Chapter 6: Presentation and disclosure

General

The following paragraphs deal with IAS 21’s disclosure requirements that apply to both individual financial statements and consolidated financial statements. IFRS 7 requires significant additional disclosures about foreign currency transactions and activities.

Presenting foreign currency gains or losses with operating margin IAS 21 is silent regarding where in profit or loss foreign currency exchange gains and losses should be presented. The presentation should follow the nature of the transactions to which the foreign currency gains and losses are linked. As such, recognizing foreign currency gains and losses relating to operational activities (e.g., on trade receivables/trade payables etc.) within income from operations, and recognizing foreign currency exchange gains and losses related to debt in finance costs, would be appropriate. When relevant to an understanding of the entity’s financial performance, presentation as a separate line item will be appropriate.

Presentation currency different from functional currency If the presentation currency is not the same as the functional currency (or, for a group, the functional currency of the parent), that fact should be stated. The functional currency should be disclosed, together with the reason for using a different presentation currency. When an entity presents its financial statements in a currency other than its functional currency (or, for a group, in a currency other than the functional currency of the parent), the financial statements may be described as complying with IFRS Standards only if they comply with all the requirements of each applicable Standard and each applicable Interpretation of those Standards including the translation method set out in IAS 21.

Supplementary information in other currencies When an entity displays its financial statements or other financial information in a currency that is different from either its functional currency or its presentation currency and the requirements of IAS 21 are not met, it is required to: clearly identify the information as supplementary information, to distinguish it from the information that complies with IFRS Standards; disclose the currency in which the supplementary information is displayed; and disclose the entity’s functional currency and the method of translation used to determine the supplementary information.

Entities sometimes present their financial statements or other financial information in a currency that is not the functional currency without meeting the requirements of IAS 21.

For example, an entity may convert into another currency only selected items from its financial statements; alternatively, an entity whose functional currency is not that of a hyperinflationary economy may convert the financial statements into another currency by translating all items at the most recent closing rate. Such conversions are not in accordance with IFRS Standards and the disclosures set out above are required.

Accounting policies

There is no specific requirement in IAS 21 to disclose accounting policies in respect of foreign currency transactions. However, IAS 1 requires disclosure of significant policies that are relevant to an entity’s financial statements. In respect of foreign currency transactions, the accounting policy note should state, as a minimum, the methods used in translating foreign currency transactions and the financial statements of foreign operations (including those operating in hyper-inflationary economies), and the treatment accorded to exchange differences.

Disclosure

In respect of exchange differences, IAS 21 requires disclosure of: The amount of exchange differences recognised in profit or loss, except for those arising on financial instruments measured at ‘fair value through profit or loss’ in accordance with IFRS 9. Net exchange differences recognised in other comprehensive income and accumulated in a separate component of equity, and a reconciliation of the amount of such exchange differences at the beginning and end of the period.

Where should foreign exchange differences be presented in the income statement? The disclosure required is on an aggregate net basis. The total amount of exchange differences recognised in profit or loss includes exchange differences recognised on subsequent settlement and retranslation to closing rate on balances arising on foreign currency transactions. However, the standard is silent as to where in profit or loss they should be included. In practice, foreign exchange differences typically tend to be classified in the same line item as the underlying transaction. Therefore: Foreign exchange differences arising from trading transactions are included in the results of operating activities. Foreign exchange differences arising from financing are included as a component of finance cost/income. Foreign exchange differences arising on deferred tax balances are included as part of deferred tax expense (income).

A reporting entity can present its financial statements in a currency that is different from its functional currency. In this situation, the following should be disclosed:

• The fact that the presentation currency is different from the functional currency.
• The functional currency. The reasons for using a different presentation currency. A description that the financial statements comply with International Financial Reporting Standards only if they comply with all the requirements of each applicable standard and each applicable interpretation of those standards, including the translation method.

In these cases, the entity provides the foreign currency risk disclosures required by IFRS 7 in reference to its functional currency rather than its presentation currency. The entity’s exposure to currencies other than the functional currency will affect its future performance, and the details of these exposures are provided in the financial statements.

When there is a change in the functional currency of either the reporting entity or a significant foreign operation, that fact and the reason for the change in functional currency are disclosed.

Where an entity displays its financial statements or other financial information in a currency that is different from either its functional currency or its presentation currency, and the translation procedures required by IAS 21) are not met, it should:

• Clearly identify the information as supplementary information, to distinguish it from the information that complies with International Financial Reporting Standards.
• Disclose the currency in which the supplementary information is displayed.
• Disclose the entity’s functional currency and the method of translation used to determine the supplementary information.

When can an entity provide supplementary information in a currency that is different from its presentation or functional currency? IAS 21 does not prohibit an entity from providing for its users, as supplementary information, financial statements or other financial information (such as five-year summaries) in a currency that is not its functional currency or its presentation currency. Such supplementary information is often referred to as a ‘convenience translation’. It is normally based on translations prepared by applying a single exchange rate to all amounts appearing in financial statements presented in the entity’s functional or presentation currency. The relationships among amounts in the financial statements do not change. Such translations fail to account for the effects of changes in foreign exchange rates and, therefore, do not comply with the translation procedures set out under IAS 21.

When should a change in functional currency be accounted for? It might not be practicable to determine the date of change at a precise point during the reporting period. It is also likely that the change could have occurred gradually during the reporting period. If so, it might be acceptable to account for the change as of the beginning or end of the accounting period in which the change occurs, whichever more closely approximates to the date of change.