On 30 September 2005, IASB published for public comment DTC 1 Proposed Amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates - Net Investment in a Foreign Operation. The comment period for DTC 1 ended on 31 October 2005. If the correction is issued, it will apply retrospectively with immediate effect.
DTC 1 deals with monetary items that form part of a reporting entity’s net investment in a foreign operation. Currently IAS 21 requires exchange differences on such monetary items to be taken to a separate component of equity if certain conditions are met. Two of these conditions are:
- The monetary item must be denominated in the functional currency of either the reporting entity or the foreign operation. Otherwise, the exchange difference should be taken to the income statement.
- The monetary item must result from a transaction by the entity with the foreign operation. However IAS 21 does not specify whether “entity” refers to the parent only, or whether it includes the subsidiaries. If it refers only to the parent, then exchange differences on a monetary item between a subsidiary and a foreign operation must be taken to the income statement.
DTC 1 amends both of the above conditions. When DTC 1 comes into effect, exchange differences on such monetary items should be taken to a separate component of equity regardless of:
- the currency in which that monetary item is denominated; and
- whether the monetary item results from a transaction between the foreign operation and the parent or any of its subsidiaries.
