Executive summary
The International Accounting Standards Board (IASB) has issued amendments to IAS 21 ‘The Effects of Changes in foreign Exchange Rates’ to clarify how entities should translate financial statements from a non-hyperinflationary currency into a hyperinflationary one.
Background
The objective of IAS 21 is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency.
In June 2022, the IFRS Interpretations Committee (IFRIC) received a submission regarding the accounting treatment applied by a parent entity with a functional currency in a hyperinflationary economy when consolidating a subsidiary with a functional currency in a non-hyperinflationary economy. During its research, the IFRIC concluded that the matter identified was common and there was diversity in practice, which was expected to increase in the future. The IFRIC also identified a related issue, where an entity with a non-hyperinflationary functional currency presents its financial statements in a hyperinflationary presentation currency.
The IFRIC referred the matter to the IASB and recommended a narrow-scope amendment to provide an appropriate translation method for both the original and related issues. In July 2024, the IASB proposed amendments to IAS 21 to address these matters, which have been finalised following consideration of feedback on the proposals. These targeted amendments aim to enhance information quality cost-effectively, reduce reporting differences, and clarify guidelines for hyperinflationary currencies.
The amendments
Amendments to IAS 21
The amendments to IAS 21 introduce new translation provisions as follows:
- Entities with a non-hyperinflationary functional currency but a hyperinflationary presentation currency must now translate all amounts (assets, liabilities, equity, income, expenses, including comparatives) at the closing rate at the date of the most recent statement of financial position. Previously, assets and liabilities were translated at the closing rate, but income and expenses were translated at transaction rates. This change ensures all amounts are expressed in terms of a current measuring unit, improving comparability and usefulness for users of financial statements.
- When an entity applies IAS 29 ‘Financial Reporting in Hyperinflationary Economies’ and translates the results and financial position of a foreign operation with a non-hyperinflationary functional currency, comparative amounts for the foreign operation should be restated using a general price index, not the closing rate. This exception reduces preparation costs and maintains consistency in financial ratios.
- Entities must disclose when these new requirements have been applied and therefore all amounts have been translated at the closing rate.
- If the presentation currency ceases to be hyperinflationary, this fact must also be disclosed. Entities with foreign operations affected by these amendments must provide summarised financial information about those operations, helping users assess their impact on the entity’s results and financial position.
Amendments to other IFRS Accounting Standards
In addition, the following changes are reflected in other IFRS Accounting Standards as follows:
- IFRS 19 ‘Subsidiaries without Public Accountability: Disclosures’ – the new disclosure requirements that are being introduced in IAS 29 are being replicated in IFRS 19.
- IAS 29 ‘Financial Reporting in Hyperinflationary Economies’ – corresponding paragraph references are amended to reflect the new paragraphs added in IAS 21.
Effective date
The amendments are effective from annual reporting periods beginning on or after 1 January 2027. Early adoption of the Standard is permitted.
Our thoughts
We support the release of the amendments to IAS 21, which should increase the usefulness of the presented information in a cost-effective manner. While the effective date is a while away, we would encourage reporting entities to consider early application if they are in scope of IAS 21.
For further information on the amendments, refer to IASB publications Translation to a Hyperinflationary Presentation Currency (Amendments to IAS 21) which provides a more detailed look at the amendments to this Standard. A subscription is required to view the publication.
