– IMPLICATIONS OF GAAP CHANGES
The changes to the accounting treatment of business combinations, in particular the implications for the way goodwill is calculated and accounting for changes in shareholdings (business combinations achieved in stages, loss of control, etc.) arising from the revised IFRS3, Business Combinations and amended IAS27, Consolidated and Separate Financial Statements in January 2008 have led to amendments to various other accounting standards.
One such standard is IAS21, The Effects of Changes in Foreign Exchange Rates. This article addresses the implications for investments in foreign operations as a result of these amendments, which are effective for annual periods beginning on or after 1 July 2009. However, if an entity applies IAS27 for an earlier period, the amendments to IAS21 are applied for that earlier period.
One of the objectives of IAS21 is to prescribe how to include a foreign operation in the financial statements of the reporting entity, i.e. the translation of a foreign operation’s results and financial position, which are denominated in a foreign currency into the presentation currency of the group. A foreign operation is defined as “an entity that is a subsidiary, associate, jointly controlled entity or a branch of the reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity”.
The requirement to exclude foreign exchange adjustments, on a foreign operation, from profit or loss until realised remains. Previous standards required the foreign exchange adjustments that arose to be recognised directly in a separate component of equity, typically called a foreign currency translation reserve. The general principle still applies, but the adjustment will be recognised as part of other comprehensive income in the statement of comprehensive income as required by IAS1, Presentation of financial statements. In addition, there are some significant changes in relation to the calculation of the amount reclassified (released) to profit or loss when the interest in the foreign operation is disposed of.
2004 version of IAS21
The 2004 version of IAS21 requires that on the disposal of a foreign operation, the cumulative amount of the foreign exchange differences shall be recognised in profit or loss when the gain or loss on disposal is recognised. Paragraph 49 requires that when there is a partial disposal only the proportionate share of the related accumulated foreign exchange differences is included. The impact was that, if the shareholding was reduced by 20 percent, 20 percent of the cumulative reserve would be released to profit or loss. Whilst the 2004 standard indicates that an impairment of the carrying amount of the foreign operation is not a partial disposal, it does not define a partial disposal.
Amendments to IAS21
The amendments to IAS21 focus on the disposal of a foreign operation, specifically the treatment of the foreign exchange differences recognised in other comprehensive income and accumulated in a separate component of equity through the introduction of paragraphs 48A–D. In addition, the amended standard clarifies the concept of a partial disposal and the treatment of the related foreign exchange differences. It remains to be seen whether these amendments assist users in better understanding the reporting entity’s financial statements, but what they do achieve is ensuring consistency of the accounting treatment of foreign operations in terms of IAS21, IFRS3 and IAS27. In conclusion, a diagrammatic representation of these amendments is presented below.
For examples of the financial reporting implications arising from these amendments, please refer to this article on www.accountancysa.org.za.
1). FAS160, Noncontrolling Interests in Consolidated Financial Statements, FASB (2007)
2). IAS1, Presentation of financial statements. IASB (2007)
3). IFRS3, Business Combinations. IASB (2008)
4). IAS27, Consolidated and Separate Financial Statements. IASB (2008)
5). IAS21, The Effects of Changes in Foreign Exchange Rates. IASB (2004)
6). IAS21, The Effects of Changes in Foreign Exchange Rates. IASB (2008)
7). Basis for Conclusions to IFRS3 IAS21, The Effects of Changes in Foreign Exchange Rates. IASB (2008)
Goolam Modack is lecturer in the Department of Accounting at the University of Cape Town.