Chapter 10 — Key Differences Between U.S. GAAP and IFRS Accounting Standards — Foreign Currency

Determination of the functional currency

There is no hierarchy of factors for entities to consider in determining the functional currency.

There is a hierarchy of factors for entities to consider in determining the functional currency.

Paragraph 9 of IAS 21 states that the two primary factors to consider are (1) the currency that mainly influences the entity’s pricing of goods and services and (2) the currency that mainly influences the costs of providing goods or services. Paragraphs 10 and 11 of IAS 21 specify the secondary factors.

Translations when there is a change in functional currency

The effect of a change in functional currency that is unrelated to a highly inflationary economy depends on whether the change is from the reporting currency to a foreign currency or vice versa. A change from the reporting currency to a foreign currency is accounted for prospectively from the date of the change. By contrast, a change from a foreign currency to the reporting currency is accounted for on the basis of the translated amounts at the end of the previous period.

The effect of a change in functional currency that is unrelated to a hyperinflationary economy is accounted for prospectively from the date of the change.

A change in functional currency should be recognized as of the date on which it is determined that there has been a change in the underlying events and circumstances relevant to the reporting entity that justifies a change in the functional currency. For convenience, and as a practical matter, there is a practice of using a date at the beginning of the most recent period (annual or interim, as the case might be).

Transaction gains and losses related to AFS debt securities

Transaction gains or losses related to AFS debt securities are reported in OCI.

Transaction gains or losses related to AFS debt securities are reported in earnings.

Recognition of deferred taxes for temporary differences related to nonmonetary assets and liabilities associated with changes in the exchange rate

No deferred tax is recognized for temporary differences caused by changes in the exchange rate for nonmonetary assets and liabilities when the local currency amount is remeasured to the functional currency.

For additional discussion, see Chapter 8 of this Roadmap as well as Chapter 9 of Deloitte’s Roadmap Income Taxes.

Deferred tax is recognized for temporary differences caused by changes in the exchange rate for nonmonetary assets and liabilities when the local currency amount is remeasured to the functional currency.

Translation process for multitiered organizations

Organizations typically apply the step-by-step method.

Entities have a policy choice between the step-by-step method and the direct method.1

Parent and investee with different fiscal-year-end dates — differences in exchange rates

An entity may elect a policy of either disclosing, or both disclosing and recognizing, material intervening events.

For more information, see Section 3.3.1 of this Roadmap as well as Section 11.1.3 of Deloitte’s Roadmap Consolidation — Identifying a Controlling Financial Interest.

Under IFRS 10 and IAS 28, a reporting entity is required to prepare financial statements of the subsidiary or equity method investee for the date of the reporting entity’s financial statements unless it is impractical to do so. If it is impractical, the difference can be no greater than three months and adjustments should be made for significant post-balance-sheet changes in exchange rates up to the date of the consolidated financial statements.

Identifying what qualifies as a partial disposal that may result in a reclassification or reattribution of the CTA

Only changes in a parent’s ownership interest (equity investments in a foreign entity) may be treated as partial disposals that result in a reclassification or reattribution of the CTA.

Accordingly, the sale or liquidation of the net assets within a foreign entity would not result in a release or reattribution of the CTA (unless it results in a complete or substantially complete liquidation of the foreign entity).

Do not distinguish between partial disposals of investments in and those within a foreign operation.

Accordingly, an entity can elect either the proportionate or absolute reduction approach as an accounting policy and, if applicable, can choose how the absolute reduction approach is applied.

CTA associated with retained interest when significant influence is lost

Under U.S. GAAP, upon a loss of significant influence, the proportionate amount of the CTA is reclassified from equity to earnings; the remaining CTA balance is reclassified in the carrying value of the retained interest. However, if the equity security is subsequently measured at fair value, the impact on the income statement of losing significant influence may be the same under U.S. GAAP as it is under IFRS Accounting Standards. U.S. GAAP would differ from IFRS Accounting Standards in situations in which the retained interest is measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in an orderly transaction (the measurement alternative).

Upon a loss of significant influence, the entire CTA associated with the investment is reclassified from equity to earnings regardless of the measurement applied to the retained interest.

Impact of CTA on the measurement of impairment losses of foreign investees held for disposal

In certain circumstances, entities are required to include related CTA in the carrying amount of an investment in a foreign entity that is being evaluated for impairment.

See Section 5.5 for further discussion.

Entities are not permitted to include related CTA in the carrying amount of an investment in a foreign operation that is being evaluated for impairment.

See paragraphs BC37 and BC38 of IFRS 5 for further details about this issue.

Identifying whether an economy is highly inflationary (hyperinflationary)

There is a prescribed criterion for determining whether an economy is highly inflationary (i.e., the absolute rate of inflation) that, when met, results in highly inflationary accounting “in all instances.”

There are no prescribed criteria that result in automatic hyperinflationary treatment; rather, paragraph 3 of IAS 29 provides several judgment-based indicators related to determining whether an economy is hyperinflationary.

Commencing accounting for highly inflationary (hyperinflationary) economies

Commence the requisite accounting on the first day of the next reporting period in which it becomes subject to a highly inflationary economy (see Section 7.3).

IAS 29 requires that an entity commence the requisite accounting from the beginning of the reporting period in which it becomes subject to a hyperinflationary economy.

Translations of foreign entities whose functional currency is the currency of a highly inflationary (hyperinflationary) economy

Previously issued foreign entity financial statements should not be restated. That is, the effects of a highly inflationary economy are accounted for prospectively.

Further, the financial statements of the foreign entity are remeasured for consolidation purposes as if the immediate parent’s reporting currency were its functional currency.

Restatement of the foreign operation’s financial statements is required before translation (purchasing power adjustments are made retrospectively). That is, the effects of a hyperinflationary economy are accounted for retrospectively.

Further, the financial statements of the foreign operation are translated into the presentation currency by using the closing rate as of the balance sheet date.

Economies that cease to be highly inflationary (hyperinflationary)

The functional currency accounting bases for nonmonetary assets and liabilities are determined by translating the reporting currency amounts as of the date of change into the local currency at current exchange rates.

The functional currency accounting bases for nonmonetary assets and liabilities are the unit currency amount at the end of the previous reporting period.