Interpretation 22 Foreign Currency Transactions and Advance Consideration was issued by the International Accounting Standards Board (IASB) in December 2016 to clarify the ‘date of the transaction’ for the purposes of translating foreign currency transactions where consideration is received or paid in advance under AASB 121 The Effects of Changes in Foreign Exchange Rates.
The interpretation was approved by the Australian Accounting Standards Board (AASB) in February 2017.
A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.
AASB 121, paragraph 21
The date of a transaction is the date on which the transaction first qualifies for recognition in accordance with Australian Accounting Standards…
Extract of AASB 121, paragraph 22
When an entity receives consideration in advance of recognising revenue in the income statement, it recognises both the consideration received, and a non-monetary liability (deferred income or contract liability) in the statement of financial position at the spot rate of exchange on the date that consideration is received.
There is currently diversity in practice when the deferred income is subsequently recognised in the income statement as revenue. This means that revenue is either being recognised:
Similar diversity exists for other types of transactions where consideration is both denominated in a foreign currency and paid or received in advance, for example, purchases and sales of PPE, intangibles and investment property, purchases of inventory or services, entering into lease contracts, and receipt of some government grants.
Interpretation 22 specifies that we should use the rate in Option 1 above, i.e. the spot rate on the date when the cash was received or paid in advance, and the non-monetary asset or liability was initially recognised.
This means that the related income, expense or asset is not remeasured for changes in the spot rate occurring between the date of initial recognition of the advance consideration, and the date of recognition of the transaction to which that consideration relates.
On 1 January 2016, Entity ABC entered into a contract with a supplier to purchase PPE for USD 5,000. Delivery is expected in Australia on 30 June 2016, but Entity ABC must pay the full purchase price on 1 April 2016. The amount is non-refundable.
Assume exchange rates are as follows:
1 April 2016 AUD 1: USD 0.75
30 June 2016 AUD 1: USD 0.70
Entity ABC’s functional currency is AUD.
The following will be recorded in the books of Entity ABC:
|1 April 2016|
|Dr Prepayment (non-monetary asset)||6,667|
|Being USD 5000 / 0.75|
|30 June 2016|
|No further adjustment to non-monetary asset|
The Illustrative Examples to Interpretation 22 include more examples of accounting where there are multiple prepayments.
Interpretation 22 only applies in cases where the foreign currency advance consideration results in the recognition of a non-monetary asset or liability. However, it does not apply to payments and receipts for income taxes and insurance contracts (including reinsurance contracts) that it issues or reinsurance contracts that it holds.
Interpretation 22 also does not apply when the asset, expense or income:
|Type of entity||Effective date|
|For-profit entities||Annual periods beginning on or after 1 January 2018|
|Not-for-profit entities||Annual periods beginning on or after 1 January 2019|
All types of entities can adopt these changes early, but must disclose that fact.
On initial application, an entity may apply Interpretation 22 either:
Where the ‘prospective’ method is used, the new requirements are applied to assets, expenses and income recognised on or after the beginning of the reporting periods in (b)(i) and (b)(ii) above for which the entity has recognised non-monetary assets/liabilities arising from advance consideration before that date. For example: