Accounting Standards

Introduction of the Euro

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.

Reference: FRS 21, The Effects of Changes in Foreign Exchange Rates

1. From 1 January 1999, the effective start of Economic and Monetary Union (EMU), the euro will become a currency in its own right and the conversion rates between the euro and the participating national currencies will be irrevocably fixed, i.e. the risk of subsequent exchange differences related to these currencies is eliminated from this date on.


2. The issue is the application of FRS 21 to the changeover from the national currencies of participating Member States of the European Union to the euro ("the changeover").

This means that, in particular:

1. foreign currency monetary assets and liabilities resulting from transactions should continue to be translated into the reporting currency at the closing rate. Any resultant exchange differences should be recognised as income or expense immediately, except that an enterprise should continue to apply its existing accounting policy for exchange gains and losses related to foreign exchange contracts that are used to reduce the exchange risk on future transactions or commitments (anticipatory hedges);
   
   
2. cumulative exchange differences relating to the translation of financial statements of foreign entities should continue to be classified as equity and should be recognised as income or expense only on the disposal of the net investment in the foreign entity; and
   
   
3. exchange differences resulting from the translation of liabilities denominated in participating currencies should not be included in the carrying amount of related assets.

FRS 21.10(a) requires that foreign currency monetary items (as defined by FRS 21.06) be reported using the closing rate at each balance sheet date. According to FRS 21.14, exchange differences arising from the translation of monetary items generally should be recognised as income or as expenses in the period in which they arise. The effective start of the EMU after the balance sheet date does not change the application of these requirements at the balance sheet date; in accordance with FRS 10.20 it is not relevant whether or not the closing rate can fluctuate after the balance sheet date.

FRS 21.13 states that the Standard does not deal with hedge accounting, except in restricted circumstances. Therefore, this Interpretation does not address how foreign currency hedges should be accounted for. FRS 8.36 would allow such a change in accounting policy only if the change would result in a more appropriate presentation of events or transactions. The effective start of EMU, of itself, does not justify a change to an enterprise's established accounting policy related to anticipatory hedges because the changeover does not affect the economic rationale of such hedges. Therefore, the changeover should not alter the accounting policy where gains and losses on financial instruments used as anticipatory hedges are currently deferred and matched with the related income or expense in a future period.

Effective Date: INT FRS 7 comes into effect on 1 February 2003. Changes in accounting policies should be accounted for according to the transitional requirements in FRS 8.40.