Mahesh Narayanasami
Partner
KPMG US, DPP New York
There is currently no specific guidance for translating a company’s financial statements from a non-hyperinflationary functional currency into a hyperinflationary presentation currency. This scenario arises when a company presents its financial statements in a hyperinflationary currency but has:
- a non-hyperinflationary functional currency; or
- a foreign operation with a non-hyperinflationary functional currency.
To reduce diversity in practice and improve the usefulness of information for investors, the International Accounting Standards Board (IASB) proposes to amend IAS 21 The Effects of Changes in Foreign Exchange Rates to clarify that a company uses the closing rate when translating all the financial statement amounts (including comparatives) into its presentation currency in these circumstances.
The IASB proposals offer a consistent and straightforward translation method and would resolve issues for some companies with an ever-growing foreign currency translation reserve.
What is the proposed change?
A company with a non-hyperinflationary functional currency but a hyperinflationary presentation currency would translate all the financial statement amounts (including comparatives) using the closing rate at the latest reporting date.
The company would also be required to disclose that it has done this and when applicable, summarise financial information about its foreign operations affected by the proposed translation method. The proposals would be applied retrospectively, and the effective date would be determined at a later stage. Earlier application would be permitted.
How would the proposed change affect the financial statements?
Under the current translation requirements, net assets or net liabilities are translated using the closing rate at the reporting date, reflecting the decline in economic value of the hyperinflationary presentation currency. In contrast, income and expenses and other components of equity are translated using historical exchange rates. The resulting exchange differences are recognised in the foreign currency translation reserve (in other comprehensive income), which could grow significantly in a hyperinflationary economic environment.
Under the proposals, a company may no longer see its foreign currency translation reserve growing more than other components of equity. This is because the company would use the same closing rate to translate all amounts, including components of equity, into its presentation currency.
What’s next? Have your say by 22 November 2024
The exposure draft is open for comment until 22 November 2024. We encourage stakeholders to read the proposals and provide their comments to the IASB.
Speak to your usual KPMG contact to find out more about the proposals and visit kpmg.com/ifrs to keep up to date with the latest news and discussion.
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