9.4 Exchange Rate Changes
ASC 830-20
Subsequent Rate Changes
50-2 Disclosure of a rate change that occurs after the date of the reporting entity’s financial statements and its effects on unsettled balances pertaining to foreign currency transactions, if significant, may be necessary. If disclosed, the disclosure shall include consideration of changes in unsettled transactions from the date of the financial statements to the date the rate changed. In some cases it may not be practicable to determine these changes; if so, that fact shall be stated.
Effects of Rate Changes on Results of Operations
50-3 Management is encouraged to supplement the disclosures required by this Subtopic with an analysis and discussion of the effects of rate changes on the reported results of operations. This type of disclosure might include the mathematical effects of translating revenue and expenses at rates that are different from those used in a preceding period as well as the economic effects of rate changes, such as the effects on selling prices, sales volume, and cost structures. The purpose is to assist financial report users in understanding the broader economic implications of rate changes and to compare recent results with those of prior periods.
ASC 830-30
Subsequent Change in Exchange Rate
45-16 A reporting entity’s financial statements shall not be adjusted for a rate change that occurs after the date of the reporting entity’s financial statements or after the date of the foreign currency statements of a foreign entity if they are consolidated, combined, or accounted for by the equity method in the financial statements of the reporting entity.
Subsequent Rate Changes
50-2 Disclosure of a rate change that occurs after the date of the reporting entity’s financial statements or after the date of the foreign currency statements of a foreign entity if they are consolidated, combined, or accounted for by the equity method in the financial statements of the reporting entity and its effects on unsettled balances pertaining to foreign currency transactions, if significant, may be necessary.
As indicated in the guidance above, an entity should not adjust its financial statements for a rate change that occurs after the date of its financial statements (except in situations in which there is significant devaluation for subsidiaries reporting on a lag, as discussed in Section 3.3.1). However, disclosures related to such a rate change may be warranted depending on the change’s significance as well as its impact on foreign currency transactions that remain unsettled as of the balance sheet date. Such disclosures may include discussion of the effects of changes in exchange rates on the following:
- Results of operations.
- Selling prices.
- Sales volume.
- Cost structures.
The purpose of such disclosures is to help financial statement users understand the overall effects of changes in exchange rates on an entity’s cash flows and net income. If there are no unsettled foreign currency transactions as of the balance sheet date, an entity is not required to provide such disclosures since any change in exchange rates would only affect subsequent translation adjustments, which do not affect net income or cash flows (i.e., translation adjustments are recorded in equity).
SEC Considerations
If the impact of a change in exchange rates is expected to significantly affect
an SEC registrant’s future cash flows, the
registrant should disclose this fact in its
MD&A.
As with disclosures about the effects of post-balance-sheet rate changes, ASC
830-20-50-3 notes that an entity is “encouraged to
supplement the [required] disclosures” with
additional analysis of the effects that changes in
exchange rates have had on the entity’s operations
within the current reporting period. Such an
analysis may include the effects of changes in
exchange rates on the items listed above along
with the effect of changes on items such as the
translation of revenue and expenses at rates
different from those used in prior periods.
ASC 830-20-50-3 further notes that such supplemental disclosures may “assist
financial report users in understanding the
broader economic implications of rate changes and
to compare recent results with those of prior
periods.”
SEC Considerations
If a foreign government officially changes a fixed exchange rate and this change
causes the local currency to decline with respect to other currencies, the
SEC is likely to expect registrants to include appropriate disclosures about
the event in MD&A. See Section 9.5
for information about disclosures that may be appropriate, depending on an
entity’s particular facts and circumstances.