Commission Regulation (EC) No 708/2006 of  8 May 2006  amending Regulation (EC) No 1725/2003 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards International Accounting Standard (IAS) 21 and International Financial Reporting Interpretations Committee’s (IFRIC) Interpretation 7   (Text with EEA relevance)
Date: 2006-05-08
Institutions: European Commission
Subjects: accounting, capital market, international standard

9.5.2006

EN

Official Journal of the European Union

L 122/19

COMMISSION REGULATION (EC) No 708/2006

of 8 May 2006

amending Regulation (EC) No 1725/2003 adopting certain international accounting standards in
accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council
as regards International Accounting Standard (IAS) 21 and International Financial Reporting
Interpretations Committee’s (IFRIC) Interpretation 7

(Text with EEA relevance)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty
Community,

establishing the European

in order that the exchange differences arising could be
recognised in the equity section of
the consolidated
financial statements. However, in practice the loan may
be denominated in another (third) currency. The IASB
intended to impose this
concluded that
restriction,
to
permit the loan to be denominated in a third currency.

therefore published this

it had not

amendment

Having regard to Regulation (EC) No 1606/2002 of
the
European Parliament and of the Council of 19 July 2002 on
the application of international accounting standards (1), and in
particular Article 3(1) thereof,

(4)

The consultation with technical experts in the field
confirm that IFRIC 7 and the Amendment to IAS 21
in
meet
Article 3(2) of Regulation (EC) No 1606/2002.

the technical criteria for adoption set out

Whereas:

(1)

(2)

(3)

By Commission Regulation (EC) No 1725/2003 (2)
certain international standards and interpretations that
were extant at 14 September 2002 were adopted.

On 24 November 2005,
the International Financial
Reporting Interpretations Committee (IFRIC) published
IFRIC Interpretation 7 Applying the Restatement Approach
under
IAS 29 Financial Reporting in Hyperinflationary
‘IFRIC 7’.
IFRIC 7 clarifies the
Economies, hereinafter
requirements under IAS 29 Financial Reporting in Hyperin-
flationary Economies relating to issues that companies had
regarding how a company should restate its financial
statements pursuant to IAS 29 in the first year it iden-
tifies the existence of hyperinflation in the economy of
its functional currency.

a

in

On 15 December 2005, the International Accounting
Standards Board (IASB)
issued Amendment to IAS 21
The Effects of Changes in Foreign Exchange Rates — Net
its
Foreign Operation,
Investment
requirements regarding an entity's investment in foreign
operations. Companies had raised concerns relating to
loans that form part of a company's investment in a
foreign operation as
IAS 21 included provisions
requiring the loan to be denominated in the functional
currency of either the company or the foreign operation

clarify

to

(1) OJ L 243, 11.9.2002, p. 1.
(2) OJ L 261, 13.10.2003, p. 1. Regulation as last amended by Regu-

lation (EC) No 108/2006 (OJ L 24, 27.1.2006, p. 1).

(5)

Regulation (EC) No 1725/2003 should therefore be
amended accordingly.

(6)

The measures provided for in this Regulation are in
accordance with the opinion of the Accounting Regu-
latory Committee,

HAS ADOPTED THIS REGULATION:

Article 1

Annex to Regulation (EC) No 1725/2003 is amended as
follows:

1. International Financial Reporting Interpretations Committee’s
Interpretation 7 Applying the Restatement Approach
(IFRIC)
in Hyperinflationary
IAS 29 Financial Reporting
under
Economies, is inserted as set out in the Annex to this Regu-
lation;

2. International Accounting Standard (IAS) 21 is amended in
accordance with the Amendment to IAS 21 The Effects of
Changes in Foreign Exchange Rates — Net
in a
Foreign Operation, as set out in the Annex to this Regulation.

Investment

L 122/20

EN

Official Journal of the European Union

9.5.2006

Article 2

Each company shall apply IFRIC 7 as set out

1.
in the Annex to this Regulation as from the
commencement date of its 2006 financial year at the latest, except for companies with a January or
February commencement date shall apply IFRIC 7 as from the commencement date of its 2007 financial
year at the latest.

Each company shall apply the Amendment to IAS 21 as set out in the Annex to this Regulation as

2.
from the commencement date of its 2006 financial year at the latest.

This Regulation shall enter into force on the third day following that of its publication in the Official Journal
of the European Union.

Article 3

This Regulation shall be binding in its entirety and directly applicable in all Member States.

Done at Brussels, 8 May 2006.

For the Commission

Charlie McCREEVY
Member of the Commission

9.5.2006

EN

Official Journal of the European Union

L 122/21

ANNEX

INTERNATIONAL FINANCIAL REPORTING STANDARDS

IFRIC 7

IAS 21

IFRIC Interpretation 7 Applying the Restatement Approach under IAS 29 Financial Reporting in
Hyperinflationary Economies

Amendment to IAS 21 The Effects of Changes in Foreign Exchange Rates — Net Investment in a
Foreign Operation

‘Reproduction allowed within the European Economic Area. All existing rights reserved outside the EEA, with
the exception of the right to reproduce for the purposes of personal use or other fair dealing. Further infor-
mation can be obtained from the IASB at www.iasb.org’

L 122/22

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Official Journal of the European Union

9.5.2006

IFRIC INTERPRETATION 7

Applying the Restatement Approach under IAS 29

Financial Reporting in Hyperinflationary Economies

References
— IAS 12 Income Taxes
— IAS 29 Financial Reporting in Hyperinflationary Economies

Background

1 This Interpretation provides guidance on how to apply the requirements of IAS 29 in a reporting period in which an
entity identifies (*) the existence of hyperinflation in the economy of its functional currency, when that economy was
not hyperinflationary in the prior period, and the entity therefore restates its financial statements in accordance with
IAS 29.

Issues

2 The questions addressed in this Interpretation are:

(a) how should the requirement ‘… stated in terms of the measuring unit current at the balance sheet date’

in

paragraph 8 of IAS 29 be interpreted when an entity applies the Standard?

(b) how should an entity account for opening deferred tax items in its restated financial statements?

Consensus

3 In the reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional
currency, not having been hyperinflationary in the prior period, the entity shall apply the requirements of IAS 29 as if
the economy had always been hyperinflationary. Therefore, in relation to non-monetary items measured at historical
cost, the entity’s opening balance sheet at the beginning of the earliest period presented in the financial statements shall
be restated to reflect the effect of inflation from the date the assets were acquired and the liabilities were incurred or
assumed until the closing balance sheet date of the reporting period. For non-monetary items carried in the opening
balance sheet at amounts current at dates other than those of acquisition or incurrence, that restatement shall reflect
instead the effect of inflation from the dates those carrying amounts were determined until the closing balance sheet
date of the reporting period.

4 At the closing balance sheet date, deferred tax items are recognised and measured in accordance with IAS 12. However,

the deferred tax figures in the opening balance sheet for the reporting period shall be determined as follows:

(a)

the entity remeasures the deferred tax items in accordance with IAS 12 after it has restated the nominal carrying
amounts of its non monetary items at the date of the opening balance sheet of the reporting period by applying
the measuring unit at that date.

(b) the deferred tax items remeasured in accordance with (a) are restated for the change in the measuring unit from the
date of the opening balance sheet of the reporting period to the closing balance sheet date of that period.

The entity applies the approach in (a) and (b) in restating the deferred tax items in the opening balance sheet of any
comparative periods presented in the restated financial statements for the reporting period in which the entity applies
IAS 29.

5 After an entity has restated its financial statements, all corresponding figures in the financial statements for a
subsequent reporting period,
including deferred tax items, are restated by applying the change in the measuring
unit for that subsequent reporting period only to the restated financial statements for the previous reporting period.

Effective date

6 An entity shall apply this Interpretation for annual periods beginning on or after 1 March 2006. Earlier application is
encouraged. If an entity applies this Interpretation to financial statements for a period beginning before 1 March 2006,
it shall disclose that fact.

(*) The identification of hyperinflation is based on the entity’s judgement of the criteria in paragraph 3 of IAS 29.

9.5.2006

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Official Journal of the European Union

L 122/23

Amendment to IAS 21

The Effects of Changes in Foreign Exchange Rates

This document sets out amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates. The amendments finalise
proposals that were contained in Draft Technical Correction 1 Proposed Amendments to IAS 21 Net Investment in a
Foreign Operation published in September 2005.

An entity shall apply the amendments in this document for annual periods beginning on or after 1 January 2006. Earlier
application is encouraged.

Net investment in a foreign operation

P a r a g r a p h 1 5 A i s a d d e d a s f o l l o w s .

‘15A The entity that has a monetary item receivable from or payable to a foreign operation described in paragraph
15 may be any subsidiary of the group. For example, an entity has two subsidiaries, A and B. Subsidiary B is a
foreign operation. Subsidiary A grants a loan to Subsidiary B. Subsidiary A’s loan receivable from Subsidiary B
would be part of the entity’s net investment in Subsidiary B if settlement of the loan is neither planned nor
likely to occur in the foreseeable future. This would also be true if Subsidiary A were itself a foreign operation.’

Recognition of exchange difference

P a r a g r a p h 3 3 i s a m e n d e d a s f o l l o w s .

‘33 When a monetary item forms part of a reporting entity’s net

investment in a foreign operation and is
denominated in the functional currency of the reporting entity, an exchange difference arises in the foreign
operation’s individual financial statements in accordance with paragraph 28. If such an item is denominated in
the functional currency of the foreign operation, an exchange difference arises in the reporting entity’s separate
financial statements in accordance with paragraph 28. If such an item is denominated in a currency other than
the functional currency of either the reporting entity or the foreign operation, an exchange difference arises in
the reporting entity’s separate financial statements and in the foreign operation’s individual financial statements
in accordance with paragraph 28. Such exchange differences are reclassified to the separate component of equity
in the financial statements that include the foreign operation and the reporting entity (ie financial statements in
which the foreign operation is consolidated, proportionately consolidated or accounted for using the equity
method).’

P a r a g r a p h 5 8 A i s a d d e d a s f o l l o w s .

‘58A Net Investment in a Foreign Operation (Amendment to IAS 21), issued in December 2005, added paragraph 15A
and amended paragraph 33. An entity shall apply those amendments for annual periods beginning on or after
1 January 2006. Earlier application is encouraged.’