Explanatory Statement

AASB 2006-1 Amendments to Australian Accounting Standards

January 2006

EXPLANATORY STATEMENT

Adoption of Australian equivalents to IFRSs

The Australian Accounting Standards Board (AASB) is implementing the directive of the Financial Reporting Council (FRC) to adopt the Standards of the International Accounting Standards Board (IASB), for application to reporting periods beginning on or after 1 January 2005. 

The IASB defines International Financial Reporting Standards (IFRSs) as comprising:

(a) International Financial Reporting Standards;

(b) International Accounting Standards (IAS); and

(c) Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC).

The Australian equivalents to IFRSs are:

(a) Accounting Standards issued by the AASB that are equivalent to Standards issued by the IASB, being AASBs 1 – 99 corresponding to the IFRS series and AASBs 101 – 199 corresponding to the IAS series; and

(b) Urgent Issues Group (UIG) Interpretations issued by the AASB corresponding to the Interpretations adopted by the IASB, as listed in AASB 1048 Interpretation and Application of Standards. 

In implementing the FRC’s directive, the AASB is replacing relevant existing AASB Standards with Australian Standards equivalent to those of the IASB.  The AASB has decided it will continue to issue sector-neutral Standards, that is, Standards applicable to both for-profit and not-for-profit entities, including public sector entities.  Except for Standards that are specific to the not-for-profit or public sectors or that are of a purely domestic nature, the AASB uses the IASB Standards as the “foundation” Standards to which it adds material detailing the scope and applicability of a Standard in the Australian environment.  Additions are made, where necessary, to broaden the content to cover sectors not addressed by an IASB Standard and domestic, regulatory or other issues.

On 15 July 2004, the Board made the set of Australian Standards equivalent to IFRSs, together with several associated Australian Standards, effective for annual reporting periods beginning on or after 1 January 2005.  

Reasons for Issuing AASB 2006-1

AASB 2006-1 is an amending Standard which makes amendments to
AASB 121 The Effects of Changes in Foreign Exchange Rates.  The amendments made to AASB 121 relate to net investments in foreign operations and the recognition of exchange differences that arise when a monetary item is denominated in a functional currency other than that of a reporting entity and a foreign operation.  These amendments arise from the issue by the IASB of amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates in December 2005. 

Main Features of this Standard

This Standard was made by the AASB on 18 January 2006 under
section 334 of the Corporations Act 2001.

Application Date

This Standard is applicable to annual reporting periods ending on or after 31 December 2006.

Main Changes

The main changes are:

1. the recognition that the entity that has a monetary item receivable from or payable to a foreign operation may be any subsidiary of the group; and

2. an amendment to acknowledge that exchange differences that arise when monetary items that form part of an entity’s net investment in a foreign operation and are denominated in a currency other than the functional currency of either the reporting entity or the foreign operation should be reclassified to the separate component of equity in the financial statements that include the foreign operation and the reporting entity.

Consultation prior to Issuing this Standard

The IASB initiated a consultation process following the issue of a Draft Technical Correction for comment in September 2005.  Subsequently, the IASB amended IAS 21 so that a monetary item can be denominated in any currency to be part of the reporting entity’s net investment in a foreign operation.  The AASB issued a Media Release drawing attention to the IASB’s proposals and noting that the AASB would make the same amendments to AASB 121 as the IASB proposed to IAS 21, if the amendment went ahead.  A number of Australian constituents participated in the consultation process and there was strong support for the proposals.