Translation of hyperinflationary foreign operations (IAS 29/IAS 21): PwC In brief INT2020-05

Publication date: 19 Mar 2020

adobe_pdf_file_icon_32x32In brief IFRIC agenda decision - presenting translation and restatement effects of IAS 21 and IAS 29

At a glance

The IFRS Interpretations Committee (IC) received a request asking: (1) how an entity with a non-hyperinflationary presentation currency should present differences that arise on restating and translating the opening financial position of a hyperinflationary foreign operation; and (2) whether the foreign currency translation reserve should be reclassified when a foreign operation becomes hyperinflationary.

The IC concluded that an entity should present translation differences in OCI and not in equity. The IC also concluded that an entity does not reclassify the accumulated foreign currency translation reserve to a component of equity that is not subsequently reclassified to profit or loss when a foreign operation becomes hyperinflationary.

The agenda decision is relevant to entities with foreign operations in hyperinflationary economies, particularly those that currently apply a different policy for recognising restatement and translation effects on opening equity. These entities should reconsider their existing policies in the light of the IC’s conclusion and determine whether any changes are required.

What is the issue?

IAS 21 requires an entity to restate the results and financial position of a hyperinflationary foreign operation by applying IAS 29 before applying the translation method set out in IAS 21. This will have two effects:

  • a restatement effect resulting from restating the entity’s interest in the equity of the hyperinflationary foreign operation (IAS 29); and
  • a translation effect resulting from translating the entity’s interest in the equity of the hyperinflationary foreign operation at a closing rate that differs from the previous closing rate (IAS 21).

However, neither IAS 21 nor IAS 29 explains specifically how these effects should be presented in the consolidated financial statements, and the IC observed that there was mixed practice.

IAS 21 also requires the results and financial position of a foreign operation that does not have the functional currency of a hyperinflationary economy to be translated into the presentation currency in each period, and any translation differences to be recognised in a foreign currency translation reserve within equity until the foreign operation is sold. However, neither IAS 21 nor IAS 29 explains specifically how this reserve is dealt with when the foreign operation becomes hyperinflationary.

The IC has issued an agenda decision on the interaction between IAS 21 and IAS 29 that addresses both of these issues.

How does an entity present any exchange difference arising from translating a hyperinflationary foreign operation?

The IC concluded that an exchange difference can be defined either as a translation effect alone or as the combined effect of restatement and translation. The way in which an entity defines exchange difference will determine the presentation of these effects.

IAS 21 requires the recognition of exchange differences in profit or loss or other comprehensive income (OCI). As a result, it would not be appropriate to recognise all translation differences directly in equity, even if a foreign operation has a functional currency of a hyperinflationary economy. The presentation of the restatement and translation effects will therefore follow one of two approaches: 

  • the combined effect of the restate/translate approach in OCI; or
  • the translation effect in OCI and the restatement effect in equity.

Should an entity reclassify its currency translation reserve in equity when a foreign operation first becomes hyperinflationary?

The IC concluded that an entity would not reclassify the accumulated foreign currency translation reserve to a component of equity that is not subsequently reclassified to the income statement when a foreign operation becomes hyperinflationary. The accumulated foreign currency translation reserve is reclassified to profit or loss only when the foreign operation is sold (or partially sold).

What is the impact and for whom?

The agenda decision will affect entities with foreign operations in hyperinflationary economies, particularly those that currently apply a policy of recognising restatement and translation effects in equity. In particular, the agenda decision means that the accumulated foreign currency translation reserve at the date when a foreign operation becomes hyperinflationary, together with translation differences that arise subsequently, will remain in the translation reserve until the foreign operation is sold. The impact on the amount of translation differences reclassified on a subsequent disposal could be material.

Entities that currently apply a different policy should reconsider their existing presentation policies in the light of the IC’s comments and determine whether any changes are required.

When does it apply?

The agenda decision has no formal effective date. The IC has noted that agenda decisions might often result in explanatory material that was not previously available, which might cause an entity to change an accounting policy. The IASB expects that an entity would be entitled to sufficient time to make that determination and implement any change. Any change in policy should be applied retrospectively, and comparative amounts should be restated.

Where do I get more details?

For more information, refer to the agenda decision or please contact Tony Debell (tony.m.debell@pwc.com) or Elizabeth Dicks (elizabeth.a.dicks@pwc.com).

 

 
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