The ASB (Accounting Standards Board) issued FRS 23: The Effects of Changes in Foreign Exchange Rates in December 2004. This standard will only apply to those companies that fall within the scope of and therefore have to apply FRS 26: Financial Instruments: Measurement. SSAP 20 will remain in place unamended for companies not applying FRS 23. The ASB has said it will issue further guidance for such companies in due course.

FRS 23 is part of a package of standards which comprises:

• FRS 23;
• FRS 24 (IAS 29): Financial reporting in hyperinflationary economies;
• The disclosure requirements* of FRS 25 (IAS): Financial instruments: disclosure and presentation;
• FRS 26 (IAS) 39: Financial instruments: measurement.

FRS 26 determines the application of the package of standards: if a company is within the scope of FRS 26 then the whole package applies.

* The other requirements of FRS 25 will apply to all companies for periods commencing on or after 1 January 2005.

Changes to existing UK requirements
SSAP 20 was developed at the same time as the original IAS 21 and was therefore similar to that standard. The current version of IAS 21, from which FRS 23 is taken, does not change the fundamental approach in the original standard. This means that the changes from SSAP are not fundamental. A summary of the main differences is set out below.

• SSAP 20 assumes that a company’s results will be presented in the functional currency whereas FRS 23 explicitly allows a different presentation currency.
• SSAP 20 allows contracted rates that will be used at settlement to be used when translating any assets or liabilities whereas FRS 23 requires the use of spot rates at the relevant dates or period ends.
• Exchange differences on the net investment in a foreign operation pass through the STRGL under SSAP 20 but through the P&L under FRS 23.
• SSAP 20 allows two possible methods for the translation of foreign subsidiaries, the net investment method or the temporal method. FRS 23 allows only the net investment method.
• SSAP 20 does not specifically address the treatment of goodwill and fair value adjustments. FRS 23 requires these to be treated as assets and translates at the closing rate.
• SSAP 20 does not deal with the disposal of a foreign operation. However, the implication of this and other standards is that no adjustment is made in respect of previously recognised exchange differences. However, under FRS 23 the cumulative amount of such differences must be reversed out of the STRGL and recognised in full in the P&L (recycled). The ASB does not agree with this treatment but has accepted it as part of the overall convergence process.

FRSSE
Companies applying the FRSSE are exempt from this standard.

Effective date
It is not permissible to adopt this standard unless the company has also adopted FRS 26 and if FRS 26 is adopted then this standard must be applied.

FRS 26 is effective for accounting periods commencing on or after 1 January 2005 for all listed companies preparing their accounts in accordance with UK GAAP. This will include the individual accounts of listed parent companies.

For companies applying the fair value measurement rules incorporated in the Companies Act 1985 and therefore required to implement FRS 26: this standard will be effective for periods commencing on or after 1 January 2006.

Andy Holton
December 2004