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| Home > Accounting Standards > Interpretations of Financial Reporting Standards 2003 > INT FRS 11 |
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Interpretation of Financial Reporting Standard
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Foreign Exchange - Capitalisation of Losses Resulting from Severe Currency Devaluations |
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Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items. |
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Reference: FRS 21, The Effects of Changes in Foreign Exchange Rates |
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ISSUE |
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- 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 FRS 21.10(a). The Allowed Alternative Treatment in FRS 21.20 requires several conditions to apply before an enterprise may include such exchange losses in the carrying amount of the related assets.
- The issues are:
- in which period the conditions that the liability "cannot be settled" and that there is "no practical means of hedging" should be applied; and
- when the acquisition of an asset is "recent".
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CONSENSUS |
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| 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.
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| 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. |
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| 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. |
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| 6. |
"Recent" acquisitions of assets are acquisitions within twelve months prior to the severe devaluation or depreciation of the reporting currency. |
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BASIS FOR CONCLUSIONS |
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| 7. |
The rationale for the Allowed Alternative Treatment in FRS 21.20 is that exchange losses should be included in the carrying amount of an asset only if those exchange losses are an unavoidable consequence of buying the asset and therefore are to be considered as part of its acquisition cost. If an enterprise was able to settle the liability or to hedge the risk of foreign currency losses at any time before the severe devaluation or depreciation occurred, the loss incurred at a later date was not unavoidable and, therefore, should not be capitalised. |
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| 8. |
FRS 21 further limits the amount that may be capitalised in such circumstance. Paragraph 20 requires that the adjusted carrying amount of the asset should not exceed the recoverable amount of the asset. |
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| 9. |
For purposes of applying the Allowed Alternative Treatment in FRS 21.20, twelve months is considered to be an operational and economically reasonable period to determine the meaning of "recent" acquisitions of assets. The twelve months period refers to the date of acquisition of an asset only and does not restrict the period of capitalisation of subsequent exchange losses. Therefore, under the Allowed Alternative Treatment exchange losses arising on a particular liability are capitalised cumulatively, provided all conditions of FRS 21.20 continue to be met. |
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Effective Date: INT FRS 11 comes into effect on 1 February 2003. Changes in accounting policies should be accounted for according to the transitional requirements in FRS 8.40 |
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