10
INDONESIAN INSTITUTE OF ACCOUNTANTS
Statement of Financial Accounting Standard (SFAS) No.10, Transactions in Foreign Currencies, was adopted by a meeting of the Indonesian Accounting Principles Committee on August 24, 1994 and was ratified by the Executive Committee of the Association of Indonesian Accountants on September 7, 1994.
Compliance with the policies contained in this Statement is not obligatory in the case of immaterial items.
Jakarta, September 7, 1994
Executive Committee
Association of Indonesian Accountants
Indonesian Accounting Principles Committee
Hans Kartikahadi Chairman
Jusuf Halim Secretary
Hein G. Surjaatmadja Member
Katjep K. Abdoelkadir Member
Wahjudi Prakarsa Member
Jan Hoesada Member
M. Ashadi Member
Mirza Mochtar Member
IPG. Ary Suta Member
Sobo Sitorus Member
Timoty Marnandus Member
CONTENTS
paragraphs INTRODUCTION...01-05 Objective
Scope...01-04
Definitions...05
EXPLANATION...06-25 Initial Recognition...06-08 Reporting at Subsequent Balance Sheet Dates...09-10 Recognition of Exchange Differences...11-21 Forward Exchange Contract...15
Net Investment in a Foreign Entity...16-18 Allowed Alternative Treatment...19-21 Disclosure...22-25 STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 10 TRANSACTIONS IN FOREIGN CURRENCIES...25-35 Initial Recognition...26
Reporting at Subsequent Balance Sheet Dates...27
Recognition of Exchange Differences...28-32 Forward Exchange Contract...29
Net Investment in a Foreign Entity...30-31 Allowed Alternative Treatment...32
Disclosure...33
Transition...34
INTRODUCTION Objective
An enterprise may engage in foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. In order to include foreign currency transactions in financial statements, transactions must be expressed in the enterprise’s reporting currency.
This Statement prescribes the accounting treatment for foreign currency transactions including the determination of the exchange rate used and recognition of the financial effects of changes in exchange rates in the financial statements.
Scope
01 This Statement should be applied in accounting for transactions in foreign currencies.
02 This Statement does not deal with hedge accounting for foreign currency items other than exchange differences arising on hedge transactions. Other aspects of hedge accounting will be dealt with in the related financial accounting standard.
03 This Statement does not deal with the translation of financial statements from foreign operations for consolidation or partial consolidation purposes or in applying the equity method (see SFAS No. 11, Translation of Financial Statements in Foreign Currencies).
04 This Statement does not deal with the presentation of foreign currencies in a cash flow statement of cash flow arising from transactions in a foreign currency (see SFAS No. 2, Cash Flow Statements).
Definitions
05 The terms used in this Statement are defined as follows:
Foreign operation is a subsidiary, associate, joint venture or branch of the
reporting enterprise, the activities of which are based or conducted in a country other than the country of the reporting enterprise. The operation may be an integral part of a reporting enterprise or a foreign entity.
Foreign entity is a foreign operation, the activities of which are not an integral part
of those reporting enterprises.
Reporting currency is the currency used to present the financial statements.
Exchange rate is the ratio of exchange for two currencies.
Exchange difference is the difference resulting from reporting the same number of
units of a foreign currency in the reporting currency at different exchange rates.
Closing rate is the spot exchange rate at the balance sheet date.
Net investment in a foreign entity is the reporting enterprise’s share in the net assets
of that entity.
Monetary items is money held and assets and liabilities to be received or paid in
fixed or determinable amounts of money.
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.
EXPLANATION Initial Recognition
06 A foreign currency transaction is a transaction which is denominated in, or requires settlement in, a foreign currency. This includes transactions arising when an enterprise either:
(a) buys or sells goods or services whose 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 assets, or incurs or settle liabilities, denominated in a foreign currency.
07 A foreign currency transaction should be recorded using the exchange rate at the date of the transaction.
08 The 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.
09 At each balance sheet date:
(a) foreign currency assets and liabilities items should be reported in rupiah using the closing rate. If there is a difficulty in determining the closing rate, the Bank of Indonesia’s middle rate can be used as an objective indicator;
(b) non-monetary items should 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 should be reported using the exchange rates that existed when the values were determined.
10 The carrying amount of an item is determined in accordance with the relevant accounting standards. For example, certain financial instruments and property (investments carried out by pension funds), 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 Statement.
Recognition of Exchange Differences
11 Paragraphs 13-17 outline the accounting treatment required by this Statement in respect to exchange differences for 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 affect liabilities which cannot be settled and which arise directly on the recent acquisition of assets invoiced in a foreign currency. The alternative treatment for such exchange differences is outlined in paragraph 20.
12 This Statement does not deal with hedge accounting for foreign currency items other than exchange differences arising on a hedge transaction. Other aspects of hedge accounting will be dealt with in the relevant financial accounting standard.
13 Exchange differences on the translation of foreign currency monetary assets and liabilities at balance sheet date and gain/loss from exchange differences in foreign currency transactions, should be credited or expensed in the period in which they arise, with the exception of exchange differences dealt with in accordance with paragraph 16 and 18.
Forward Exchange Contract
15a A type of SWAP forward exchange contract is an exchange transaction of two foreign currencies with a cash purchase and then resale at a future specified date or cash sale and then repurchase at a future specified date. The purpose of the transaction is to fix the exchange rate and to avoid a loss from exchange difference. In a SWAP transaction, there is a predetermined premium;
15b The accounting treatment for a hedge contract is as follows:
(i) The difference between the spot rate and the forward rate is recorded as a discount or premium to be amortized over the life of the contract;
(ii) The difference of exchange rate for foreign currency liabilities (which is protected under hedging), forward receivable and forward payable in foreign currency should be measured at the end of each period. The exchange difference arising from the difference between the balance sheet spot rate and the spot exchange rate at the inception of the contract is recognized as gain or loss of foreign exchange in that period; and
(iii) In the balance sheet, the forward receivable or forward payable, and the related unamortized discount or premium which arises from forward contracts should be grouped together as an asset or liability, depending on the overall net position of the item.
Net Investment in a Foreign Entity
16 Exchange differences arising from a monetary item that, in substance, forms part of an enterprise’s net investment in a foreign entity should be classified as equity in the enterprise’s financial statements until the disposal of the net investment, at which time an exchange differences should be recognized as income or expense in accordance with SFAS No. 11, Translation of Financial Statements in Foreign Currencies.
17 An enterprise may have a monetary item that is receivable from, or payable to, a foreign entity. An item for which settlement is neither planned, nor likely to occur in the foreseeable future is, in substance, an extension to, or deduction from, the enterprise’s net investment in that foreign entity. Such monetary items may include long-term receivables or loans but do not include trade receivables or trade payables.
Allowed Alternative Treatment
19 The benchmark treatment for exchange differences dealt with in paragraph 20 is set out in paragraph 13.
20 Exchange differences may result from a severe devaluation or depreciation of a currency against which there is no practical means of hedging, resulting in liabilities which cannot be settled as a consequence of the recent acquisition of an asset invoiced in a foreign currency. Such exchange differences should be included in the carrying amount of the related asset, provided that the adjusted carrying amount does not exceed the lower of the replacement cost and the amount recoverable from the sale or use of the asset. The alternative chosen should be disclosed.
Disclosure
22 An enterprise should disclose:
(a) the amount of exchange differences included in net profit or loss for that period;
(b) net exchange differences (which is classified in the equity section as a separate item), and the reconciliation of the exchange difference at the beginning and the end of the period; and
(c) the amount of exchange differences arising during the period included in an asset’s carrying amount, in accordance with the allowed alternative treatment detailed in paragraph 20.
23 An enterprise should disclose the effect on foreign currency monetary items in relation to a subsequent exchange difference, if that difference is material and if nondisclosure will influence the user’s decisions and evaluations (see SFAS No. 8, Contingencies and Events Occurring After the Balance Sheet Date).
24 Disclosure is also required in relation to management’s policy on foreign currency risk.
STATEMENT OF FINANCIAL ACCOUNTING STANDARD NUMBER 10
TRANSACTIONS IN FOREIGN CURRENCIES
Statement of Financial Accounting Standard No. 10 consists of paragraphs 26-35. This Statement should be read in the context of paragraphs 1-25.
Initial Recognition
26 A foreign currency transaction should be recorded using the exchange rate at the date of transaction.
Reporting at Subsequent Balance Sheet Dates 27 At each balance sheet date:
(a) foreign currency assets and liabilities items should be reported in rupiah using the closing rate. If there is difficulty in determining the closing rate, the Bank of Indonesia’s middle rate can be used as an objective indicator;
(b) non-monetary items should 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 foreign currency should be reported using the exchange rates that existed when the values were determined.
Recognition of Exchange Differences
Forward Exchange Contract
29a A type of SWAP forward exchange contract is an exchange transaction of two foreign currencies with a cash purchase and then resale at a future specified date or cash sale selling and then repurchase at a future specified date. The purpose of the transaction is to fix the exchange rate and to avoid a loss from exchange difference. In SWAP transactions there is a pre-determined premium.
29b The accounting treatment for a hedge contract is as follows:
(i) The difference between the spot rate and the forward rate is recorded as a discount or premium to be amortized over the life of the contract;
(ii) The difference of the exchange rate for foreign currency liability (which is protected under hedging), forward receivable and forward payable in foreign currency, should be measured at each end of each period. The exchange difference arising from the difference between the balance sheet spot rate and the spot exchange rate at the inception of the contract is recognized as gain or loss of foreign exchange in that period; and
(iii) In the balance sheet, the forward receivable or forward payable, and the related unamortized discount or premium which arise from forward contract should be grouped together as an asset or liability, depending on the overall net position of the item.
Net Investment in a Foreign Entity
30 Exchange differences arising on a monetary item that, in substance form part of an enterprise’s net investment in a foreign entity, should be classified as equity in the enterprise’s financial statements until the disposal of the net investment, at which time any exchange differences should be recognized as income or expense in accordance with SFAS No. 11, Translation of Financial Statements in Foreign Currencies.
Allowed Alternative Treatment
32 Exchange differences may result from a severe devaluation or depreciation of a currency against which there is no practical means of hedging, resulting in liabilities which cannot be settled as a consequence of the recent acquisition of an asset invoiced in a foreign currency. Such exchange differences should be included in the carrying amount of the related asset, provided that the adjusted carrying amount does not exceed the lower of the replacement cost and the amount recoverable from the sale of use of the asset. The choice of this alternative should be disclosed.
Disclosure
33 An enterprise should disclose:
(a) the amount of exchange differences included in net profit or loss for that period;
(b) net exchange differences (classified in the equity sections as a separate item), and the reconciliation of that exchange difference at the beginning and the end of the period; and
(c) the amount of exchange differences arising during the period included in an asset’s carrying amount, in accordance with allowed alternative treatment in paragraph 32.
Transition
34 When an enterprise applies this Statement for the first time, the cumulative balance of the deferred exchange differences at the beginning of the period, which should be classified as equity in the previous period, should be classified and disclosed separately. In the event that these amounts cannot be determined fairly, the reason for this exception should be explained.
Effective Date
