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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.

Content

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Reporting currency - measurement and presentation of financial statements under IAS 21 and IAS 29

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 expected to apply to immaterial items.

References: IAS 21, the effects of changes in foreign exchange rates (revised 1993) and IAS 29, financial reporting in hyperinflationary economies (reformatted 1994)(50).

Issue

1. Paragraph 4 of IAS 21 states that while that Standard does not specify the currency in which an enterprise presents its financial statements, an enterprise normally uses the currency of the country in which it is domiciled. While IAS 21 defines the term "reporting currency" as the currency used in presenting the financial statements, the reporting currency used by an enterprise also has significant implications for accounting measurement in the financial statements.

2. IAS 21.7 defines a foreign currency as a currency other than the reporting currency of an enterprise. Therefore, the selection of a reporting currency establishes that all other currencies are treated as foreign currencies. Procedures for accounting for foreign currency transactions and translating financial statements of foreign operations are specified in IAS 21. IAS 21.36 indicates additional consequences of selecting a reporting currency for a foreign entity that reports in the currency of a hyperinflationary economy. The financial statements of such a foreign entity are restated under IAS 29 before they are translated into the reporting currency of the reporting enterprise. IAS 29.8 also requires restatement by an enterprise that presents its own financial statements using the currency of a hyperinflationary economy as its reporting currency.

3. The issues are:

(a) how an enterprise determines a currency for measuring items in its financial statements (the "measurement currency");

(b) whether an enterprise may use a currency other than the measurement currency for presenting its financial statements (the "presentation currency"); and

(c) if the presentation currency may be different from the measurement currency, then how the financial statements should be translated from the measurement currency to the presentation currency.

4. IAS 21.5 states that the restatement of an enterprise's financial statements from the currency in which it presents its financial statements in compliance with IAS into another currency for the convenience of users accustomed to that currency or for similar purposes is not dealt with by IAS 21. As a result, such restatements are not addressed in this Interpretation.

Consensus

5. The measurement currency should provide information about the enterprise that is useful and reflects the economic substance of the underlying events and circumstances relevant to that enterprise. If a particular currency is used to a significant extent in, or has a significant impact on, the enterprise, that currency may be an appropriate currency to be used as the measurement currency (additional guidance is provided in Appendix A to this interpretation). All transactions in currencies other than the measurement currency should be treated as transactions in foreign currencies when applying IAS 21.

6. Once the measurement currency has been selected, it should not be changed unless there is a change in the underlying events and circumstances relevant to that enterprise as determined in accordance with paragraph 5 of this interpretation.

7. If the measurement currency, determined in accordance with paragraph 5 of this Interpretation, is the currency of a hyperinflationary economy, then:

(a) the enterprise's own financial statements should be restated under IAS 29; and

(b) when the enterprise is a foreign entity as defined in IAS 21 and is included in the financial statements of another reporting enterprise, its financial statements should be restated under IAS 29 before being translated into the reporting currency of the other reporting enterprise.

8. If the currency of a country that does not have a hyperinflationary economy is determined to be an appropriate measurement currency under paragraph 5 of this interpretation, the enterprise is not required to restate its financial statements under IAS 29.

9. Although an enterprise normally presents its financial statements in the same currency as the measurement currency determined under paragraph 5 of this interpretation, it may choose to present its financial statements in a different currency. The method of translating the financial statements of a reporting enterprise from the measurement currency to a different currency for presentation is not specified under International Accounting Standards. However, for financial statements to present fairly the financial position, financial performance and cash flows, the translation method applied by an enterprise should not lead to reporting in a manner that is inconsistent with the measurement of items in the financial statements using the currency determined in accordance with paragraph 5 of this interpretation. In the case of an enterprise that has foreign entities and presents consolidated financial statements, the currency used in presenting the consolidated financial statements is normally the same as the parent's measurement currency but will often differ from the measurement currencies used by individual foreign entities. (Appendix B provides an illustration of application of this interpretation to consolidated financial statements.)

Disclosure

10. The following should be disclosed:

(a) when the measurement currency is different from the currency of the country in which the enterprise is domiciled, the reason for using a different currency;

(b) the reason for any change in the measurement currency or presentation currency; and

(c) when the financial statements are presented in a currency different from the enterprise's measurement currency, the measurement currency, the reason for using a different presentation currency, and a description of the method used in the translation process.

In consolidated financial statements, the references to measurement currency for the purpose of these disclosure requirements are to the measurement currency of the parent.

Date of consensus: February 2000.

Effective date: This interpretation becomes effective for annual financial periods beginning on or after 1 January 2001. Changes in accounting policies should be accounted for according to the transition requirements of IAS 8.46.

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