Foreign currency conversion – Draft German Amendment Accounting Standard 10 for changes to German Accounting Standard 25

The translation of foreign currencies for consolidated financial statements as of 1.1.2019 has been regulated in the German Accounting Standard No. 25 (GAS 25). The Accounting Standards Committee of Germany (ASCG) has now published the Draft of German Amendment Accounting Standard No.10 (E-GAAS 10). Following the first time application of GAS 25, the ASCG dealt with various issues that required a clarifying supplement.

Adjusting for inflation

A key topic in E-GAAS 10 is the clarification of the issue of adjusting for inflation through indexing, which had resulted in increased enquiries to the ASCG, particularly in the case of hyperinflationary economies. The marginal number B44 in E-GAAS 10 refers to the index that reflects the price developments between the base year and the reporting date. In order to prevent possible misunderstandings of GAS 25, which in the case of indexing allows the interpretation that, first of all, you should proceed up to the base year and, subsequently, from the base year to the reporting date, the following has been clarified. The amendment to subsection 104 of GAS 25, which replaces the words “inflation adjustment (base year)” with “recognition of these items and the respective income and expenses” aims to achieve clear indexation from initial recognition. Furthermore, marginal number B40 has been supplemented by a clause 1. According to that, indexation and inflation adjustments should be limited to non-monetary items.

Translation of foreign currency

Section 308a clause 2 of the Commercial Code (Handelsgesetzbuch, HGB) stipulates that income statement items have to be translated at average exchange rates. Subsection 106 c) of GAS 25 was understood as a requirement that, in any case, exists to the same extent in German accounting. According to prevailing opinion, providing information about the average exchange rate does indeed fall under the general disclosure requirements in terms of the accounting recognition and measurement policies applied (Section 313(1) clause 3 no. 1 HGB) and, consequently, also has to be disclosed in consolidated financial statements. However, as the time periods used to determine the average exchange rate are what is relevant and not the mathematical method that was applied, in subsection 106, the following formulation was chosen to achieve a clear interpretation: ”reference periods used to determine average exchange rates as well as any weighting applied in the course of this”.

Amendments to other standards

In addition, E-GAAS 10 provides for amendments to GAS 16 “Interim Financial Reporting”, GAS 19 “Duty to Prepare Consolidated Financial Statements, Basis of Consolidation” and GAS 23 “Accounting for Subsidiaries in Consolidated Financial Statements”. These amendments are exclusively editorial changes that had to be made on account of the Second Act Amending Financial Market Regulations based on European legal acts (Zweites Finanzmarktnovellierungsgesetz).