This article is the thirtieth in a series of articles that takes our readers on a journey through International Financial Reporting Standards (IFRS) with a special focus on the standards’ quintessential feature: they are principles-based. In this article, we provide an overview of some of the most significant differences between IFRS and U.S. generally accepted accounting principles (GAAP) with regard to foreign currency matters. Actual differences in the accounting treatment between the two frameworks depend on specific circumstances.
The primary standard dealing with foreign currency matters under IFRS is International Accounting Standard (IAS) 21, The Effects of Changes in Foreign Exchange Rates. Under U.S. GAAP, the literature relating to foreign currency matters is included in FASB Accounting Standards Codification (ASC) Topic 830, Foreign Currency Matters, which codifies FASB Statement No. 52, Foreign Currency Translation. The overall approaches under IFRS and U.S. GAAP are very similar. However, there are some differences including, but not limited to, the following:
Topic |
IFRS |
U.S. GAAP |
Indicators to assess the functional currency |
IAS 21 includes primary and secondary indicators to be considered in determining the functional currency of a foreign operation. |
ASC 830 does not distinguish between primary and secondary indicators. |
Change in functional currency |
When there is a change in an entity’s functional currency, the entity must apply the translation procedures applicable to the new functional currency prospectively from the date of the change. |
U.S. GAAP distinguishes functional currency changes between: (1) from reporting currency to foreign currency; and (2) from foreign currency to reporting currency. Different specific requirements apply. |
Foreign exchange gains or losses on available-for-sale financial instruments |
For an available-for-sale monetary financial asset, the entity recognizes changes in the carrying amount relating to changes in foreign exchange rates in profit or loss, and other changes in the carrying amount in other comprehensive income. |
All changes in fair value relating to financial instruments remeasured at fair value through other comprehensive income (available-for-sale) are recognized in other comprehensive income. |
First-time adopters of IFRS: treatment of Cumulative Translation Adjustments (CTA) |
On the date of transition to IFRS, a first-time adopter of IFRS may elect to reset CTA to zero. |
U.S. GAAP does not include a similar provision. Equity is translated using historical rates. |
For further information, please contact Bob Dohrer (robert.dohrer@rsmi.com) or Marco Marcellan (marco.marcellan@rsmi.com) in our International Assurance Services Group. |
