Foreign Currency Translation
To finance governments’ operations and meet obligations, and to take advantage of the lower cost of borrowing in foreign markets, governments issue debt in capital markets of different countries.
Translating the foreign currency denominated items to a Canadian dollar equivalent at the financial statement date gives rise to foreign exchange gains and losses.
Reasons for the Project
When PSAB approved Section PS 2600, Foreign Currency Translation, in October 2002, the Board made a commitment to revisit the issue of accounting for foreign exchange gains and losses. In June 2006, PSAB reconfirmed its commitment to review the issue and approved a project proposal.
Section PS 2600 recommends deferral and amortization of foreign exchange gains and losses resulting from translation of monetary items denominated in foreign currency at the financial statement date. This is the only accounting standard, among other major accounting standards widely used in the world, that allows deferral and amortization treatment for foreign exchange gains and losses. This treatment results in items in the statement of financial position that do not meet the definition of asset or liability.
Hedge accounting for foreign currency items, which is addressed in Section PS 2600, will be handled from a broader perspective in the Financial Instruments project. The conclusion of that project will be reflected in the amended Section PS 2600.
The objective is to amend Section PS 2600, taking into consideration the final recommendations of the Financial Instruments project and the conceptual framework to ensure consistent accounting standards.
PSAB Decision Summary – December 12-13, 2013
PSAB completed its review of the application of Section PS 2601, Foreign Currency Translation, and Section PS 3450, Financial Instruments, for governments, and confirmed that the principles are fundamentally sound.
The request for additional time to implement the standards was supported. PSAB views the extension as an opportunity to address transitional issues and concerns prior to the effective date.
PSAB approved an amendment to the transitional provisions to extend the effective date to April 1, 2016 from April 1, 2015, which will be issued in the Handbook in March 2014.
PSAB Decision Summary – June 12-13, 2013
PSAB reviewed the wording in the transitional provisions in Section PS 2601, Foreign Currency Translation, and Section PS 3450, Financial Instruments, to clarify its intent regarding the effective dates for adoption. PSAB approved amendments to the transitional provisions in these two Sections and agreed that exposure of the changes is not required given the change is simply clarification of an implementation intent. The relevant amendments state that the Sections apply to fiscal years beginning on or after April 1, 2015. For those government organizations that applied the CICA Handbook – Accounting prior to adopting the CICA Public Sector Accounting Handbook, the Sections apply to fiscal years beginning on or after April 1, 2012.
PSAB approved Section PS 2601, replacing existing Section PS 2600, Foreign Currency Translation. The effective date for Section PS 2601 is April 1, 2012 for government organizations and April 1, 2015 for governments. Earlier adoption is permitted. Governments and government organizations adopt Section PS 2601 in the same fiscal year Section PS 3450, Financial Instruments, is adopted.
In view of the Concepts Underlying Financial Performance project, the transition requirements state that PSAB will review the application of this Section for governments by December 31, 2013.
PSAB approved an Exposure Draft (ED) proposing amendments to Section PS 1200, Financial Statement Presentation. The ED contains a presentation model that reports remeasurement gains and losses outside of the statement of operations.
- The main features of the ED include the following:
- A statement of remeasurement gains and losses is introduced.
- The statement of remeasurement gains and losses reports:
(a) exchange gains and losses associated with monetary assets and monetary liabilities denominated in a foreign currency that have yet to be settled; (b) amounts reclassified to the statement of operations upon derecognition or settlement; and (c) other comprehensive income reported when a government includes the results of government business enterprises and government business partnerships in the government’s summary financial statements.
- The proposed amendments would apply to the financial reporting period a government implements the proposed new PSA Handbook Section on Financial Instruments and associated amendments, including proposed amendments to Section PS 2600, Foreign Currency Translation.
PSAB reviewed two options to the proposals contained in the ED issued in October 2009 — hedge accounting and an alternative presentation model. The Board requested the task force to draft a Re-exposure Draft with a presentation model that would report remeasurement gains and losses outside of the statement of operations for its consideration in September 2010.
PSAB approved an ED resulting from the proposed PSA Handbook Section on Financial Instruments. The amendments proposed in the ED are required to ensure that Section PS 2600 is consistent with the proposed standards for Financial Instruments.
- The main features of this ED include the following:
- All monetary items and those non-monetary items included in the fair value category are translated using the exchange rate on the financial statement date.
- An exchange gain or loss reported prior to the period of settlement is unrealized and presented as a remeasurement gain or loss. Within the Financial Instruments ED, unrealized gains or losses that arise on items in the fair value category are distinguished in this manner. The statement of operations would be comprised of two components, allowing those unrealized amounts that are remeasurement gains and losses to be presented apart from the other revenues and expenses a government reports on and compares to budget.
- Hedge accounting provisions in Section PS 2600 are removed.
- The scope exclusion for foreign exchange reserves in Section PS 2600.04 are removed.
- The proposed amendments will be effective for fiscal years beginning on or after April 1, 2012. Early adoption is encouraged. A government adopts standards contained in the Financial Instruments ED and the amended Foreign Currency standards in the same fiscal period. Any adjustment to the carrying amount of applicable assets and liabilities at the beginning of the fiscal year the amendments are applied should be recognized as an adjustment to the accumulated surplus/deficit at that date.
PSAB deferred consideration of changes to Section PS 2600 pending deliberations on responses to the Financial Instruments Statement of Principles. Proposals to amend Section PS 2600 are expected to be issued together with the Financial Instruments Exposure Draft.
PSAB approved a Project Proposal.
Disclaimer: This project summary has been prepared for information purposes only. Decisions reported are tentative and reflect only the current status of discussions on this project, which may change after further Board deliberations. Decisions to publish Handbook material are final only after a formal ballot process.