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21.5 Other disclosures
Publication date: 31 May 2022
us Financial statement presentation guide
In addition to the required disclosures, reporting entities may consider disclosures in the following areas depending on materiality and facts and circumstances.
- The existence of foreign currency commitments and contingencies (FSP 21.5.1)
- The effects of changes in foreign currency exchange rates subsequent to period-end (FSP 21.5.2)
- The effects of changes in foreign currency exchange rates during the period on the results of operations (FSP 21.5.3)
- Foreign currency hedging policies (FSP 21.5.4)
- How functional currency is determined (FSP 21.5.5)
- Changes in functional currency (FSP 21.5.6)
- The use of multiple foreign currency exchange rates (FSP 21.5.7)
- Operations in highly inflationary economies (FSP 21.5.8)
Disclosures in these areas provide the users of the financial statements with increased transparency into how foreign currency impacts the operations and financial position of the business.
21.5.1 Foreign currency commitments and contingencies
As outlined in FSP 23, reporting entities are required to disclose commitments and contingencies in the footnotes. When commitments and contingencies (such as leases, dividend restrictions, or the income tax effect of unremitted earnings) are denominated in a foreign currency, the reporting entity should disclose these amounts in the reporting currency.
ASC 830 does not specify the exchange rate to be used to present the amounts in such instances; however, common practice is to present the amounts using the exchange rate at the balance sheet date, with disclosure of the fact that current rates have been used, as suggested by ASC 830-20-30-3 and ASC 830-20-35-2.
In certain instances, alternative exchange rates or disclosures may be more appropriate, including the following.
- A singular, significant unrecognized contingency exists for a number of years (e.g., a foreign tax assessment)
The amount may be disclosed in the foreign currency with parenthetical disclosure of the reporting currency amount specified at current rates. This approach avoids the possible confusion resulting from the effects of subsequent rate changes.
- Disclosure of foreign retained earnings (e.g., subject to either taxation on repatriation or dividend restrictions)
The amount may appear inappropriate if translated at current rates when the retained earnings themselves are translated at historical rates in the primary financial statements. In such cases, judgment and expanded disclosure (e.g., use of a dual translation) should resolve any potential confusion.
21.5.2 Effects of exchange rate changes subsequent to year-end
If significant exchange rate changes occur subsequent to the balance sheet date, ASC 830-20-50-2 indicates that a reporting entity should consider additional disclosure, including the effect on unsettled balances pertaining to foreign currency transactions. If it is not practical to determine the effects of changes on unsettled transactions, ASC 830-20-50-2 prescribes that the reporting entity state that fact in the footnotes.
Also, subsequent changes in exchange controls could significantly impact the ability of a reporting entity to transact in a foreign currency after the balance sheet date, due to restrictions on purchases and sales of foreign currency within a specific country. Reporting entities should consider disclosure in these situations.
For further discussion of subsequent events, see FSP 28.
21.5.3 Effects of foreign exchange rate changes
Reporting entities include the effects of all exchange rate changes occurring during the year either in income (for transaction gains and losses) or as a component of OCI (for translation gains and losses).
Reporting entities may consider additional disclosure regarding the broader economic circumstances surrounding rate changes to assist financial statement users in understanding the effects on the results of operations and to improve the comparability of current results with prior periods.
ASC 830-20-50-3 notes that this disclosure is “encouraged,” and that it may include (1) the effects of translating revenue and expenses at different rates than used in the previous period, and (2) the economic effects of rate changes, including the effects on selling prices, sales volume, and cost structures.
21.5.4 Foreign currency hedging policy
A reporting entity should consider disclosing its foreign currency hedging policy when it has a material impact on the financial statements and/or disclosure will enhance the comparability and transparency of the financial statements. See FSP 19.5 (post ASU 2017-12) or FSP 19.5A (pre ASU 2017-12) for a discussion of derivatives and hedging disclosures.
21.5.5 Determination of functional currency
ASC 830 does not require disclosure of the factors considered in determining functional currency. Nevertheless, in some instances, disclosure of the factors may be helpful to provide comparability and improved understanding of the results of operations.
21.5.6 Changes in functional currency
The SEC staff has stated in their Division of Corporation Finance: Frequently Requested Accounting and Financial Reporting Interpretations and Guidance, dated March 31, 2001, that registrants with foreign operations in economies that have recently experienced economic turmoil should evaluate whether significant changes in economic facts and circumstances have occurred that warrant reconsideration of their functional currencies. Reconsideration of the functional currency is also required when the economy in which a foreign operation is located ceases to be highly inflationary.
The SEC staff has indicated that ASC 830 does not prescribe specific disclosures about a change in functional currency. However, the SEC staff believes that disclosures in the financial statements and MD&A may be necessary to permit an investor to understand the foreign operations and their impact on the registrant's results of operations, liquidity, and cash flows. Registrants should consider the need to disclose the nature and timing of the change, the actual and reasonably likely effects of the change, and the economic facts and circumstances that led management to conclude that the change was appropriate. The effects of those underlying economic facts and circumstances on the registrant's business should also be discussed in MD&A.
See FX 3.3.2 for additional considerations related to changes in functional currency.
21.5.7 Multiple foreign currency exchange rates
Often, in economies with high inflation, significant currency exchange controls exist. In these situations, governments sometimes allow multiple legal exchange rates to exist and different rates may be used to remeasure monetary balances denominated in a foreign currency and to translate balances from a foreign entity’s functional currency to the reporting currency. This may occur when one exchange rate is available for use in exchanging funds to be used for payment of purchases and an alternative rate is required for the payment of dividends.
ASC 830-30-S99 outlines the minimum expected disclosure requirements for SEC registrants when different exchange rates are used for remeasurement of monetary balances and for the translation of functional currency financial statements.
Excerpt from ASC 830-30-S99-1
- Disclosure of the rates used for remeasurement and translation.
- A description of why the actual U.S. dollar denominated balances differ from the amounts reported for financial reporting purposes, including the reasons for using two different rates with respect to remeasurement and translation.
- Disclosure of the relevant line items (e.g., cash, accounts payable) on the financial statements for which the amounts reported for financial reporting purposes differ from the underlying U.S. dollar denominated values.
- For each relevant line item, the difference between the amounts reported for financial reporting purposes versus the underlying U.S. dollar denominated values.
- Disclosure of the amount that will be recognized through the income statement (as well as the impact on the other financial statements) as part of highly inflationary accounting...
21.5.8 Operations in highly inflationary economies
We encourage robust disclosure regarding operations in highly inflationary economies. Reporting entities should consider disclosing the following related to subsidiaries in highly inflationary economies:
- A description of the business (including the types and amounts of materials imported, plant and equipment in country, and the impact of regulations such as price controls on the business)
- Summarized financial information (including balance sheet, statement of cash flows, and income statement)
- Net monetary assets and liabilities by currency
- The amount of any gain or loss that resulted from exchange rates that have changed
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