4 Lack of Exchangeability (Amendments to IAS 21)

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23 January 2024
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30 January 2024 Agenda Paper 4

Executive Summary

Project Type Endorsement and adoption
Project Scope Narrow-scope

Purpose of the paper

The purpose of this paper is to:

  • Obtain Board feedback on the Draft Endorsement Criteria Assessment (DECA) and related Invitation to Comment (ITC) for the narrow-scope amendments Lack of Exchangeability (Amendments to IAS 21) (the Amendments).
  • Request the Board's approval to publish the DECA and ITC on the UKEB website for stakeholder consultation with a 90-day comment period.

Summary of the Issue

The UKEB undertook stakeholder engagement and submitted a comment letter to the IASB in August 2021 on the IASB's 2021 Exposure Draft (ED) setting out proposals to amend IAS 21 The Effects of Changes in Foreign Exchange Rates. The UKEB supported the original proposals in the ED and only suggested some minor clarifications/enhancements to improve the wording of the Amendments.

During November 2023, the IASB issued the Amendments clarifying the requirements for assessing exchangeability, the exchange rate to use when there is a lack of exchangeability and the related disclosures. The Amendments introduce some changes to recognition, measurement and disclosure requirements in IFRS Accounting Standards. The final Amendments are consistent with the ED proposals but have been enhanced in ways that address the concerns raised by the UKEB.

The purpose of the DECA is to assess whether the Amendments meet the statutory criteria for adoption set out in SI 2019/685[^1]. The DECA includes:

  • a description of the UK statutory requirements for adoption of new and amended international accounting standards;
  • a description of the Amendments; and
  • an assessment of whether the Amendments meet the statutory criteria for adoption.

The Amendments are effective for annual reporting periods beginning on or after 1 January 2025. Earlier application is permitted. Some transition relief is provided.

Decisions for the Board

  1. Does the Board have any comments on the DECA (Appendix A) or the Invitation to Comment (ITC) (Appendix B)?
  2. Does the Board agree that, subject to any amendments or additions required at this meeting, the DECA and ITC can be published for public consultation with a 90-day comment period?

Recommendation

Subject to any amendments or additions required by the Board, the Secretariat recommends that the Board approves the DECA and ITC for public consultation with a 90-day comment period.

Appendices

  • Appendix A [Draft] Endorsement Criteria Assessment of Lack of Exchangeability (Amendments to IAS 21)
  • Appendix B DECA—Invitation to Comment
  • Appendix C Your Details

Background

1In August 2023, the IASB issued the narrow scope amendments Lack of Exchangeability (Amendments to IAS 21) (the Amendments).

2The Amendments required companies to use a consistent approach in assessing if there is lack of exchangeability between currencies, and when there is, the exchange rate to use and the related disclosures.

3The Amendments were intended to address diversity in practice and improve the usefulness of the information provided to the investors.

4The Amendments are effective for annual periods beginning on or after 1 January 2025. Earlier application is permitted. Some transition relief is provided.

Stakeholder outreach

5The UKEB gathered feedback on the IASB's initial proposals from a diverse range of UK stakeholders. That feedback informed the UKEB comment letter to the IASB, submitted on 31 August 2021.

6The IASB issued its final Amendments on 15 August 2023. Since their publication, the UKEB has contacted a limited number of stakeholders based on their previous engagement and interest in the project in order to obtain feedback for this project. Specifically these stakeholders were:

  1. A preparer (large UK-listed multinational consumer products);
  2. Accounting firms and institutes Advisory Group (AFIAG); and
  3. The UK accounting regulator, the FRC.

7In response to the feedback on the Project Initiation Plan (PIP) at the November 2023 Board meeting, the Secretariat approached a further 11 UK companies (identified through desk-based research) with potential material operations in the countries subject to a lack of exchangeability. Those companies were asked:

  1. If they had material operations in countries exposed to a lack of exchangeability?
  2. Were the amendments largely consistent with current practice?
  3. Did they see the possibility of being exposed in the future to a lack of exchangeability in other jurisdictions?
  4. Any expected material costs to be incurred due to these amendments?

8Three large UK companies responded with feedback (noted below) that is aligned with the UKEB's assessment. Respondent 1, FTSE 100, Consumer goods company noted (in part):

"We are supportive of the Amendments to IAS 21 which finally recognises that there can often be a lack of exchangeability which is not due to a suspension of rates of exchange, but rather due to insufficient amounts of hard currency being available to the reporting entity on an on-going basis. The territories for which we need to use alternative rates due to a lack of exchangeability are not super-material".

9Respondent 2, FTSE 100, Telecommunications company noted (in part):

"We have evaluated the Amendments to IAS 21 and determined that this will not be a material issue for us. In Latin America we typically trade in USD which should be readily exchangeable (and those entities are not material for our Group). We have discontinued our operations from the other [affected country]".

10Respondent 3, FTSE 100, Metals and mining company noted (in part):

"Our business in the [affected country] is impacted by these amendments, however we do not foresee a material impact on the Group as a result of the amendments and don't expect material costs to adopt".

"We believe that the amendments are largely consistent with the current practice under IAS 21. We support that the amendments are adopted for use in the UK to drive consistency with the international framework”.

11Feedback gathered through discussions with the Investor Advisory Group (IAG), the Preparer Advisory Group (PAG), AFIAG were consistent with these views. Advisory group members noted that the Amendments are largely consistent with the current practice and only affect a few UK entities. This outreach is reflected in the DECA.

12Announcement of the DECA consultation will take place through the usual channels. Stakeholders will have the opportunity to provide responses to the DECA. However, as already noted in the PIP, no additional stakeholder outreach is planned.

Next steps and timeline

13In accordance with the PIP, the Board's aim would be to ensure an adoption decision is reached before the expected effective date of the Amendments of 1 January 2025.

14Subject to amendments or additions to the DECA required by the Board, the proposed timeline for publication, public consultation and subsequent finalisation of the Endorsement Criteria Assessment (ECA) is set out in the table and diagram below. Note that all dates are indicative and subject to modification. The Board will be alerted to any significant changes.

Date Milestone Status
30 January 2024 Presentation of Draft Endorsement Criteria Assessment (DECA) for approval This meeting
DECA consultation period (90 days): 5 February – 6* May 2024
24 May 2024 Verbal update to the Board on feedback received on the DECA (if significant) To be completed
28 June 2024 Consideration of an adoption package for approval and the draft Due Process Compliance Statement for the project. Board members provide a tentative vote. To be completed
Mid-July 2024 Estimated period for formal voting, publication of voting outcome and Adoption Package on the UKEB website To be completed
18 July 2024 Final Due Process Compliance Statement for noting. To be completed

*TBC

Timeline diagram showing key project milestones and dates from October 2023 to July 2024, including endorsement criteria assessment, consultation, and adoption package approval.

The UKEB does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it.

© 2024 All Rights Reserved

Contents

Introduction

Purpose

1The purpose of this Draft Endorsement Criteria Assessment (DECA) is to determine whether the Lack of Exchangeability (Amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates), issued by the International Accounting Standards Board (IASB) in August 2023 meet the UK's statutory requirements for adoption as set out in Regulation 7 of Statutory Instrument 2019/685[^2] (SI 2019/685).

2The Amendments have an effective date of 1 January 2025 with earlier application permitted.

3The UKEB actively influenced the development of the Amendments. This included submitting a Final Comment Letter on 31 August 2021[^3] in response to the IASB's Exposure Draft ED/2021/4[^4] Lack of Exchangeability.

Background to the Amendments

4The IFRS Interpretations Committee received a submission about the determination of the exchange rate when there is a long-term lack of exchangeability as IAS 21 The Effects of Changes in Foreign Exchange Rates does not include explicit requirements on the exchange rate an entity uses when the spot exchange rate is not observable.

5To address the matter the IASB proposed narrow scope amendments to IAS 21 to clarify the requirements for assessing exchangeability, the exchange rate to use when there is a lack of exchangeability and the related disclosures. The Amendments aim to address diversity in practice and improve the usefulness of the information provided to the investors.

6Section 2 in this DECA provides a brief description of the Amendments.

Scope of the adoption assessment

7The Amendments make changes to the mandatory parts of IAS 1 and IAS 21 and to Application Guidance that is an integral part of IAS 21. These changes to the mandatory parts of the standard forms part of the UKEB's adoption assessment.

8The Amendments also include additions to the Illustrative Examples and Amendments to the Basis for Conclusions of IAS 21. Neither of these are a mandatory part of IAS 21. As the UK-adopted international accounting standards comprise only the mandatory[^5] sections of standards, the amendments to the Illustrative Examples and Basis for Conclusions of IAS 21 are not adopted by the Board and are not considered in this DECA.

Structure of the assessment

9The UKEB's analysis is presented in the following sections:

  1. Section 1: describes UK statutory requirements for adoption of new or amended international accounting standards; and
  2. Section 2: discusses how the Amendments meet the criteria in Section 1.

Do the Amendments lead to a significant change in accounting practice?

10A standard adopted by the UKEB under Regulation 6 of SI 2019/685 that it considers is likely to lead to a 'significant change in accounting practice', is subject to the requirements in paragraph 3 of Regulation 11 of SI 2019/685 that the UKEB:

  1. carry out a review of the impact of the adoption of the standard; and
  2. publish a report setting out the conclusions of the review no later than 5 years after the date on which the standard takes effect (being the first day of the first financial year in respect of which it must be used)”.

11Section 2 of the DECA discusses whether the Amendments lead to a significant change in accounting practice and [tentatively] concludes that they do not.

Section 1: UK statutory requirements for adoption

UK statutory requirements

1.1Paragraph 1 of Regulation 7 of SI 2019/685 requires that an international accounting standard only be adopted if:

  1. the standard[^6] is not contrary to either of the following principles-
    1. an undertaking's accounts must give a true and fair view of the undertaking's assets, liabilities, financial position and profit or loss;
    2. consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the accounts taken as a whole, so far as concerns members of the undertaking;
  2. the use of the standard is likely to be conducive to the long term public good in the United Kingdom; and
  3. the standard meets the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management.”

1.2This DECA assesses the criteria above in the following order:

  1. Whether the Amendments meet the criteria of relevance, reliability, understandability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management (Regulation 7(1)(c)).
  2. Whether the Amendments are not contrary to the principle that an entity's accounts must give a true and fair view (Regulation 7(1)(a)).
  3. Whether use of the Amendments is likely to be conducive to the long term public good in the UK (Regulation 7(1)(b)). Regulation 7(2) of SI 2019/685 includes specific areas to consider for this assessment. They are:
    1. whether the Amendments are likely to improve the quality of financial reporting;
    2. the costs and benefits that are likely to result from the use of the Amendments; and
    3. whether the Amendments are likely to have an adverse effect on the economy of the UK, including on economic growth.

Relevance, Reliability, Understandability and Comparability

1.3Information is relevant if it is capable of making a difference in the decision-making of users[^7] or in their assessment of the stewardship of management. The information may aid predictions of the future, confirm or change evaluations of the past, or both.

1.4Financial information is reliable if, within the bounds of materiality, it:

  1. can be depended on by users to represent faithfully what it either purports to represent or could reasonably be expected to represent;
  2. is complete; and
  3. is free from material error and bias.

1.5Financial information should be readily understandable by users with a reasonable knowledge of business and economic activities and accounting, and a willingness to study the information with reasonable diligence.

1.6Information is comparable if it enables users to identify and understand similarities in, and differences among, items. Information about an entity should be comparable with similar information about other entities and with similar information about the same entity for another period.

1.7In conducting the overall assessment against the technical accounting criteria, the UKEB is required to adopt an absolute, rather than a relative, approach. This means that this assessment is an absolute one against the criteria (do the Amendments provide information that is understandable, relevant, reliable and comparable?) rather than a relative one (do the Amendments provide information that is more understandable, relevant, reliable and comparable than current, or any other, accounting?). When an assessment of any individual aspect or requirement of the Amendments uses comparative language (e.g. 'enhances comparability'), this does not mean that the objective is to reflect a real comparison in relative terms. Instead, the objective is to explain that any individual aspect or requirement of the Amendments has the potential to “enhance” one or more of the qualitative characteristics. Consideration of whether the Amendments are likely to improve the quality of financial reporting is separate from this assessment and is included within the UK long term public good assessment in Section 2.

True and fair view assessment

1.8As noted above, the first adoption criterion set out in Regulation 7(1) of SI 2019/685 requires that an international accounting standard can be adopted only if:

"[....] the standard is not contrary to either of the following principles-

  1. an undertaking's accounts must give a true and fair view of the undertaking's assets, liabilities, financial position and profit or loss;
  2. consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the accounts taken as a whole, so far as concerns members of the undertaking; [....]"

1.9For the sake of brevity, the UKEB refers to the assessment against this endorsement criterion as 'the true and fair view assessment' and to the principles set out in Regulation 7(1)(a) as the 'true and fair principle'. However, these abbreviated expressions do not imply that the assessment has considered anything other than the full terms of the endorsement criterion set out above.

1.10The duty of the UKEB under Regulation 7(1)(a) is to determine generically, before a standard is applied to a set of accounts, whether that standard is 'not contrary' to the true and fair principle. In other words, it is an ex-ante assessment. The UKEB has therefore considered whether the Amendments contain any requirement that would prevent accounts prepared using the Amendments from giving a true and fair view.

1.11The approach is to determine whether the Amendments are not contrary to the true and fair principle in respect of any of the specific items identified in Regulation 7(1)(a) (namely, the assets, liabilities, financial position and profit or loss) in the context of the preparation of the accounts as a whole. A holistic approach has been taken to this assessment, considering the impact of the Amendments taken as a whole, including its interaction with other UK-adopted international accounting standards.

1.12For the purposes of the assessment, the UKEB considers the requirement in IAS 1 Presentation of Financial Statements[^8] for financial statements to 'present fairly the financial position, financial performance and cash flows of an entity's to be equivalent to the Companies Act 2006 requirement for accounts to give a true and fair view.

1.13This assessment is separate from the duty of directors under section 393(1) of the Companies Act 2006, which requires directors to be satisfied that a specific set of accounts gives a true and fair view of an undertaking's or group's assets, liabilities, financial position and profit or loss.

[Draft Adoption decision]

1.14[Section 2 of this DECA discusses how the Amendments meet the statutory endorsement criteria set out in this Section 1.

1.15On the basis of these assessments, and subject to any stakeholder feedback, the UKEB [tentatively] concludes that the Amendments meet the statutory endorsement criteria. The UKEB is therefore of the view that it will adopt the Amendments for use in the UK.]

Section 2: Description and assessment of the Amendments

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