Username:
Password:
Forgot Password?

AASB 121 - The Effects of Changes in Foreign Exchange Rates

Print this Article Print this Article
Email this Article

Text of the Standard 
Summary 
AIFRS compared to IFRS and old AGAAP 
Interpretations and guidance 
Questions and answers 
Articles 

 
Comparison between AASB 121 and IAS 21 
Comparison by Jeffrey Knapp 
 
Background 
 
AASB 121 ‘The Effects of Changes in Foreign Exchange Rates’ is the Australian equivalent to IAS 21 of the same name. It was made by the AASB on 15 July 2004 as part the AASB’s program to adopt International Financial Reporting Standards by 2005. 
 
Consequential amendments to AASB 121 were made by the AASB on 22 December 2004 following a review of its Australian equivalents to IFRSs. AASB 2004-2 ‘Amendments to Australian Accounting Standards’ sets out the applicable amendments which have been incorporated into the published version of AASB 121 in this text. 
 
AASB 121 Compared to IAS 21 
 
Additions 
 
Paragraph Description 
 
Aus 2.1 Which entities AASB 121 applies to, ie. reporting entities and general purpose financial reports. 
 
Aus 2.2 The application date of AASB 121, ie. annual reporting periods beginning 1 January 2005. 
 
Aus 2.3 Prohibits early application of AASB 121. 
 
Aus 2.4 Makes the requirements of AASB 121 subject to AASB 1031 ‘Materiality’. 
 
Aus 2.5 Explains which Australian Standards have been superseded by AASB 121. 
 
Aus 2.6 Clarifies that the superseded Australian Standards remain in force until AASB 121 applies. 
 
Aus 2.7 Notice of the new Standard published on 22 July 2004. 
 
Aus 38.1 Clarifies that an entity preparing Corporations Act financial reports must draw up those reports using one presentation currency. 
 
Aus 53.1 Disclosure required of the reason and justification for not using the Australian currency as the presentation currency of an Australian financial report if applicable. 
 
Deletions 
 
Paragraph Description 
 
58 Effective date of IAS 21. 
 
59 Transitional provision in respect of accounting for the acquisition of a foreign operation. 
 
60 First time application for all other changes to be accounted for in accordance with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’. 
 
61 Reference to superseded IAS 21. 
 
62 Reference to superseded SIC Interpretations – SICs 11, 19 and 30. 
 
 
 
Differences Between AASB 121 and AASB 1012 
Comparison from the Australian Accounting Standards Board 
 
This section identifies the differences resulting from the replacement of AASB 1012 Foreign Currency Translation by AASB 121 The Effects of Changes in Foreign Exchange Rates. Because of the fundamental differences between AASB 1012 and AASB 121, the analysis of differences only examines the incompatibilities between the two Standards. 
 
The analysis of differences should not be taken as providing an exhaustive list of differences. 
 
Introduction 
 
The existing approach to accounting for foreign currency transactions and operations prescribed by AASB 1012 assumes that the reporting currency is a single currency. AASB 1034 Financial Report Presentation and Disclosures requires entities covered by that Standard to use the Australian currency as the reporting currency.  
 
AASB 121 follows a different approach. The notion of reporting currency (which is used in AASB 1012) is replaced by two concepts: functional currency (the currency in which the entity measures the items in its financial report) and presentation currency (the currency in which the entity presents its financial report). Each entity (whether a stand-alone entity; a parent of a group; or an operation within a group, such as a subsidiary) is required to determine its functional currency and measure its results and financial position in that currency. The entity determines its functional currency, as the currency “of the primary economic environment in which the entity operates” (see AASB 121.8).  
 
Under AASB 121 entities can select one or more presentation currencies. Entities in a group with functional currencies different from the group’s presentation currency need to translate their results to the group’s presentation currency for the purpose of preparing consolidated financial statements. Overseas operations with the same functional currency as the parent, assuming the group financial statements are presented in the parent’s functional currency, require no translation because their results are prepared in the parent’s functional currency. 
 
Differences 
 
A. Incompatibilities between AASB 121 and AASB 1012, and other related pronouncements 
 
A.1 Hedging 
 
AASB 1012 prescribes the treatment for hedging transactions. AASB 121 does not deal with hedge accounting. Foreign currency hedge accounting is dealt with in AASB 139 Financial Instruments: Recognition and Measurement. 
 
A.2 Classification of Foreign Operations 
 
AASB 1012 looks to the relationship between the foreign operation and the reporting entity to determine the method of translating the foreign operation’s financial information. An integrated foreign operation’s results are translated using the temporal method and a self-sustaining foreign operation’s results are translated using the current rate method. AASB 1012 requires that exchange differences be recognised as income or expense under the temporal method, or directly in equity under the current rate method. 
 
AASB 121 does not distinguish between foreign operations that are integral and those that are self-sustaining. Instead, each entity must identify its functional currency in accordance with the Standard. The general translation provisions (AASB 121.38-43) prescribe the translation process from functional to presentation currency, with additional requirements (AASB 121.44-47) applicable for consolidation.  
 
A.3 Self-Sustaining Foreign Operations 
 
In general, those entities that were classified as self-sustaining under AASB 1012 will have a different functional currency from their Australian parent and will have to prepare their financial statements in that currency. On consolidation, the financial statements will be translated from the entity’s functional currency to the group’s presentation currency.  
 
AASB 1012 specifies the current rate method for translating foreign operations that are classified as self-sustaining. This method bears closest resemblance to the requirements for translation from an entity’s functional currency to its presentation currency under AASB 121.  
 
The translation provisions in AASB 121 differ from the current rate method in AASB 1012 with respect to the translation of equity. In AASB 1012, equity items must be translated at the date of investment or acquisition. Post acquisition changes in equity are required to be translated on the date of the movement. In contrast, AASB 121 does not specify the rate at which equity items should be translated. 
 
Both Standards require that any exchange differences be recognised as a separate component of equity. AASB 1012 specifies that this account be called the “Foreign Currency Translation Reserve”. AASB 121 does not specify the name of the separate equity account. 
 
A.4 Integrated Foreign Operations 
 
AASB 1012 specifies the temporal method for translating foreign operations that are classified as integrated. AASB 121 does not incorporate the notion of integrated foreign operations, and does not allow the temporal translation method to be used.  
 
A.5 Change of Reporting Currency 
 
Under AASB 1012.7.8, a change in reporting currency of a foreign operation is recognised and disclosed as a change in accounting policy. AASB 1001 Accounting Policies has extensive disclosure and recognition requirements relating to changes in accounting policy. AASB 121.54, requires the disclosure of an explanation of a change in functional currency. AASB 121.53 requires disclosure of the reason for choosing a presentation currency that is different from the entity’s functional currency and AASB 121.Aus53.1 requires disclosure of the reason and the justification for using a presentation currency that is not the Australian currency. 
 
A.6 Disposal of a Foreign Operation 
 
On disposal of a self-sustaining foreign operation, AASB 1012.7.10 requires that the residual amount in the foreign currency translation reserve be offset against retained earnings/accumulated losses without being recognised in the income statement. AASB 121.48 prescribes that the balance in the translation reserve be recognised in the income statement on disposal of a foreign operation.