5.6 Foreign Currency Matters

The primary sources of guidance on accounting for foreign currency transactions and translations are IAS 21 and IAS 29 under IFRS Accounting Standards and ASC 830 under U.S. GAAP.

Topic	IFRS Accounting Standards (IAS 21, IAS 29)	U.S. GAAP (ASC 830)
Determination of the functional currency	There is a hierarchy of factors for an entity to consider in determining the functional currency. Paragraph 9 of IAS 21 states, in part, that the two primary factors to consider are (1) the currency “that mainly influences [the entity’s] prices for 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.	There is no hierarchy of factors for an entity to consider in determining the functional currency.
Translations when there is a change in functional currency	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 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.	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.
Transaction gains and losses related to debt securities accounted for at FVTOCI	The unrealized change in the fair value of a debt instrument accounted for at FVTOCI that is attributable to changes in foreign exchange rates (calculated on the basis of the instrument’s amortized cost) must be recognized in profit or loss.	The unrealized change in the fair value of an investment in a debt security classified as an AFS that is attributable to changes in foreign currency rates must be recognized in OCI.
Recognition of deferred taxes for temporary differences related to nonmonetary assets and liabilities from changes in the exchange rate	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.	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.
Parent and investee with different fiscal-year-end dates — differences in exchange rates	Under IFRS 10 and IAS 28, a reporting entity is required to prepare financial statements of the subsidiary or equity method investee by using the same fiscal-year-end date as that 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.	An entity may elect a policy of either disclosing, or both disclosing and recognizing, material intervening events.
Identifying what qualifies as a partial disposal that may result in a reclassification or reattribution of the cumulative translation adjustment (CTA)	IFRS Accounting Standards 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.	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 CTA. Accordingly, the sale or liquidation of the net assets within a foreign entity would not result in a release or reattribution of CTA (unless it results in a complete or substantially complete liquidation of the foreign entity).
Impact of CTA on the measurement of impairment losses of foreign investees held for disposal	An entity is not permitted to include related CTA in the carrying amount of an investment in a foreign operation that is being evaluated for impairment.	In certain circumstances, an entity is required to include related CTA in the carrying amount of an investment in a foreign entity that is being evaluated for impairment.
Adjusting financial statements of an entity that operates in a hyperinflationary economy	An entity adjusts the financial statements by using a general price level index before translating.	An entity adjusts the financial statements as if the reporting currency of the parent were the entity’s functional currency.