Public Finance Management Act, 1999 (Act No. 1 of 1999)

Notices

Standards of Generally Accepted Municipal Accounting Practice (GAMAP) in terms of Section 91

GAMAP 4 : The Effects of Changes in Foreign Exchange Rates
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Introduction

 

Standards of Generally Accepted Municipal Accounting Practice (GAMAP)

 

The Accounting Standards Board (Board) is required in terms of the Public Finance Management Act, Act No. 1 of 1999, as amended (PFMA), to determine generally recognised accounting practice referred to as Standards of Generally Recognised Accounting Practice (GRAP).

The Board must determine GRAP for:

(a)departments (national and provincial);
(b)public entities;
(c)constitutional institutions;
(d)municipalities and boards, commissions, companies, corporations, funds or other entities under the ownership control of a municipality; and
(e)Parliament and the provincial legislatures.

 

The above are collectively referred to as "entities" Standards of GRAP.

 

The Board considers that the Standards of GAMAP constitute GRAP for municipalities.

 

GAMAP is an interim solution until such time as it is replaced by a Standard of GRAP.

 

Any limitation of the applicability of specific Standards is made clear in those Standards.

 

The Standard of GAMAP on The Effects of Changes in Foreign Exchange Rates is set out in paragraphs .01 - .16. All paragraphs in this Standard have equal authority. The authority of appendices is dealt with in the preamble to each appendix. This Standard should be read in the context of its objective, the Preface to Standards of GRAP, the Preface to Standards of GAMAP and the framework for the Preparation and Presentation of Financial Statements.

 

Reference may be made here to a Standards of GRAP that has not been issued at the time of issue of this Standard. This is done to avoid having to change the Standards already issued when a later Standard is subsequently issued. Paragraph .12 of the Standard of GRAP on Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.

 

Objective

 

An entity may have transactions in foreign currencies. In order to include foreign currency transactions in the financial statements of an entity, transactions must be expressed in the entity’s reporting currency.

 

The principal issues in accounting for foreign currency transactions are to decide which exchange rate to use and how to recognise the financial effect of changes in exchange rates in the financial statements.

 

Scope

 

.01An entity which prepares and presents financial statements under the accrual basis of accounting shall apply this Standard in accounting for transactions (including the subsequent reporting of monetary and non-monetary items) in foreign currencies.

 

.02This Standard deals with the presentation of revenue, expenses, liabilities and assets arising from transactions in a foreign currency. It does not deal with the presentation in a cash flow statement of cash flows arising from transactions in a foreign currency (see the Standard of Generally Recognised Accounting Practice on Cash Flow Statements).

 

Definitions

 

.03The following terms are used in this Standard with the meanings specified:

 

Accrual basis means a basis of accounting under which transactions and other events are recognised when they occur (and not only when cash or its equivalent is received or paid). Therefore, the transactions and events are recorded in the accounting records and recognised in the financial statements of the periods to which they relate. The elements recognized under accrual accounting are assets, liabilities, net assets, revenue and expenses.

 

Cash flows are inflows and outflows of cash and cash equivalents.

 

Closing rate is the spot exchange rate at the reporting date.

 

Exchange difference is the difference resulting from translating a given number of units of one currency into another currency at different exchange rates.

 

Exchange rate is the ratio for exchange of two currencies.

 

Expenses are decreases in economic benefits or service potential during the reporting period in the form of outflows or consumption of assets or incurrences of liabilities that result in decreases in net assets, other than those relating to distributions to owners.

 

Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

 

Foreign currency is a currency other than the functional currency of an entity.

 

Monetary Items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money.

 

Transaction date is the date upon which the entity is irrevocably committed to the transaction.

 

Reporting currency is the currency used in presenting the financial statements.

 

Reporting date means the date of the last day of the reporting period to which the financial statements relate.

 

Revenue is the gross inflow of economic benefits or service potential during the reporting period when those inflows result in an increase in net assets, other than increases relating to contributions from owners.

 

Spot rate is the exchange rate at the date of the transaction.

 

Initial recognition

 

.04Subject to restrictions imposed by legislation, a foreign currency transaction is a transaction which is denominated in or requires settlement in a foreign currency, including transactions arising when an entity either:
(a)buys or sells goods or services of which the price is denominated in a foreign currency,
(b)borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency,
(c)becomes a party to an unperformed foreign exchange contract, or
(d)otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency.

 

.05A foreign currency transaction shall be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.

 

.06The exchange rate at the date of the transaction is often referred to as the spot rate. For practical reasons, a rate that approximates the actual rate at the date of the transaction is often used, for example, an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. However, if exchange rates fluctuate significantly, the use of the average rate for a period is unreliable.

 

Reporting at subsequent reporting dates

 

.07At each reporting date:
(a)foreign currency monetary items shall be reported using the closing rate,
(b)non-monetary items which are carried in terms of historical cost denominated in a foreign currency shall be reported using the exchange rate at the date of the transaction, and
(c)non-monetary items which are carried at fair value denominated in a foreign currency shall be reported using the exchange rates that existed when the values were determined.

 

.08The carrying amount of an item is determined in accordance with the relevant Standard of Generally Accepted Municipal Accounting Practice, the International Public Sector Accounting Practice Standard or the Statement of Generally Accepted Accounting Practice. For example, certain financial instruments and property, plant and equipment may be measured at fair value or at historical cost. Whether the carrying amount is determined based on historical cost or fair value, the amounts so determined for foreign currency items are then reported in the reporting currency in accordance with this Standard.

 

Recognition of exchange differences

 

.09Paragraphs .10 and .11 set out the accounting treatment required by this Standard in respect of exchange differences on foreign currency transactions. These paragraphs include the benchmark treatment for exchange differences that result from a severe devaluation or depreciation of a currency against which there is no practical means of hedging and that affects liabilities which cannot be settled and which arise directly from the recent acquisition of assets invoiced in a foreign currency. The allowed alternative treatment for such exchange differences is set out in paragraph .13.

 

.10Exchange differences arising on the settlement of monetary items or on reporting an entity’s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, shall be recognised as revenue or as expenses in the period in which they arise.

 

.11An exchange difference results when there is a change in the exchange rate between the transaction date and the date of settlement of any monetary items arising from a foreign currency transaction. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognised in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognised in each intervening period up to the period of settlement is determined by the change in exchange rates during that period.

 

Allowed alternative treatment

 

.12The benchmark treatment for exchange differences dealt with in paragraph .13 is set out in paragraph .10.

 

.13Exchange differences may result from a severe devaluation or depreciation of a currency against which there is no practical means of hedging and that affects liabilities which cannot be settled and which arise directly from the recent acquisition of an asset invoiced in a foreign currency. Such exchange differences shall be included in the carrying amount of the related asset.

 

.14Exchange differences are not included in the carrying amount of an asset when the entity is able to settle or hedge the foreign currency liability arising from the acquisition of the asset. However, exchange losses are part of the directly attributable costs of the asset when the liability cannot be settled and there is no practical means of hedging, for example when, as a result of exchange controls, there is a delay in obtaining foreign currency. Therefore, under the allowed alternative treatment, the cost of an asset invoiced in a foreign currency is regarded as the amount of reporting currency that the entity ultimately has to pay to settle its liabilities arising directly from the recent acquisition of the asset.

 

Disclosure

 

.15An entity shall disclose the following:
(a)The amount of exchange differences included in the surplus or deficit for the period, distinguishing between those arising from borrowing and operating activities, and
(b)The amount of exchange differences arising during the period which is included in the carrying amount of an asset in accordance with the allowed alternative treatment in paragraph

 

Effective date

 

.16This Standard of Generally Accepted Municipal Accounting Practice becomes effective for annual financial statements covering periods beginning on or after a date to be determined by the Minister of Finance in a regulation to be published in accordance with section 91(1)(b) of the Public Finance Management Act (Act No. 1 of 1999) as amended.