South Africa IFRS 21 Financial statements currency conversion

[Harryflang]

Hi
I have a question that relates to converting financial statements from local currency (ZAR in this case) to USD. The company reports in its registered country in ZAR but have a foreign shareholder that requires the income statement and balance sheet in USD.
Assume this company has only one asset that is USD denominated/priced (a USD bank account). The value of the asset does not change in USD terms throughout the year and the company has no other transactions.
Assume the ZAR depreciates from 10:1 to 20:1 during the financial year. The company will recognise an exchange gain for the year -USD account value x 10(move in exchange rate).
When presenting a set converted to USD, the company will use the average exchange rate to calculate the USD equivalent gain in its income statement. USD account balance x 5 (average exchange rate).
Reality is that in the company in USD terms made no exchange gain in USD terms, because its USD denominated asset did not change in value.
My group accountants advise that IFRS requires this average rate conversion, but in my opinion the USD numbers will give a distorted view by showing the user that the company made an exchange gain when the USD value of the asset remained the same.
What is the solution to accurate reporting?

 

[DrStrangeLove]

This issue comes up in US GAAP as well. In pre-Codification US GAAP, this was addressed by FAS 52. Using the average exchange rate to convert the income statement is a simplification. The result is that the converted accounts don't quite roll correctly. In your example, the ZAR-denominated rollforwards will roll, but the USD-denominated rollforwards will not exactly roll. For US GAAP, the outages in the converted rollforwards get lumped together in OCI as an exchange rate conversion adjustment and accumulated in AOCI.

If the adjustment is too large for your comfort, the solution is to calculate the income sheet exchange rate as the daily exchange rate weighted by daily cashflow. It will be more accurate, but also much more burdensome to calculate, especially if you have several operating currencies at once or a lot of cross-conversions in a period. It won't eliminate the problem entirely; you'll still need an OCI entry for the residual exchange rate effect. But you'll reduce the impact from simply using the average exchange rate over the income statement period.

 

[Harryflang]

Thanks for the response. Too many currencies for the more accurate solution. The real set of financials are in Zimbabwe currency (RTGS) in a company with USD bank account. It went from 1 000:1 to expected 19 000:1 so you can imagine the impact. Will eliminate/ignore the currency revaluation values that relate to USD denominated assets and liabilities for decision making.