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| Old GAAP | FRS 102 | Further Comment On Differences |
| Foreign Currencies | Foreign Currencies (S.30) | |
| Concept of local currency which is defined as the currency of the primary economic environment in which the entity operates.
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Concept of functional currency defined which is similar to the concept of ‘local currency’ under old GAAP. However, there is further guidance provided on the how functional currency is determined which may result in a different decision as to what an entities functional currency under FRS 102 particularly where it is a holding company.
The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. Therefore, the following are the most important factors an entity considers in determining its functional currency: a. the currency i. that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and ii. of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services; and b. the currency that mainly influences labour, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled) (Section 30.3). The following factors may also provide evidence of an entity’s functional currency: a. the currency in which funds from financing activities (issuing debt and equity instruments) are generated; and b. the currency in which receipts from operating activities are usually retained (Section 30.4). The following additional factors are considered in determining the functional currency of a foreign operation, and whether its functional currency is the same as that of the reporting entity (the reporting entity, in this context, being the entity that has the foreign operation as its subsidiary, branch, associate or joint venture): a. whether the activities of the foreign operation are carried out as an extension of the reporting entity, rather than being carried out with a significant degree of autonomy. An example of the former is when the foreign operation only sells goods imported from the reporting entity and remits the proceeds to it. An example of the latter is when the operation accumulates cash and other monetary items, incurs expenses, generates income and arranges borrowings, all substantially in its local currency; b. whether transactions with the reporting entity are a high or a low proportion of the foreign operation’s activities; c. whether cash flows from the activities of the foreign operation directly affect the cash flows of the reporting entity and are readily available for remittance to it; d. whether cash flows from the activities of the foreign operation are sufficient to service existing and normally expected debt obligations without funds being made available by the reporting entity (Section 30.5). |
Where an entity carries out business other than in the currency in which it is established, given that more detailed guidance is provided in Section 30 as to the determination of an entities functional currency there may be instances where the functional currency will have to be adjusted. This is particular relevant to intermediate holding companies who are not autonomous from the parent company. Under old GAAP it may have been possible that some of these intermediate holding companies had a functional currency of euro under old GAAP however based on the facts and circumstances the functional currency may now change. This change would have to be applied retrospectively which would mean that at the date of transition the historical cost balances for non-monetary items would have to be considered. That said, given that these are merely holding companies there may not be many non-monetary assets on the balance sheet. In this case the opening balance sheet would have to be restated and difference due to exchange posted to profit and loss reserves.
On transition a detailed examination is required to assess if the functional currency will change. Refer to Section 300 of the detailed guide for guidance in applying a functional currency retrospectively. See attached an example of the disclosures requirements when this applies (Example 135A – Example Disclosure For A Change In Functional Currency Retrospectively Due To A Prior Period Error). |
| No concept of presentation currency in the standard, instead referred to as the local currency. | Presentational currency defined and entities can choose to select its presentational currency. There are detailed rules detailing how a functional currency can be restated to its presentational currency.
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This provides entities with a choice as to what currency to present the financial statements in. It is unlikely to create a transition difference unless the entity decides to adopt this policy. Where this is chosen the standard should be reviewed. (Example 135B – Guidance On The Application Of Presentational Currency). |
| Use of forward contract rates allowed to translate monetary assets at each period end however it was not required. No requirement to fair value forward foreign contracts instead these were disclosed.
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Use of forward contract rates not allowed to translate monetary assets, instead the year end spot rate must be used and the fair value of the forward contracts recognised in the balance sheet under Section 12.
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Where forward contract rates were used under old GAAP by an entity to retranslate monetary assets, a transition adjustment will be required to show these balances at the spot rate and recognise the fair value of the forward contract. There may also be a deferred tax impact on this adjustment as previously the adjustment to state year end balances at forward rates may have been taxable/tax deductible.
A review will need to be performed as to whether the FX adjustment is taxable/tax deductable. See attached an example of the transition adjustments required where a forward rate was used at the date of transition (Example 136 http://uk.frs102.com/download/2602/ – Contracted Rate Adjustment). See attached an example of the work and journals required to fair value the forward foreign currency contract on transition to FRS 102 assuming no hedge accounting is adopted (Example 137 – Forward Contracts). See attached example where hedge accounting is adopted on transition (Example 138 – Cash Flow Hedge Example). |
| Under old GAAP no specific guidance was provided in relation to the treatment of long term loans provided in a foreign currency. As a result many entities may have treated long term loans akin to an investment and therefore treated these as non-monetary assets. | No longer possible for long term loans to be treated akin to an investment and treated as non-monetary asset, instead these are monetary assets requiring translation at the year-end spot rate.
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Where an entity has previously treated such foreign long term loans as non-monetary assets (and hence maintained it at historic cost) under old GAAP, a transition adjustment will be required to restate this balance at the date of transition. See attached an example of the journals required for such an adjustment (Example 139 – Long Term Loan Adjustment). |
| On consolidation of a foreign entity, there was no explicit guidance on how goodwill in a foreign currency should be treated, therefore some entities may not have retranslated this to the year-end spot rate.
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On consolidation of a foreign entity, goodwill is treated as an asset of the foreign operation and retranslated to the year-end rate.
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Where under old GAAP an entity has not previously retranslated the foreign currency goodwill at the period end spot rate a transition adjustment may be required. There is no deferred tax impact as no deferred tax should be recognised on goodwill recognised in business combinations under Section 29. See attached an example of the journals required where a transition adjustment is required (Example 140 – Goodwill On Foreign Operations To Be Retranslated At The Closing Rate). |
| SSAP 20 requires that either the close or average rate be used when translating the profit and loss account of a foreign operation. | The section requires the transaction rate/average rate to be used when translating the profit and loss account of a foreign operation. | Where the closing rate was utilised under old GAAP by an entity, then the comparative year will need to be adjusted. |
| For foreign equity investments which are financed by foreign currency borrowings, there is a special provision allowing an entity to retranslate the equity investment at the closing rate and the exchange difference can be posted to the STRGL which is set against the exchange difference on retranslation of the foreign borrowing which is also posted to the STRGL. | No such special provision is contained in Section 30 unless it meets the requirements of a fair value hedge. This will result in volatility in the profit and loss as the loan will be retranslated at the year-end rate and the investment will not be retranslated as it is a non-monetary asset.
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Where previously an entity has applied the net investment in foreign currency method under old GAAP and hedge accounting is not applied an adjustment will be required on the transition date and since the date of transition. See example attached illustrating the journals required where such an adjustment is required (Example 141 – Foreign Borrowings Taken Out To Fund Foreign Investment). |
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