CFM8041 – Accounting for foreign exchange: International Financial Reporting Standards

Background to the changes

For accounting periods beginning on or after 1 January 2005, the consolidated accounts of listed companies will have to prepared in accordance with International Financial Reporting Standards (IFRS), following a European Union regulation approved in June 2002.

International Accounting Standard 21 (IAS21) deals with ‘The effects of changes in foreign exchange rates’. (IASs and IFRSs are the same thing – the designation has recently been changed to IFRS). IAS21 follows the same general approach as SSAP20, and accounts that comply with SSAP20 also comply with the existing IAS 21.

However, as part of its ‘improvements’ project, the International Accounting Standards Board FRS23 incorporates the provisions of the revised IAS21 into UK GAAP.

One of the changes made by the IASB is to move the existing provisions in IAS21 that deal with hedging net investments in foreign operations into the revised IAS 39, also released in December 2003. Further details on IAS39 ‘Financial instruments: recognition and measurement,’ and its UK equivalent may be found in CFM16000 onwards which has as yet no direct equivalent within UK GAAP.

Its important to note that FRS23 can only be adopted if FRS26 too is adopted; otherwise SSAP20 remains in force.