Tentative Agenda Decision—Cumulative Exchange Differences arising before a Foreign Operation becomes Hyperinflationary (IAS 21 and IAS 29)

 

The IFRS Interpretations Committee (Committee) discussed the following matter and tentatively decided not to add it to its standard-setting agenda. The Committee will reconsider this tentative decision, including the reasons for not adding the matter to its standard-setting agenda, at a future meeting. The Committee invites comments on its tentative agenda decision. All comments will be on the public record and posted on our website unless a responder requests confidentiality and we grant that request. We do not normally grant such requests unless they are supported by good reason, for example, commercial confidence. 

Tentative agenda decision

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

  1. has a presentation currency that is not the currency of a hyperinflationary economy as defined in IAS 29;
  2. has a foreign operation with a functional currency that is the currency of a hyperinflationary economy as defined in IAS 29 (hyperinflationary foreign operation); and
  3. translates the results and financial position of the hyperinflationary foreign operation into its presentation currency in preparing its consolidated financial statements.

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

  1. present in other comprehensive income (OCI) any exchanges differences resulting from translating the results and financial position of that non-hyperinflationary foreign operation; and
  2. present in a separate component of equity the cumulative amount of those exchange differences (cumulative pre-hyperinflation exchange differences).

The request asked whether, at the beginning of the period during which the foreign operation becomes hyperinflationary, the entity reclassifies within equity the cumulative pre-hyperinflation exchange differences––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.

The Committee observed that paragraph 41 of IAS 21 requires the entity to present the cumulative pre-hyperinflation exchange differences in a separate component of equity ‘until disposal of the foreign operation’. Furthermore, paragraph 48 of IAS 21 requires the entity to reclassify the cumulative pre-hyperinflation exchange differences from equity to profit or loss (as a reclassification adjustment) on disposal of the foreign operation.

Accordingly, the Committee concluded that, in the fact pattern described in the request, the entity retains the cumulative pre-hyperinflation exchange differences as a separate component of equity (to which paragraph 48 of IAS 21 applies) until disposal of the foreign operation. The entity does not reclassify within equity the cumulative pre-hyperinflation exchange differences when 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 when a foreign operation becomes hyperinflationary. Consequently, the Committee [decided] not to add the matter to its standard-setting agenda.

The deadline for commenting on the proposals is 25 November 2019. The Committee will consider all comments received in writing by that date; agenda papers analysing comments received will include analysis only of comments received by that date.

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