Highlights
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 hyperinflationary functional currency and 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) has amended IAS 21 The Effects of Changes in Foreign Exchange Rates to clarify that:
- a company with a non-hyperinflationary functional currency uses the closing rate at the latest reporting date when translating all the financial statement amounts (including comparatives) into its presentation currency; and
- a company uses the closing rate at the latest reporting date when translating all amounts (except comparatives) of a foreign operation with a non-hyperinflationary functional currency and applies the general price index to restate the comparatives.
What is the change?
Under the final amendments, a company with a non-hyperinflationary functional currency but a hyperinflationary presentation currency translates all the financial statement amounts (including comparatives) using the closing rate at the latest reporting date.
The final amendments also provide guidance for a company with hyperinflationary functional and presentation currencies that has a foreign operation with a non-hyperinflationary functional currency. In this case, the company:
- restates the comparative information of the foreign operation included in the company’s previously issued financial statements by applying the general price index under paragraph 34 of IAS 29 Financial Reporting in Hyperinflationary Economies; and
- translates all amounts of the foreign operation other than comparatives using the closing rate at the latest reporting date.
The company is also required to disclose:
- that the amendments have been applied in translating financial statements; and, when applicable,
- summarised financial information about its foreign operations affected by the translation method.
How do the amendments 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 amendments, 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.
Additionally, the amendments introduce the use of the general price index to restate the comparatives of certain foreign operations. This change may simplify companies’ procedures by eliminating the need to reperform the consolidation procedures for comparatives.
Effective from 1 January 2027
The amendments apply retrospectively for annual reporting periods beginning on or after 1 January 2027. Earlier application is permitted.
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