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.
Overview
The AASB 2006-1 Amendments to Australian Accounting Standards was enacted in January 2006 to align Australian Accounting Standards with International Financial Reporting Standards, specifically addressing changes in foreign exchange rates in relation to net investments in foreign operations. This Act was introduced to ensure that Australian financial reporting practices remain consistent with international standards, thereby enhancing the comparability and transparency of financial information across borders. The Australian Accounting Standards Board (AASB), acting under the Corporations Act 2001, developed these amendments in response to the International Accounting Standards Board's (IASB) updates to IAS 21. The primary objective of AASB 2006-1 is to incorporate these international changes into Australian standards, ensuring that financial statements reflect accurate and consistent treatment of exchange differences for entities with foreign operations. This legislative action helps maintain the integrity and reliability of financial reporting in Australia, facilitating better decision-making by investors and other stakeholders.
Scope and Application
The AASB 2006-1 Amendments to Australian Accounting Standards, specifically pertaining to AASB 121 The Effects of Changes in Foreign Exchange Rates, applies to entities preparing financial statements under the Australian Accounting Standards. These entities include for-profit and not-for-profit organisations, including public sector entities, that prepare financial statements in accordance with Australian Accounting Standards. The geographic reach of the Act is national, as it applies to all entities within Australia. The Act is effective for annual reporting periods ending on or after 31 December 2006, and it extends to address specific amendments in the recognition and classification of exchange differences related to net investments in foreign operations. The Act also acknowledges that any subsidiary of a group can have a monetary item receivable from or payable to a foreign operation. Subordinate instruments may be used to further refine the application and interpretation of this Standard.
Key Provisions
The main operative sections of AASB 2006-1 (sections 334 and 335) permit the AASB to make amendments to existing AASB Standards to align them with the International Financial Reporting Standards (IFRSs) as directed by the Financial Reporting Council (FRC). Section 334 specifies that the AASB may make such amendments by issuing an amending Standard, which is applicable to annual reporting periods ending on or after a specified date, in this case, 31 December 2006. Section 335 details the specific amendments to AASB 121, which concern the recognition of exchange differences in net investments in foreign operations. The AASB has amended AASB 121 to ensure that any subsidiary within a group can hold a monetary item receivable from or payable to a foreign operation and to specify that exchange differences arising from such items should be reclassified to a separate component of equity in the financial statements.
The AASB imposes obligations on entities to comply with the amended AASB 121, which now aligns with IAS 21. Entities must ensure that they correctly identify and account for monetary items that are part of their net investment in foreign operations. Specifically, they must recognise exchange differences arising from these items and reclassify them to the appropriate equity component. The AASB also mandates that the amendments be applied to annual reporting periods ending on or after 31 December 2006. This requirement ensures that financial statements reflect the correct accounting treatment for exchange differences, thereby providing a clearer picture of the entity's financial position.
Failure to comply with the requirements of AASB 2006-1 may result in financial statements that do not accurately reflect the entity's financial position. Although the legislation does not explicitly state penalties for non-compliance, entities may face scrutiny from regulators, potential legal action, or reputational damage. The Australian Securities and Investments Commission (ASIC) could take action against entities that fail to adhere to accounting standards, which could include fines or other regulatory sanctions. The precise penalties would depend on the severity and impact of the non-compliance, but the consequences could be significant for entities that do not meet the requirements of the amended AASB 121.