CFM21770 - Accounting for corporate finance: International Financial Reporting Standards: IAS 39: financial assets and liabilities designated in a foreign currency

For those entities applying IFRS or FRS 101 with an accounting period beginning on or after 1 January 2018 refer to IFRS 9 for the recognition and measurement of financial instruments at CFM 21800+.

Foreign Exchange differences

A financial asset or liability within the scope of IAS 39 may be denominated in a foreign currency. In such cases, its fair value or amortised cost will generally be determined in the currency concerned. Then IAS 21, the standard dealing with the effect of changes in foreign exchange rates, is applied, so that the amount is translated into the company’s functional currency at the appropriate rate of exchange. This will be generally be

• the closing rate for monetary items (those that will be settled by a fixed or determinable amount of money changing hands), and for non-monetary financial assets such as ordinary shares where these are measured at fair value in the foreign currency
• an historical rate for non-monetary financial assets that are not carried at fair value, such as shares whose fair value cannot be reliably measured.

But if the company hedges fair value changes in the asset or liability that result from changes in exchange rates (see CFM27120), it will always retranslate that asset or liability at the closing rate, even where an historical rate would otherwise be used. This may happen if, for example, a company in its solus accounts uses fair value hedging to hedge exchange exposure on its shareholding in a subsidiary.

Under IAS 21, exchange differences on monetary items are recognised in profit and loss. An AFS asset that is a monetary item (such as a bond or loan note) is treated as if it were carried at amortised cost in the foreign currency. Exchange differences resulting from changes in amortised cost are recognised in profit and loss. But fair value changes are still taken to equity until they are recycled (see CFM21590).

Exchange differences on an AFS asset that is not a monetary item are effectively taken to equity as part of the fair value movement on that instrument.

Where there is a hedging relationship between a non-derivative monetary asset and a non-derivative monetary liability (for example, if a long-term loan to a subsidiary is hedged by borrowing in the same currency), changes to the foreign currency component of both asset and liability are taken to profit and loss.