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IASB AMENDS STANDARD ON FOREIGN EXCHANGE RATES |
| Source: | International Accounting Standards Board | | Country: | International | | Date: | 30/12/2005 | | Contributor: | Andrew Priest | | Web: | http://www.iasb.org |
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The International Accounting Standards Board (IASB) has issued a limited amendment to International Accounting Standard (IAS) 21 The Effects of Changes in Foreign Exchange Rates. The amendment clarifies the requirements of IAS 21 regarding an entity’s investment in foreign operations and will therefore help the financial reporting of entities that invest in businesses operating in a currency different from that used by the entity.
Earlier this year companies and other constituents expressed concern about problems in implementing IAS 21, which was revised in 2003 but became mandatory only in 2005. In particular, IAS 21 required different accounting depending on the currency in which a monetary item was denominated, specifically where such an item was regarded as part of an entity’s investment in a foreign operation. Secondly, IAS 21 was not clear on whether any member of a consolidated group could enter into the monetary transaction with the foreign operation. In response to these concerns the IASB developed an amendment on a fast-track basis to enable entities to take advantage of the improvement in financial reports for 2005.
Introducing the amendment, Sir David Tweedie, IASB Chairman, said: "This document is a good example of the Board responding quickly to deal with a practical problem of implementation that constituents have identified. We believe that this amendment will benefit those many companies around the world that invest in operations outside their own jurisdictions."
About the Amendment
- IAS 21 The Effects of Changes in Foreign Exchange Rates was issued by the IASB in 2003 as part of the IASB’s project to improve many of the standards issued by its predecessor body. Earlier this year, constituents expressed concern that IAS 21 gave rise to results that were counter-intuitive and was not clear about the accounting for a net investment in a foreign operation.
- In particular, IAS 21 required different accounting depending on the currency in which a monetary item was denominated, specifically where such an item was regarded as part of an entity’s investment in a foreign operation. Secondly, IAS 21 was not clear on whether any member of a consolidated group could enter into the monetary transaction with the foreign operation.
- In response to these concerns, the IASB reviewed aspects of IAS 21. As regards a monetary item that forms part of an entity’s investment in a foreign operation, the IASB concluded that the accounting treatment in consolidated financial statements should not be dependent on the currency of the monetary item, nor on which entity within the group conducts a transaction with the foreign operation. On 30 September the IASB published for public comment its proposal to amend IAS 21. Having considered the comments subsequently received the IASB confirmed the amendment and decided that it should be made available for adoption with immediate effect when issued.
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