Lack of Exchangeability - Proposed RDR Concessions

The External Reporting Board (XRB) recently issued an amending standard for for-profit entities, Lack of Exchangeability, which defines when a currency is exchangeable and introduces new requirements, guidance, and disclosures relating to estimating the spot exchange rate when a currency is not exchangeable.

The XRB is now proposing to provide reduced disclosure regime (RDR) concessions for several of the new disclosures introduced by the amending standard. The proposed concessions would mean that Tier 2 for-profit entities would not need to comply with these specific disclosure requirements.

The XRB is seeking feedback on the proposed RDR concessions from stakeholders who are likely to be affected by the amending standard and its disclosure implications.

Proposed RDR concessions are presented in bold and italic and denoted with an asterisk (*).

57A) When an entity estimates a spot exchange rate because a currency is not exchangeable into another currency (see paragraph 19A), the entity shall disclose information that enables users of its financial statements to understand how the currency not being exchangeable into the other currency affects, or is expected to affect, the entity’s financial performance, financial position and cash flows. To achieve this objective, an entity shall disclose information about:

(a) the nature and financial effects of the currency not being exchangeable into the other currency;   

(b) the spot exchange rate(s) used;

*(c) the estimation process; and

*(d) the risks to which the entity is exposed because of the currency not being exchangeable into the other currency.

57B) Paragraphs A18–A20 specify how an entity applies paragraph 57A.

A18) An entity shall consider how much detail is necessary to satisfy the disclosure objective in paragraph 57A. An entity shall disclose the information specified in paragraphs A19–A20 and any additional information necessary to meet the disclosure objective in paragraph 57A.

A19) In applying paragraph 57A, an entity shall disclose:

(a) the currency and a description of the restrictions that result in that currency not being exchangeable into the other currency;

(b) a description of affected transactions;

(c) the carrying amount of affected assets and liabilities;

(d) the spot exchange rates used and whether those rates are:

 (i) observable exchange rates without adjustment (see paragraphs A12–A16); or

(ii) spot exchange rates estimated using another estimation technique (see paragraph A17);

*(e) a description of any estimation technique the entity has used, and qualitative and quantitative information about the inputs and assumptions used in that estimation technique; and

*(f) qualitative information about each type of risk to which the entity is exposed because the currency is not exchangeable into the other currency, and the nature and carrying amount of assets and liabilities exposed to each type of risk.

A20) When a foreign operation’s functional currency is not exchangeable into the presentation currency or, if applicable, the presentation currency is not exchangeable into a foreign operation’s functional currency, an entity shall also disclose:

(a) the name of the foreign operation; whether the foreign operation is a subsidiary, joint operation, joint venture, associate or branch; and its principal place of business;

(b) summarised financial information about the foreign operation; and

*(c) the nature and terms of any contractual arrangements that could require the entity to provide financial support to the foreign operation, including events or circumstances that could expose the entity to a loss.

About the RDR framework

The purpose of the RDR framework is to simplify the financial reporting for Tier 2 entities by removing or modifying some of the disclosure requirements in the accounting standards, while maintaining the same recognition and measurement requirements as Tier 1 entities.

The objective is to balance the benefits with the costs of preparing financial statements for Tier 2 for-profit entities. It achieves this by only requiring disclosures when they are of particular interest or value to users of those financial statements.

Rationale for proposing RDR concessions

We are proposing to provide RDR concessions for several disclosures introduced by the amending standard where it is not clear that there is sufficient benefit to users of these financial statements to justify the additional costs in disclosing these items.

We also observe that these disclosures are of a similar theme to other disclosures that are already subject to RDR concessions under NZ IFRS RDR.

Therefore, we consider that it would be consistent and logical to extend the same concessions to the marked disclosures introduced by the amending standard.

Consultation closed on 21 November 2023