CFM23080 - New UK GAAP: FRS 102: financial assets and liabilities denominated in a foreign currency

For those entities applying FRS 102 with an accounting period beginning on or after 1 January 2015.

Foreign exchange difference

A financial asset or liability within the scope of Sections 11 and 12 of FRS 102 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 Section 30 of FRS 102 is applied so that the amount is translated into the company’s functional currency at the appropriate rate of exchange (see for examples paragraphs 30.9 - 30.11 of Section 30). 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 items where these are measured at fair value in the foreign currency.
• the historical rate (the exchange rate used at the date of transaction) for non-monetary financial assets that are measured at historical cost, 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.

Section 30 requires that exchange differences on monetary items are recognised in profit or loss in the period in which they arise (unless part of net investment in foreign operation).