• An exceptional accounting treatment for unusual losses and profits resulted from exchange rate differences
The Main Committee to review the Egyptian Accounting Standards, headed by Sherif Samy – EFSA’s Chairman met to discuss an accounting treatment of exchange rate differences in the financial statements of some entities in light of exchange rate liberalization. The Committee examined the consequences of the liberalization of the exchange rate that resulted in unusual profits or losses of some entities. Also, the committee reviewed the conditions of some entities where the historical cost of its fixed assets differs – materially – from the replacement cost at the moment.
Sherif Samy noted that the income statement shall reflect the operating performance of the business, referring to the relevant international standards, and after lengthy discussions of a study provided by The Egyptian Society of Accountants and Auditors (ESAA), it was agreed to apply an exceptional treatment that shall be applied – once – on the financial statements for the fiscal year that begin before 3 November 2016.
He added that the Committee’s proposal will be presented to the Minster of Investment – in all its details and methods of application – as being the competent minister in preparation for its issuance. It will be announced and published backed by adequate explanations immediately after the issuance of the ministerial decree to be applied and ensure the integrity of its application.
Sherif Samy explained that the proposed treatment stated that the currency’s loss was associated with the liberalization of the exchange rate. These unusual losses shall be included in the statement of comprehensive income within other comprehensive income items rather than in the year’s income statement. Also, it shall be deported at the end of the year directly to the gains or losses items. On the other hand, the currency’s losses associated with the period following the liberalization of the exchange rate until the end of the year are charged to this year’s income statement.
The proposed treatment allows the entity which has a list of foreign currency obligations associated with fixed assets before the date of exchange rate liberalization, to resort to the capitalization of the losses resulting from the liberalization of the exchange rate.
He pointed out that in light of the fact that the fixed assets are calculated in accordance with the Egyptian Accounting Standards by using the historical cost; the historical cost for a large proportion of those assets -materially- differs from their replacement cost at the moment. The proposed treatment included an additional temporarily option that allows the entity to amend the values of the fixed asset (such as machinery and equipment, and equipment, motor vehicles, excavators, transport, etc.) with the exception of land and building which are calculated by the historical cost in the financial statements of the entity , this is by using standardized coefficient by the Committee that shall reflect the impact of the change in the exchange rate on the date of exchange rate liberalization. He noted that the value of the increase shall be included in the net book value of asset to be amended, as a result of using the coefficient proposed by the Committee, in a separate item of Property rights entitled revaluation surplus.
Sherif Samy noted that the committee was formed pursuant to Ministerial Decree no. 909 of 2011, which included to be headed by EFSA’s Chairman and the membership of the Chairman of the General Authority for Investment and free zones (GAFI), and representative of the Accountability State Authority and the head of the Egyptian Institute for Accounting and Auditing and Chairman of The Egyptian Society of Accountants and Auditors (ESAA) and head of the Division of practitioners of Free professions- the Egyptian Commerce Syndicate. and an accounting expert.
It is worth mentioning that in April 2015, the Committee has approved a proposal on updating the Egyptian auditing standards which was issued by the Minister of Investment and applied starting from 2016. This is the first updated version of the Egyptian Accounting Standards since 2006. It ensured that the Egyptian standards keep pace with the best international practices and that will enhance the profession in Egypt and achieve objectivity in presentation of financial statements and disclosures.