) based on month end rates and method (d) are better than the previous
methods as they do take into account more exchange rates which have applied
throughout the year, with method (d) being more precise, as this will have taken account
of daily exchange rates. Average monthly rates for most major currencies are likely to
be given in publications issued by the government, banks and other sources and
therefore it is unnecessary for entities to calculate their own. The work involved in
calculating an average for the year, therefore, is not very onerous. Method (d) will
normally give reasonable and acceptable results when there are no seasonal variations
in items of income and expenditure.
Where there are seasonal variations in items of income and expenditure, using a single
average rate for the entire reporting period is unlikely to result in a reasonable
approximation of applying actual rates. In these situations appropriate exchange rates
should be applied to the appropriate items. This can be done by using either of
methods (e) or (f) preferably using figures and rates for each month. Where such a
method is being used care should be taken to ensure that the periodic accounts are
accurate and that cut-off procedures have been adequate, otherwise significant items
may be translated at the wrong average rate.
Where there are significant one-off items of income and expenses then it is likely that
actual rates at the date of the transaction will need to be used to translate such items.
6.1.5
Accounting for foreign operations where sub-groups exist
A reporting entity comprising a group with intermediate holding companies may adopt
either the direct or the step-by-step method of consolidation. The direct method
involves the financial statements of foreign operations being translated directly into the
presentation currency of the ultimate parent. The step-by-step method involves the
financial statements of the foreign operation first being translated into the functional
currency of any intermediate parent(s) and then into the presentation currency of the
ultimate parent. [IFRIC 16.17].
It is asserted that both methods will result in the same amounts being reported in the
presentation currency. [IAS 21.BC18]. However, as set out at 6.6.3 below, particularly in
Example 15.19, and as acknowledged by the Interpretations Committee,11 this assertion
is demonstrably untrue in certain situations.
Whilst the various requirements of the standard appear to indicate that the direct
method should be used and the Interpretations Committee has indicated it is the
conceptually correct method,12 IAS 21 does not require an entity to use the direct
method or to make adjustments to produce the same result. Rather, an entity has an
accounting policy choice as to which of the two methods it should use and the method
selected should be used consistently for all net investments. [IFRIC 16.17].
6.2
Translation of equity items
The method of translation of the results and financial position of an entity whose
functional currency is not the currency of a hyperinflationary economy is discussed
Foreign
exchange
1145
at 6.1.1 above. The translation process makes only limited reference to the translation
of equity items. The exposure draft that preceded the standard had proposed that ‘...
equity items other than those resulting from income and expense recognised in the
period ... shall be translated at the closing rate’. However, the IASB decided not to
specify in the standard the translation rate for equity items,13 but no explanation has
been given in the Basis for Conclusions about this matter.
So how should entities deal with the translation of equity items?
6.2.1 Share
capital
Where an entity presents its financial statements in a currency other than its
functional currency, it would seem more appropriate that its share capital (whether
they are ordinary shares, or are otherwise irredeemable and classified as equity
instruments) should be translated at historical rates of exchange. Such capital items
are included within the examples of non-monetary items listed in US GAAP as
accounts to be remeasured using historical exchange rates when the temporal
method is being applied (see 5.4.3 above). IAS 21 requires non-monetary items that
are measured at historical cost in a foreign currency to be translated using the
historical rate (see 5.2 above). Translation at an historical rate would imply using the
rate ruling at the date of the issue of the shares. However, where a subsidiary is
presenting its financial statements in the currency of its parent, it may be that the
more appropriate historical rate for share capital that was in issue at the date it
became a subsidiary would be that ruling at the date it became a subsidiary of the
parent, rather than at earlier dates of issue.
Where such share capital is retranslated at the closing rate, we do not believe that it is
appropriate for the exchange differences to be recognised in other comprehensive
income nor for them to be taken to the separate component of equity required by IAS 21
(since to do so could result in them being reclassified from equity to profit or loss upon
disposal of part of the entity’s operations i
n the future), but should either be taken to
retained earnings or some other reserve. Consequently, whether such share capital is
maintained at a historical rate, or is dealt with in this way, the treatment has no impact
on the overall equity of the entity.
6.2.2
Other equity balances resulting from transactions with equity
holders
In addition to share capital, an entity may have other equity balances resulting from the
issue of shares, such as a share premium account (additional paid-in capital). Like share
capital, the translation of such balances could be done at either historical rates or at the
closing rate. However, we believe that whichever method is adopted it should be
consistent with the treatment used for share capital. Again, where exchange differences
arise through using the closing rate, we believe that it is not appropriate for them to be
recognised in other comprehensive income or taken to the separate component of
equity required by IAS 21.
A similar approach should be adopted where an entity has acquired its own equity
shares and has deducted those ‘treasury shares’ from equity as required by IAS 32 (see
Chapter 43 at 9).
1146 Chapter 15
6.2.3
Other equity balances resulting from income and expenses being
recognised in other comprehensive income
Under IAS 21, income and expenses recognised in other comprehensive income are
translated at the exchange rates ruling at the dates of the transaction. [IAS 21.39(b), 41].
Examples of such items include certain gains and losses on:
• revalued property, plant and equipment under IAS 16 (see Chapter 18 at 6.2) and
revalued intangible assets under IAS 38 – Intangible Assets (see Chapter 17 at 8.2);
• debt instruments measured at fair value through other comprehensive income,
investments in equity instruments designated at fair value through other
comprehensive income and financial liabilities designated at fair value through
profit or loss under IFRS 9 (see Chapter 46 at 2.3, 2.5 and 2.4 respectively);
• gains and losses on cash flow hedges under IFRS 9 (see Chapter 49); and
• any amounts of current and deferred tax recognised in other comprehensive
income under IAS 12 (see Chapter 29 at 10).
This would suggest that where these gains and losses are accumulated within a separate
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 226
