GAS 25 Foreign Currency Translation in Consolidated Financial Statements

• Adopted by the Accounting Standards Committee of Germany (ASCG) on 8 February 2018.  Publication of the authoritative German version by the Federal Ministry of Justice and Consumer Protection under section 342(2) of the HGB on 3 May 2018.
• Revised paragraphs 104, and 106,  and new paragraph 104a adopted by the Accounting Standards Committee of Germany (ASCG) on 17 October 2019. Publication of the authoritative German version by the Federal Ministry of Justice and Consumer Protection under section 342(2) of the HGB on 20 December 2019.

This Standard expands on the translation of foreign currency transactions in the financial statements adjusted to conform to uniform group accounting policies for consolidated financial statements, and on the principles for translating the assets and liabilities belonging to a branch outside the euro area. It also addresses the principles of foreign currency translation in accordance with section 308a of the HGB. Additionally, the Standard sets out in detail the requirements governing the disclosures on foreign currency translation in the notes to the consolidated financial statements in compliance with section 313(1) sentence 3 no. 1 of the HGB.

This Standard applies to all parent entities that are required to prepare German GAAP consolidated financial statements in accordance with sections 290ff. of the HGB or consolidated financial statements in accordance with sections 11ff. of the PublG or that do so voluntarily. The application of the requirements of the Standard to translate foreign currency transactions in German GAAP annual financial statements and to the information to be disclosed in the notes to German GAAP annual financial statements, with the necessary modifications, is encouraged.

The scope of the Standard with regard to the translation of foreign currency transactions extends both to the translation of foreign currency transactions at the data of initial recognition and to translation in the course of subsequent measurement in accordance with section 256a in conjunction with section 298(1) of the HGB.

Assets, liabilities, prepaid expenses or deferred income, or special items resulting from a foreign currency transaction are initially recognised at the spot rate (the applicable bid or ask rate) at the transaction date. Any gains and losses arising on the initial recognition of a foreign currency transaction are translated at the same exchange rate as the underlying balance sheet items.

The Standard sets out different requirements for foreign currency translation for non-monetary and for monetary assets and liabilities in the course of subsequent measurement.

Non-monetary assets that were originally acquired in foreign currency are subsequently measured in local currency on the basis of the cost recognised at the acquisition date. Determining the lower of cost or market value to be applied in accordance with section 253(3) sentences 5 and 6 as well as subsection (4) of the HGB depends on whether the assets acquired in foreign currency can be reacquired or sold exclusively in that foreign currency, or also or only in local currency.

In accordance with section 256a sentence 1 of the HGB, monetary assets and liabilities are subsequently measured at the mid-market spot rate at the reporting date. If the remaining maturity is one year or less, the realisation principle and the historical cost convention do not apply in accordance with section 256a sentence 2 of the HGB. This exception applies only in the case of exchange rate-related changes in carrying amounts.

All currency translation differences resulting from foreign currency translation in the course of the subsequent measurement of non-monetary and monetary assets and liabilities that are not part of hedging relationships within the meaning of section 254 of the HGB are recognised in profit or loss.

The assets and liabilities of a branch in a country outside the euro area are measured in the same way as assets and liabilities held directly by the head office at the acquisition date and at the subsequent reporting dates. The application of section 308a of the HGB in the German GAAP annual financial statements of the head office, with the necessary modifications, is not permitted.

The modified closing rate method in accordance with section 308a of the HGB, if applicable in conjunction with section 310(2) of the HGB, applies to the translation of foreign currency financial statements of subsidiaries and joint ventures. The Standard encourages entities to apply section 308a of the HGB to the foreign currency financial statements of associates that are measured in the consolidated financial statements using the equity method in accordance with section 312 of the HGB.

In accordance with section 308a of the HGB sentences 1 and 2, all assets, liabilities, prepaid expenses or deferred income, and special items of a foreign subsidiary are generally translated into euros at the mid-market spot rate at the group reporting date, items of equity at historical mid-market spot rates and income statement items at average rates. In accordance with section 308a sentence 3 of the HGB, the currency translation difference recognised in equity is presented within group equity following group revenue reserves. The Standard specifies the use and calculation of exchange rates for translating balance sheet and income statement items. In addition, it addresses other specific issues relating to the application of the modified closing rate method, in particular in connection with individual consolidation adjustments.

Hidden reserves and liabilities identified in the course of the initial consolidation of subsidiaries in the consolidated financial statements, provided that they are realised in the currency of the subsidiary concerned, as well as any resulting goodwill or negative consolidation differences form part of the net investment in the foreign subsidiary. They are measured consistently in the currency of the subsidiary. Their carrying amounts in the consolidated financial statements adjusted in subsequent periods, which are to be calculated in accordance with sections 301 and 309 of the HGB and the requirements of GAS 23 expanding on them, are translated into euros at the reporting dates following the date of initial consolidation in accordance with section 308a of the HGB.

If a subsidiary is deconsolidated, the currency translation difference recognised in equity and adjusted in subsequent periods until the disposal date is reclassified to profit or loss (section 308a sentence 4 of the HGB). This applies both to the sale of shares (share deal) and to the disposal of all assets and liabilities of a foreign subsidiary (asset deal).

The Standard also contains requirements addressing foreign currency translation in the case of disposals/acquisitions of shares without a change in status, a change in the method of consolidation or inclusion, and accounting for subsidiaries in a multi-level group.

The Standard requires exchange rate-related elimination differences arising in the course of consolidating intercompany balances generally to be recognised directly in equity in the ‘Currency translation difference recognised in equity’ line item. Effects on profit or loss from the measurement of intercompany contractual relationships in the annual financial statements of an entity included in the consolidated financial statements are eliminated in profit or loss and are also recognised in the ‘Currency translation difference recognised in equity’ line item. These amounts are reclassified to the income statement when the intercompany loan amounts are reduced.

For the elimination of intercompany profits or losses in accordance with section 304 of the HGB relating to intercompany transactions involving entities that prepare their financial statements in different currencies, the Standard clarifies the currency to be applied for measuring the intercompany profits or losses to be eliminated. Barring simplification considerations, the intercompany profit or loss that is eliminated against the carrying amount of inventory in the balance sheet of the receiving entity is generally measured in the currency of the receiving entity, whereas the currency of the supplier entity is used to measure the intercompany profit or loss to be eliminated from consolidated net income or net loss in the period in which the goods or services are supplied.

Currency translation differences arising in the course of consolidating income and expenses are generally reclassified to the ‘Other operating income’ or ‘Other operating expenses’ line item.

With regard to the translation of foreign currency financial statements of associates that are included in the consolidated financial statements in accordance with section 312 of the HGB, the Standard sets out two permitted presentation options for adjusting the equity method carrying amount in subsequent periods, both of which are based on section 308a of the HGB: presenting the currency translation difference recognised in equity either directly on the face of the balance sheet as a credit, or by presenting it as a debit included in the carrying amount of the investment accounted for using the equity method. Application of the first alternative is encouraged in the Standard.

Financial statements from hyperinflationary economies must be adjusted for the effects of inflation before they are included in the parent entity’s consolidated financial statements. The Standard lists indicators for identifying a hyperinflationary economy and methods to be used to adjust for inflation.

Finally, the Standard defines the disclosures in the notes to the consolidated financial statements in connection with the translation of foreign currency items and financial statements prepared in foreign currencies.

The requirements of this Standard must be applied for the first time for financial years beginning after 31 December 2018. Earlier application in full is permitted and encouraged.