IFRIC 22 Foreign Currency Transactions And Advance Consideration – FAQ | IFRS

IFRIC 22 Foreign Currency Transactions and Advance Consideration

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References IFRIC 22 Foreign Currency Transactions and Advance ConsiderationIFRIC 22 Foreign Currency Transactions and Advance Consideration

Background

1 Paragraph 21 of IAS 21 The Effects of Changes in Foreign Exchange Rates requires an entity to record a foreign currency transaction, on initial recognition in its functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency (the exchange rate) at the date of the transaction. Paragraph 22 of IAS 21 states that the date of the transaction is the date on which the transaction first qualifies for recognition in accordance with IFRS Standards (Standards).

2 When an entity pays or receives consideration in advance in a foreign currency, it generally recognises a non-monetary asset or non-monetary liability1 before the recognition of the related asset, expense or income. IFRIC 22 Foreign Currency Transactions and Advance Consideration

The related asset, expense or income (or part of it) is the amount recognised applying relevant Standards, which results in the derecognition of the non-monetary asset or non-monetary liability arising from the advance consideration. IFRIC 22 Foreign Currency Transactions and Advance Consideration

3 The IFRS Interpretations Committee (the Interpretations Committee) initially received a question asking how to determine ‘the date of the transaction’ applying paragraphs 21–22 of IAS 21 when recognising revenue. The question specifically addressed circumstances in which an entity recognises a non-monetary liability arising from the receipt of advance consideration before it recognises the related revenue. IFRIC 22 Foreign Currency Transactions and Advance Consideration

In discussing the issue, the Interpretations Committee noted that the receipt or payment of advance consideration in a foreign currency is not restricted to revenue transactions. Accordingly, the Interpretations Committee decided to clarify the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income when an entity has received or paid advance consideration in a foreign currency. IFRIC 22 Foreign Currency Transactions and Advance Consideration

Scope

4 This Interpretation applies to a foreign currency transaction (or part of it) when an entity recognises a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration before the entity recognises the related asset, expense or income (or part of it).

5 This Interpretation does not apply when an entity measures the related asset, expense or income on initial recognition:

  1. at fair value; or IFRIC 22 Foreign Currency Transactions and Advance Consideration
  2. at the fair value of the consideration paid or received at a date other than the date of initial recognition of the non-monetary asset or non-monetary liability arising from advance consideration (for example, the measurement of goodwill applying IFRS 3 Business Combinations).

6 An entity is not required to apply this Interpretation to:

  1. income taxes; or IFRIC 22 Foreign Currency Transactions and Advance Consideration
  2. insurance contracts (including reinsurance contracts) that it issues or reinsurance contracts that it holds.

Issue IFRIC 22 Foreign Currency Transactions and Advance Consideration

7 This Interpretation addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency.

Consensus IFRIC 22 Foreign Currency Transactions and Advance Consideration

8 Applying paragraphs 21–22 of IAS 21, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration.

9 If there are multiple payments or receipts in advance, the entity shall determine a date of the transaction for each payment or receipt of advance consideration.

Examples IFRIC 22 Foreign Currency Transactions and Advance Consideration

These examples accompany, but are not part of, IFRIC 22. IFRIC 22 Foreign Currency Transactions and Advance Consideration

In these examples, foreign currency amounts are ‘Foreign Currency’ (FC) and functional currency amounts are ‘Local Currency’ (LC).

The objective of these examples is to illustrate how an entity determines the date of the transaction when it recognises a non-monetary asset or non-monetary liability arising from advance consideration in a foreign currency before it recognises the related asset, expense or income (or part of it) applying relevant IFRSs.

Example 1—A single advance payment for the purchase of a single item of property, plant and equipment

Example 2—Multiple receipts for revenue recognised at a single point in time

Example 3—Multiple payments for purchases of services over a period of time

Example 4—Multiple receipts for revenue recognised at multiple points in time

See also: The IFRS Foundation

IFRIC 22 Foreign Currency Transactions and Advance Consideration

IFRIC 22 Foreign Currency Transactions and Advance Consideration