Recent gyrations in the rouble highlight a problem in financial reporting – what ‘is’ a foreign currency rate?
The Russian rouble has had a rollercoaster ride recently. Up to 28 February, one USD was worth 83 roubles. Then trouble broke out in Ukraine, and it spiralled out to 139 on 7 March before paring back for a while to 96. It then spiked again to 132 on Sunday 20 March 2022 before again settling back the next day to 101.
Something here seems awry – the jolts between around 100 and up to 130 suggest that there are two forces at work. Clearly the trend in devaluation is well understood – being a market-based response to sanctions brought against the broader Russian economy. But what force is pushing the rouble in the other direction?
There are two answers. One is obviously speculators punting on a quick and peaceful end to the war in Ukraine and a subsequent lifting of sanctions on Russia. But the other lies primarily in capital controls introduce by the Russian government. Moscow has imposed a 30% commission on foreign currency purchases by individuals on currency exchanges and has also blocked foreign investors from exiting their holdings of stocks and bonds.
In such a backdrop, how much would an ordinary Muscovite be willing to trade roubles for US dollars? One online bank recently has been offering 150 roubles to the US dollar.
Which leads us to an interesting topic impacting the accounting profession – what is a foreign exchange rate and at what point does heavy volatility, like that afflicting the rouble presently, mean that the quoted price, which is applied by financial statement preparers of financial statements with foreign operations, has little relevance to the “real” world, particularly as so much hangs on what the spot price is at a particular reporting date?
The whole matter is for consideration by the International Accounting Standards Board (IASB) following the Board’s release in April of its exposure draft for comment on Lack of Exchangeability (a proposed revision to IAS 21).
The draft paper was initially intended to address countries, particularly those experiencing hyperinflationary environments, which manage their currency exchange rate through measures which restrict the market and its participants.
The recent fluctuations of the rouble and the capital controls imposed over its market participants throw into question the reliability of ‘quoted’ market prices. This topic, crafted initially in relatively benign circumstances (at the time, there were only 3 hyperinflationary economies in the world), suddenly has quite a lot of political heat.
Right now, consolidated globalised financial statements are prepared and transposed dogmatically to published currency rates, notwithstanding how much those rates do not reflect the street value (which considers their exchangeability) of the assets and liabilities transferred from countries who deliberately interfere with their own exchange markets. This potential amendment to IAS 21 will address this blind assumption.
The IASB is currently considering its responses to comments raised by industry participants on the matter, including comments about when a currency has a lack of exchangeability and what rates should be used when this condition arises. There is potential that de-facto blue, grey or black (or any other colour designating a non-official quotation) market trading activity in currencies may be more appropriate for consolidated financial reporting in some instances.
Those entities trading in jurisdictions likely to be subject to such translation rules will need to consider the potential impact of this change in accounting standard in their future reporting periods. Upon adoption, there is a significant likelihood of a material re-transposition of assets and liabilities in the statement of financial position.
Meanwhile, we await how far the regulator will push this. The list of those countries considered to have unexchangeable currencies will make for interesting reading should this amendment to IAS 21 be adopted.