Foreign Currency Translation and Exchange Differences in Egypt

Executive summary

• Egyptian Accounting Standard (EAS) 13, "The Effects of Changes in Foreign Exchange Rates", applies today in the text attached to Prime Minister's Decree 636 of 2024, which replaced the standard in full.
• A foreign-currency transaction is recorded at the spot exchange rate prevailing on the date of the transaction (paragraph 21); at the end of each period, monetary items are translated at the closing rate (paragraph 23).
• Exchange differences on monetary items are recognised in profit or loss in the period in which they arise, except as the standard provides otherwise (paragraph 28).
• Differences on translating a foreign operation are recognised in other comprehensive income (paragraph 40) and reclassified to profit or loss on its disposal.
• Each of the exceptional appendices A, B, C and E confined its treatments to the statements of a period it defined, and those periods have passed.
• We have found no provision in force in the Income Tax Law or its regulations dealing specifically with exchange differences since article 70 of the regulations was repealed in 2015; the reference is article 17: net profit is determined on the basis of the income statement prepared under the Egyptian Accounting Standards.

Functional currency and presentation currency

The functional currency is "the currency of the primary economic environment in which the entity operates", and the presentation currency is "the currency in which an entity presents its financial statements" (paragraph 8). The primary indicators of the functional currency include the currency that mainly influences sales prices and the currency that mainly influences labour, material and other costs (paragraph 9). Where the indicators are mixed and the functional currency is not obvious, management uses its judgement, giving priority to the paragraph 9 indicators (paragraph 12). The currency of the books under Egyptian law is covered in Bookkeeping for Foreign Companies in Egypt.

The functional currency changes only if there is a change in the underlying transactions, events and conditions (paragraph 13), and the change is accounted for prospectively, at the exchange rate on the date of the change (paragraph 38).

Initial recognition and the rate used

The date of a transaction is the date on which it first qualifies for recognition. For practical reasons an average rate for a week or a month may be used for each currency, but an average is not appropriate if the period sees significant fluctuations in exchange rates (paragraph 22).

Where a currency is not exchangeable into another currency at the measurement date, the entity estimates the spot exchange rate (paragraph 19A), using an observable rate that meets the conditions, either a spot rate for another purpose or the first subsequent exchange rate (paragraph 19B), and discloses this (paragraph 57A). These provisions apply from the beginning of annual reporting periods starting on or after 1 January 2024, with earlier application permitted (paragraph 58).

Monetary and non-monetary items at the end of the period

A monetary item is a right to receive, or an obligation to deliver, a fixed or determinable number of units of currency, such as receivables and payables; amounts prepaid for goods and services, inventories and fixed assets are non-monetary (paragraph 16).

Paragraph 28 requires differences on settling or translating monetary items at rates different from those used on initial recognition to be recognised "in profit or loss (the income statement) in the period in which they arise", except as the standard provides otherwise. Where the transaction is settled in a later period, the difference recognised in each period is determined by the change in rates during that period (paragraph 29). Impairment of receivables is covered in Receivables Ageing, Collection and Expected Credit Losses.

Translating the financial statements of a foreign operation

A foreign operation is a subsidiary, associate, joint venture or branch whose activities are based in another country or conducted in a currency other than that of the reporting entity's statements (paragraph 8). Unless its functional currency is the currency of a hyperinflationary economy, its assets and liabilities are translated at the closing rate, its income and expenses at the rates on the dates of the transactions, and the resulting differences are recognised as a separate component of other comprehensive income (paragraphs 40 and 45). An intragroup monetary balance cannot be eliminated without showing the results of currency fluctuations in the consolidated statements (paragraph 46). On disposal of the foreign operation, the cumulative amount is reclassified from equity to profit or loss when the gain or loss on disposal is recognised (paragraph 49, the first of two paragraphs numbered 49 in the published text). The presentation of the income statement and the statement of comprehensive income is covered in Complete Financial Statements in Egypt. When consolidated statements must be prepared, and who is consolidated, is covered in Consolidated Financial Statements in Egypt.

The exceptional appendices: each to its own period

Each appendix followed a liberalisation, movement or adjustment of the exchange rate on a date it specified. Each subject to its own conditions, the appendices allowed exchange differences on foreign-currency liabilities that financed the acquisition of specified assets to be added to the cost of those assets, and differences on monetary items to be recognised in other comprehensive income as an exception to paragraph 28. They confined their special treatment to entities whose functional currency is the Egyptian pound, save for an exception in appendices C and E.

Each appendix applied its treatments "as exceptional accounting treatments only to the financial statements of the financial period" it defined, and the 2024 text, as issued, contained only appendix D, on exchangeability. Read together with the table, this means that the exceptional treatments in the four appendices do not apply in the statements of current periods. Appendix A had made the adjusted values of the assets at the end of the year to which it was applied the basis for the amounts carried forward to later periods, and had extended its disclosure requirements to the statements of those periods until the adjusted assets are fully depreciated or amortised (paragraphs 29 and 30). The comparison with the corresponding international standard is in Egyptian Accounting Standards vs IFRS.

The tax side

The second paragraph of article 17 of Income Tax Law 91 of 2005 provides:

"Net profit is determined on the basis of the income statement prepared in accordance with the Egyptian Accounting Standards, and the tax base is determined by applying the provisions of this Law to that net profit."

Law 53 of 2014 replaced only the first paragraph, and Law 151 of 2026 did not touch the article. Article 70 of the executive regulations issued by Minister of Finance Decree 991 of 2005 provided, in its item 2, "Currency valuation differences", that "the debit and credit differences shown in the income statement are accepted in accordance with the Egyptian Accounting Standards"; Minister of Finance Decree 172 of 2015 then repealed article 70. Since then we have found no provision in the law or its executive regulations dealing specifically with exchange differences, realised or unrealised, or with amounts recognised in other comprehensive income. Read together, article 17 and paragraph 28 mean, in our view, that exchange differences recognised in profit or loss form part of the net profit from which the tax base is determined; with the express provision repealed, however, it is prudent to document in the return the basis on which differences from retranslating unsettled balances are treated. The standard refers their tax effects to EAS 24, "Income Taxes" (paragraph 50).

What this requires

• Determining the functional currency of each entity from the indicators in paragraphs 9 to 12, and documenting the basis.
• Fixing the source of the exchange rate for each currency, and reviewing the use of averages in periods of significant fluctuation.
• Retranslating monetary items at the closing rate at every close, and keeping non-monetary items measured at cost at their historical rate.
• Tracking the cumulative translation differences of each foreign operation separately.
• Not applying the appendices' exceptional treatments in the statements of current periods.
• Disclosing the exchange differences recognised in profit or loss, other than those on financial instruments measured at fair value through profit or loss, and the net differences in other comprehensive income with a reconciliation of their movement (paragraph 52), and the functional currency and the reason for a different presentation currency where the two differ (paragraph 53).
• Reconciling the exchange differences in the statements with the tax return, documenting the basis on which differences on unsettled balances are treated, and accounting for their tax effects under EAS 24.

The firm's Accounting & Bookkeeping Department sets foreign-currency accounting policies, revalues balances at every close and prepares the exchange-difference notes to the financial statements.

Nehal Saied, Partner
Chartered Accountant, Ministry of Finance, Egypt

Member, Egyptian Tax Society
Member, Egyptian Society for Public Finance and Taxation

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