SIC-19, also known as the “Reporting Currency – Measurement and Presentation of Financial Statements under IAS 21 and IAS 29” is an interpretation issued by the International Financial Reporting Interpretations Committee (IFRIC) under the International Accounting Standards (IAS) framework.
Background:
SIC-19 was issued in 1999 and provides guidance on the presentation of financial statements when an entity operates in a hyperinflationary economy or when it prepares its financial statements in a currency other than its functional currency in accordance with IAS 21.
Key Definitions:
Reporting Currency: The currency in which an entity presents its financial statements.
Functional Currency: The currency of the primary economic environment in which the entity operates.
Hyperinflation: A cumulative inflation rate over three years approaching, or exceeding, 100%.
Measurement and Presentation of Financial Statements under IAS 21:
Under IAS 21, an entity is required to determine its functional currency, which is the currency of the primary economic environment in which it operates. The functional currency is used as the basis for measuring and presenting the financial statements. However, in some situations, an entity may need to present its financial statements in a different currency, which is known as the reporting currency. SIC-19 provides guidance on how to determine the reporting currency when it is different from the functional currency.
Determining the Reporting Currency:
SIC-19 states that an entity should determine its reporting currency based on the following factors:
The currency in which the entity generates and expends cash, and the currency that mainly influences the sales prices of its goods and services.
The currency that is commonly used in the country whose economic environment is most closely related to the entity’s operations.
The currency in which the entity’s financing activities are conducted, such as borrowing funds and issuing equity instruments.
The currency that best reflects the economic substance of the underlying events and circumstances.
Measurement and Presentation in Hyperinflationary Economies under IAS 29:
When an entity operates in a hyperinflationary economy, IAS 29 requires the entity to restate its financial statements in the reporting currency, which should be the functional currency of the entity’s parent company or the entity that dominates the financial reporting process. SIC-19 provides guidance on how to determine the reporting currency when an entity operates in a hyperinflationary economy.
Determining the Reporting Currency in Hyperinflationary Economies:
SIC-19 states that when an entity operates in a hyperinflationary economy, it should present its financial statements in the reporting currency, which should be the currency that measures the entity’s transactions, events, and conditions most faithfully. In practice, this is often the functional currency of the entity’s parent company or the entity that dominates the financial reporting process, as it is expected to have the most relevant information about the entity’s operations.
Examples and Case Studies:
Let’s consider a few examples and case studies to illustrate the application of SIC-19 in practice:
Example 1:
Company A, a subsidiary of Company B, operates in a hyperinflationary economy where the local currency is highly unstable. Company A determines that its functional currency is the local currency, but due to the hyperinflationary conditions, it presents its financial statements in the reporting currency, which is the functional currency of its parent company, Company B. This is in accordance with the guidance in SIC-19, which requires the reporting currency to be determined based on the currency of the parent company or the entity that dominates the financial reporting process.
Example 2:
Company C, a multinational company, has operations in multiple countries with different functional currencies. However, the majority of its financing activities, including borrowing funds and issuing equity instruments, are denominated in US dollars. Company C determines that the US dollar is the currency that mainly influences its sales prices and the currency in which it generates and expends cash. Therefore, Company C decides to use the US dollar as its reporting currency, even though it may not be the functional currency of some of its subsidiaries. This decision is supported by the guidance in SIC-19, which allows the reporting currency to be determined based on the currency of the entity’s financing activities.
Case Study:
XYZ Corporation, a company based in a hyperinflationary economy, prepares its financial statements in the local currency, which is subject to significant inflationary pressures. However, XYZ Corporation is a subsidiary of ABC Corporation, a parent company based in a stable economy, which prepares its financial statements in US dollars. XYZ Corporation determines that its functional currency is the local currency, but due to the hyperinflationary conditions, it decides to present its financial statements in US dollars, which is the functional currency of its parent company ABC Corporation. This decision is in accordance with the guidance in SIC-19, which requires the reporting currency to be determined based on the currency of the parent company or the entity that dominates the financial reporting process.
In conclusion, SIC-19 provides guidance on the determination of the reporting currency, measurement, and presentation of financial statements under IAS 21 and IAS 29. It emphasizes the importance of considering various factors, such as the currency in which an entity generates and expends cash, the currency that mainly influences its sales prices, the currency of financing activities, and the economic substance of the underlying events and circumstances, when determining the reporting currency. Additionally, it provides specific guidance on presenting financial statements in hyperinflationary economies. Examples and case studies illustrate the application of SIC-19 in practice, helping entities comply with the requirements of IAS 21 and IAS 29 when preparing their financial statements in different currencies.