Companies with operations in Belgium are typically required to draw up their accounting and financial statements and publish them in Euro. However in exceptional circumstances, when the currency of the primary economic environment in which the entity operates (being the 'functional currency'1) is not the Euro, a request for derogation can be filed with the FPS Economy2.
The FPS Economy makes its decision based on the advice it receives from the Commission for Accounting Standards (CAS). If approved, this derogation is granted for duration of up to three consecutive years, after which it must be renewed.
TMF Belgium recently successfully prepared and filed one such request for a client active in the aerospace industry; an industry predominantly conducted in USD. As having to use the Euro resulted in significant exchange rate differences (which create unnecessary fluctuations in the statutory accounts), the client was obviously pleased to receive a positive response from the FPS Economy.
The procedure to request a derogation is based on article 14 of the Law of 17 July 1975, derogation to keep its accounts in another currency than Euro; and article 125, §1 of the Companies Code: derogation to draw up and publish its annual accounts in another currency than Euro.
The CAS has a number of guiding advices on the request for derogation. In its advice, the CAS states that the determination of the functional currency needs to be done based on the following factors:
- The currency that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled).
- The currency of the country whose forces of competition and regulations mainly determine the sales price of the company's goods and services.
- The currency in which the assets from (in particular intra-group) financing services are generated, ie. at the time the issue of debt or equity instruments.
- The currency that mainly influences labour, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled).
- The currency in which the receipts from operational activities are usually retained.
The advice states that factors 1 to 3 are considered the primary indicators, but not all three of them have to be fulfilled at once. An entity's functional currency has to reflect the underlying transactions, events and conditions that are relevant to it.
There are a number of other commitments the Company needs to take into account:
- To change its statutory capital into its functional currency, via a notary deed
- To timely publish its annual accounts and to include a reference in the explanatory notes that it has received a derogation
- To have confirmation from the board in the explanatory notes to the annual accounts that all reasons for the derogation apply in full with respect to the annual accounts
- To have the board verify annually whether the Company continues to meet the requirements that will be listed in the derogation and will include a reference thereto in its annual report in accordance with article 95 of the Companies Code to motivate the (continued) use of its functional currency
- To diligently monitor and assure that the above conditions are met and to notify the FPS Economy and the CAS as of the moment the Company no longer meets the above requirements.
With the respective clients' input and cooperation we drafted a paper about 9 pages long (with annexes around 60 pages), which was well reasoned and motivated based on the requirements determined by the CAS. It further contained a description of the company and the sector in which it is active. The body of the paper stated the legal basis on which the request was founded and the justification for the request.
1. The Commission for Accounting Standards states the following: "the accounts of a company and the financial statements must be prepared in the functional currency". The Commission refers to International Accounting Standard 21,§8 for a definition of the term functional currency: "the currency of the primary economic environment in which the entity operates".
2. There is also a specific sectorial derogation for diamond companies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.