• Foreign exchange retranslation method

    The foreign exchange retranslation method is relevant to entities with arrangements denominated in, or determined by, reference to a foreign currency. For an entity that has made a functional currency election under Subdivision 960-D, this means a currency that is not its applicable functional currency.

    Under AASB 121 The Effects of Changes in Foreign Exchange Rates (AASB 121) or a comparable accounting standard made under a foreign law, certain gains and losses attributable to currency exchange rate movements must be recognised in profit or loss in an entity's financial reports.

    The foreign exchange retranslation method only applies to these gains and losses.

    An entity that meets the common requirements can elect to apply the foreign exchange retranslation method to all financial arrangements, and those arrangements subject to Subdivision 775-F (general election).

    Alternatively, an entity can elect to apply the foreign exchange retranslation method to one or more of its qualifying forex accounts (a qualifying forex account election).

    The retranslation method will not apply to a financial arrangement if either the fair value or reliance on financial reports election applies to that particular arrangement, or to the extent that the hedging financial arrangements election applies in relation to that arrangement.

    The gain or loss recognised in an income year under the retranslation method will generally be the same as the amount recognised under AASB 121 or its foreign equivalent in the entity's profit or loss. However, an amount will not be recognised if the amount recognised in the entity's profit or loss has been previously recognised in equity.

    See also:

    General election

    Where an entity makes the general retranslation election, the foreign exchange retranslation method will apply to financial arrangements that satisfy the following:

    • The entity starts to have the financial arrangement in the income year in which it makes the election or in a later income year.
    • An amount attributable to changes in currency exchange rates must be recognised in profit or loss in the financial reports as per AASB 121 or a comparable accounting standard made under a foreign law.

    Where the general election ceases to apply, certain balancing adjustments must be made. However, the balancing adjustments are made only to the extent the balancing adjustments are reasonably attributable to currency exchange rate movements.

    Qualifying forex account election

    Where an entity makes a qualifying forex account election, the foreign exchange retranslation method will apply to the qualifying forex account for which it made the election.

    A qualifying forex account is defined in section 995-1 as an account denominated in a foreign currency that has the primary purpose of facilitating transactions or is a credit card account.

    A qualifying forex account election will apply:

    • from the time when the entity starts to have the arrangement if the election is made before the entity starts to have the arrangement
    • from the start of the income year in which the election is made if the entity makes an election after it starts to have the arrangement.

    See also:

    Arrangement held prior to making the election

    An entity can make this election even if it starts to have the qualifying forex account election before making the election.

    However, such an election will not apply to an account that was created before the start of the first year TOFA began applying to the entity, unless that entity has made an election for TOFA to apply to its existing financial arrangements.

    For these qualifying forex accounts held prior to making the election to which TOFA applies, the entity must make a balancing adjustment according to Subdivision 230-G calculated as if the taxpayer had ceased the arrangement for its fair value at the time when the election was applied to the arrangement. However, the balancing adjustment will only recognise an amount to the extent it is reasonably attributable to a currency exchange rate effect.

    Example: Applying the general retranslation election to a US$ loan

    Yee Imports Co (Yee) is a large Australian company that is eligible and makes the foreign exchange retranslation method – general election. Yee has a loan of US$1,000 for which gains and losses attributable to changes in foreign exchange rates must be recognised in profit or loss in accordance with AASB 121. Under the loan agreement, Yee does not have to repay any principal until the end of year four.

    When Yee entered into the loan, it had a liability in Australian dollars (A$) of $2,000 (A$1 = US$0.50). By the end of year one, the Australian dollar had appreciated against the US dollar, such that the A$ value of the loan decreased to $1,333. For accounting purposes, a profit of $667 is recognised. This means for tax purposes, a $667 gain is recognised.

    In year two, a gain of $83 is recognised as the Australian dollar value of the loan has decreased from $1,333 to $1,250. In year three, the Australian dollar value of the loan has increased to $1,428 and a loss of $178 is recognised.

    At the end of year four, when the loan is repaid, Yee performs a balancing adjustment calculation under Subdivision 230-G and works out that it makes a $110 loss.

     

    Year 0

    Year 1

    Year 2

    Year 3

    Year 4

    Amount of debt (US$)

    $1,000

    $1,000

    $1,000

    $1,000

    0

    A$ currency

    0.50

    0.75

    0.80

    0.70

    0.65

    A$ value of debt

    $2,000

    $1,333

    $1,250

    $1,428

    $1,538

    Tax treatment under the foreign exchange retranslation method

    0

    $667 gain ($2,000 – $1,333)

    $83 gain ($1,333 – $1,250)

    $178 loss ($1,250 – $1,428)

    $110 loss*

    * Subdivision 230-G balancing adjustment applies when the financial arrangement ceases.

    End of example

    The foreign exchange retranslation method only applies to a gain or loss attributable to currency exchange rate movements. The accruals and realisation methods may apply to the gain or loss not attributable to currency exchange rate movements.

      Last modified: 10 Jun 2016QC 27222