Renault S.A. – Annual report – 31 December 2020
NOTE 2 – ACCOUNTING POLICIES (extract 1)
2-A. CHANGES IN ACCOUNTING POLICIES (extract)
A2 – IFRIC agenda decision concerning classification of the effects of index-based restatement and translation of the financial statements of subsidiaries in hyperinflationary economies
In view of the IFRIC’s agenda decision of March 2020 concerning classification of the effects of index-based restatement and translation of the financial statements of subsidiaries in hyperinflationary economies, the Group has concluded that the combined effect of index-based restatement and translation qualifies as an exchange difference under IAS 21 – The Effects of Changes in Foreign Exchange Rates, as restatement based on price indexes is correlated with movements in the exchange rate between the Argentinian peso and the euro, and mitigates the effect of the peso’s devaluation. Consequently, the effects of restatement and translation of the equity of subsidiaries located in Argentina are now reported in the translation adjustment in other components of comprehensive income, whereas the effects of index-based restatement were included in reserves in the 2018 and 2019 financial statements. The change led to reclassification of €349 million to the translation adjustment reserve at January 1, 2020.
NOTE 2 – ACCOUNTING POLICIES (extract 2)
2-E. TRANSLATION OF THE FINANCIAL STATEMENTS OF FOREIGN COMPANIES
The Group’s presentation currency is the euro.
For foreign companies, the functional currency is generally the local currency. In cases where most transactions are carried out in a different currency, that is adopted as the functional currency.
Foreign companies’ accounts are established in their functional currency, and subsequently translated into the Group’s presentation currency as follows:
- financial position items other than components of shareholders’ equity, which are stated at historical value, are translated at the closing exchange rate;
- income statement items are translated at the average exchange rate for the period;
- the translation adjustment is one of the other components of comprehensive income, and therefore has no impact on net income.
Goodwill generated by a business combination with a foreign company is treated as an asset or liability of the entity acquired, as appropriate. It is therefore expressed in the relevant entity’s functional currency, and translated into euros at the closing rate.
When a foreign company is sold, the accumulated translation adjustments on its assets and liabilities are transferred to other operating income and expenses in the income statement.
In an exception to the above principles, the financial statements of entities in hyperinflationary economies are translated in accordance with IAS 29 “Financial reporting in hyperinflationary economies”. Non-monetary balance sheet items, income statement items, comprehensive income items and cash flow statement items are adjusted for inflation in their original local currency, then all the financial statements are translated at the closing exchange rate for the period. This hyperinflationary accounting leads to recognition of a gain or loss resulting from exposure to hyperinflation, which is classified as other financial income and expenses and thus included in reserves the following year.
The effects of index-based restatement and translation of the equity of subsidiaries in Argentina are all included in the translation adjustment in other components of comprehensive income, since restatement based on price indexes is correlated with movements in the exchange rate between the Argentinian peso and the euro, and mitigates the effect of the peso’s devaluation.
To determine whether a country is in hyperinflation, the Group refers to the list published by the International Practices Task Force (IPTF) of the Center for Audit Quality. The financial statements of the Group’s subsidiaries in Argentina are consolidated in accordance with the principles of IAS 29, which are applied from January 1, 2018. As operations in Iran are no longer consolidated, the Group has no other subsidiary in countries on the IPTF list.