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The Interpretations Committee reach tentative agreement

 27 January 2015

The Interpretations Committee continued its consideration of a submission that asked how to determine which exchange rate to use when reporting revenue transactions denominated in a foreign currency in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates. In particular, the submission described a circumstance in which the customer paid for the goods or services by making a non-refundable payment in advance.

The Interpretations Committee noted that paragraphs 21–22 of IAS 21 require that a foreign currency transaction should be recorded, on initial recognition in the functional currency, by applying the spot exchange rate at the date on which the transaction first qualifies for recognition in accordance with IFRS.

At its meeting in November 2014, the Interpretations Committee tentatively decided to develop guidance on identifying the date of the transaction for revenue transactions denominated in a foreign currency, as an interpretation of paragraph 22 of IAS 21. The Interpretations Committee tentatively decided that in the circumstances described in the submission, the principle to apply should be that revenue should be recognised using the exchange rate at the date the advance payment is made or the advance payment is due (whichever is earlier).

At its January 2015 meeting, the Interpretations Committee considered the scope of the proposed interpretation, how the principle would apply to more complex scenarios and the effective date and transition requirements of the proposed interpretation.

Scope of the proposed interpretation

The Interpretations Committee tentatively agreed that, as an interpretation of IAS 21, the proposed guidance should not be restricted to revenue transactions, but should also apply to other foreign currency transactions that are similarly affected by the issue. That is, the proposed interpretation should apply to foreign currency transactions in circumstances in which foreign currency consideration is paid or received in advance of the recognition of the corresponding asset, expense or income; ie there is some element of prepayment or deferred income.

However, the Interpretations Committee noted that the proposed interpretation would not be applicable when the asset, expense or income is measured at fair value on initial recognition, such as, for example, business combinations, financial instruments and share-based payments. In addition, the proposed interpretation need not apply to insurance contracts and income taxes.

Applying the principle to more complex scenarios

The Interpretations Committee considered some more complex payment arrangements, including circumstances in which there are multiple payments for multiple goods or services over time. The Interpretations Committee tentatively agreed that:

  1. the proposed interpretation should clarify that the date of the transaction for the purpose of paragraphs 21-22 of IAS 21 is determined as the date on which the transaction is initially recognised. If the transaction is initially recognised in stages, the date of the transaction also occurs in stages.
  2. this date of the transaction is used to determine the exchange rate used to translate the prepayment asset or deferred income liability, together with the corresponding (portion of) the asset (on initial recognition), expense or income. The prepayment asset or deferred income liability that is recognised in relation to the advance consideration is subsequently derecognised on recognition of the corresponding asset, expense or income. The pattern of derecognition and recognition is determined by applicable IFRS, and is not affected by the denomination of the transaction in a foreign currency.

The Interpretations Committee also tentatively agreed that the proposed interpretation should only deal with circumstances in which the advance consideration is denominated or priced in a foreign currency and gives rise to a non-monetary prepayment asset or deferred income liability.

Effective date and transition

The Interpretations Committee tentatively agreed that:

  1. the effective date of any guidance should not be earlier than the effective date of IFRS 15 Revenue from Contracts with Customers (ie for accounting periods beginning on or after 1 January 2017), but earlier application should be permitted
  2. on initial application entities may apply the proposed interpretation either:
    1. retrospectively in accordance with IAS 8; or
    2. retrospectively with the cumulative effect of initially applying the interpretation recognised in opening retained earnings at the start of the reporting period in which an entity first applies the proposed Interpretation, or at the start of a prior reporting period presented, but only to transactions that are not completed transactions at that date.
  3. no specific provisions or exemptions should be given for first-time adopters.

Next steps

The Interpretations Committee tentatively agreed to publish a draft interpretation for public consultation based on the tentative decisions discussed above. Accordingly, the Interpretations Committee directed the staff to draft a proposed interpretation to be discussed at a future meeting.

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