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Overview

IPSAS 4 is based on IAS 21 The Effects of Changes in Foreign Exchange Rates (Revised 2003 as amended in 2005).


IPSAS 4 The Effects of Changes in Foreign Exchange Rates prescribes the accounting treatment for foreign currency transactions and foreign operations in the financial statements. An entity is required to determine a functional currency (for each of its operations if necessary) based on the primary economic environment in which it operates and generally records foreign currency transactions using the spot conversion rate to that functional currency on the date of the transaction. IPSAS 4 also covers the translation of financial statements into a presentation currency from a different functional currency.


IPSAS 4 was reissued in April 2008 and applies to annual periods beginning on or after 1 January 2010.


History of IPSAS 4











Effective date

Annual periods beginning on or after 1 January 2010.


Full text

Refer to IFAC website here


Summary of IPSAS 4 The Effects of Changes in Foreign Exchange Rates

Objective

The objective of IPSAS 4 is to prescribe how foreign currency transactions and foreign operations should be included in the financial statements of an entity and how to translate financial statements into a presentation currency [IPSAS 4.1] The principal issues concern which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements [IPSAS 4.2].


Scope

Entities that prepare and present financial statements under the accrual basis of accounting (i) in accounting for transactions and balances in foreign currencies, (ii) in translating the financial performance or the financial position or consolidation purposes and (iii) in translating the financial performance and financial position into the presentation currency [IPSAS 4.3].

IPSAS 4 applies to all public sector entities other than GBEs [IPSAS 4.6].


Following items are explicitly excluded from IPSAS 4 [IPSAS 4.3-4.5]:

• Transactions and balances in the scope of IPSAS 29 – Financial Instruments: Recognition and Measurement (attention: translation of derivatives from functional to reporting currency are in the scope)

• Hedge accounting for foreign currency items in the scope of IPSAS 29


Key definitions [IPSAS 4.10]


Functional currency: the currency of the primary economic environment in which the entity operates.

Presentation currency: the currency in which the entity’s financial statements are presented.

Foreign currency: currency other than the entity’s functional currency

Exchange difference: the difference resulting from translating a given number of units of one currency into another currency at different exchange rates.

Foreign operation: a controlled entity, associate, joint venture or a branch whose activities are based or conducted in a country or currency other than that of the reporting entity.



Approach for the translation of foreign currency amounts into the functional currency [IPSAS 4.20]

In preparing its financial statements a stand-alone entity, an entity with foreign operations, or a foreign operation should apply following steps:

1. determination of its functional currency

2. translation of all foreign currency items into the functional currency

3. report the effects of such translation in accordance with paragraphs 23-42 [reporting foreign currency transactions in the functional currency] and 59 [reporting the tax effects of exchange differences].


Foreign currency transactions

A foreign currency transaction should be recognized initially at the rate of exchange at the date of the transaction. An approximate rate may be used (e.g. average rate) if this is a reasonable approximation of the actual rate [IPSAS 4.24-22].


At each subsequent balance sheet date [IPSAS 4.27]:

• foreign currency monetary amounts should be translated using the closing rate

• non-monetary items carried at historical cost in a foreign currency should be reported using the exchange rate at the date of the transaction

• non-monetary items carried at fair value in a foreign currency should be reported at the rate that existed when the fair values were determined


Exchange differences arising when monetary items are settled or when monetary items are translated at rates different from those at which they were translated when initially recognized or in previous financial statements are reported in surplus or deficit in the period in which they arise, with one exception [IPSAS 4.32]. This exception concerns the exchange differences arising on monetary items that form part of the reporting entity's net investment in a foreign operation, these are reported in the consolidated financial statements that include the foreign operation, in a separate component of net assets/equity and will be recognized in surplus or deficit only on disposal of the net investment [IPSAS 4.37].

Any foreign exchange difference arising on the translation of monetary items being part of a net investment in a foreign operation is recognized in a separate component of net assets/equity for consolidation purposes [IPSAS 4.37].This differences will occur when translating these items to the functional currency of the foreign operation, the reporting entity or in translating them to the reporting currency. For consolidation purposes, the accounting treatment for these differences in the consolidated financial statements should not depend on the currency of the monetary item [IPSAS 4.38] or on which entity within the economic entity conducts a transaction with the foreign operation [IPSAS 4.19].


With regard to non-monetary items should any foreign exchange component of a gain or loss directly recognized in net assets/equity, also be recognized in net assets/equity [IPSAS 4.35]. This is the for example the case when an item of property, plant and equipment is revalued according to IPSAS 17.


Change in functional currency

An entity can change the functional currency if the underlying variables determining the functional currency have been changed [IPSAS 4.41].

An entity will account for the change in the functional currency prospectively [IPSAS 4.40], using the exchange rate of the day of the change for translating to the new functional currency [IPSAS 4.42].


Translation from the functional currency to the presentation currency

An entity whose functional currency is not the currency of a hyperinflationary economy should translate its financial performance and financial position into a different presentation currency using the following procedures [IPSAS 4.44]:

• assets and liabilities for each statement of financial position presented (including comparatives) should be translated at the closing rate. This includes (i) goodwill related to the acquisition of a foreign operation and (ii) fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation, these are treated as part of the assets and liabilities of the foreign operation translated at closing rate [IPSAS 4.56];

• revenue and expenses for each statement of financial performance (including comparatives) should be translated at exchange rates at the dates of the transactions; and

• all resulting exchange differences should be recognized in a separate component of net assets/equity.


When an entity whose functional currency is the currency of a hyperinflationary economy translates its financial performance and position in a presentation currency specific rules, as determined in IPSAS 4.48-49, apply. The financial statements of the foreign entity should be restated as required by IPSAS 10 Financial Reporting in Hyperinflationary Economies, before translation into the reporting currency [IPSAS 4.49]. After restatement all amounts should be translated to the presentation currency using closing rates, except when these amounts are translated to a non-hyperinflationary currency, then the comparables are derived directly from the prior year financials in the presentation currency [IPSAS 4.48].


Disposal of a foreign operation

The cumulative amount of the exchange differences recognized in the separate component of net assets/equity relating to that foreign operation has to be recognized in surplus or deficit when the gain or loss on disposal is recognised [IPSAS 4.57].


Tax effects of exchange differences

IPSAS 4 refers to the relevant international and national accounting standards dealing with income taxes for guidance on the treatment of tax effects [IPSAS 4.59].


Disclosure requirements

• The amount of exchange differences recognized in surplus or deficit (excluding differences arising on financial instruments measured at fair value through surplus or deficit in accordance with IPSAS 29) [IPSAS 4.61(a)]

• Net exchange differences recognised separate component of net assets/equity, and a reconciliation of the amount of such exchange differences at the beginning and end of the period [IPSAS 4.61(b)]

• In case the presentation currency is different from the functional currency, this fact shall be disclosed together with the functional currency and the reason for the use of a different presentation currency [IPSAS 4.62]

• In case of a change of the functional currency (of either the reporting entity or a significant foreign operation) this fact shall be disclosed and the reason for the change [IPSAS 4.63]


If an entity presents financial statements in a currency different from its functional currency, it may describe those financial statements as complying with IPSAS only if they comply with all the requirements of each applicable IPSAS, including the translation requirements of IPSAS 4 [IPSAS 4.64].


From time to time an entity may display its financial statements or other financial information (e.g. special purpose financial information) in a currency that is different from either its functional currency or its presentation currency by translating all amounts at closing rates, resulting in financial information which is not compliant with all IPSASs (in particular IPSAS 4).

Following disclosures are required [IPSAS 4.66]:

• Clearly identify the information as supplementary information to distinguish it from the information that complies with IPSAS

• Disclose the currency in which the supplementary information is displayed

• Disclose the entity's functional currency and the method of translation used to determine the supplementary information



May 2000

IPSAS 4: The effects of Changes in Foreign Exchange Rates was issued

December 2006

Revision of IPSAS 4

April 2008

Revision of IPSAS 4

1 January 2010

Effective date of IPSAS 4

IPSAS 4: The Effects of Changes in Foreign Exchange Rates