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Commission Regulation (EC) No 1725/2003 of 29 September
2003 adopting certain international accounting standards
in accordance with Regulation (EC) No 1606/2002 of the
European Parliament and of the Council.
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Foreign exchange - capitalisation of
losses resulting from severe currency devaluations
Paragraph 11 of IAS 1 (revised 1997), presentation of
financial statements, requires that financial statements
should not be described as complying with International
Accounting Standards unless they comply with all the
requirements of each applicable standard and each applicable
interpretation issued by the Standing Interpretations
Committee. SIC interpretations are not intended to apply to
immaterial items.
Reference: IAS 21, the effects of changes in foreign
exchange rates.
Issue
1. An enterprise has liabilities denominated in a foreign
currency that result from the acquisition of assets. After the
acquisition of the assets, the enterprise's reporting currency
undergoes a severe devaluation or depreciation. As a result,
significant foreign exchange losses arise when the liabilities
are measured at the closing rate under IAS 21.11(a). The
allowed alternative treatment in IAS 21.21 requires several
conditions to apply before an enterprise may include such
exchange losses in the carrying amount of the related assets.
2. The issues are:
(a) in which period the conditions that the liability "cannot
be settled" and that there is "no practical means of hedging"
should be applied; and
(b) when the acquisition of an asset is "recent".
Consensus
3. Foreign exchange losses on liabilities should be
included in the carrying amount of a related asset only if
those liabilities could not have been settled and if it was
impracticable to hedge them prior to the occurrence of the
severe devaluation or depreciation of the reporting currency.
The adjusted carrying amount of the asset should not exceed
its recoverable amount.
4. In order to include foreign exchange losses on
liabilities in the carrying amount of a related asset, it
should be demonstrated that the foreign currency necessary for
settlement of the liability was not available to the reporting
enterprise and that it was impracticable to hedge the exchange
risk (for example, with derivatives such as forward contracts,
options or other financial instruments). This is expected to
occur only rarely, for example, simultaneous shortage of
foreign currency due to exchange control restrictions imposed
by a government or a central bank and no availability of
hedging instruments.
5. Once the conditions for capitalisation of exchange
losses are met, an enterprise should capitalise further
exchange losses incurred after the first severe devaluation or
depreciation of the reporting currency only to the extent that
all conditions for capitalisation continue to be met.
6. "Recent" acquisitions of assets are acquisitions within
12 months prior to the severe devaluation or depreciation of
the reporting currency.
Date of consensus: January 1998.
Effective date: This interpretation becomes effective on 1
August 1998. Changes in accounting policies should be
accounted for according to the transition requirements of IAS
8.46.
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