The volatility of foreign exchange rate has affected different sectors of economy in Iran. Some of the most influenced economic sectors are those who has been granted loans in foreign currency.

In order to support domestic production, the government of Iran has allocated a part of its foreign exchange reserves to those economic parts which has more important role in the economy and has priority for the government or has started development plans in infrastructure. This financing happened with intermediation of some governmental banks such as Mellat, Tejarat, Refah and Saderat. In order to implement this instruction, an agreement reached between three parts (banks, loan recipients and the government) in which, banks, as an intermediary, were supposed to take the installments from loan recipient and settle the loans with the government.

But uncertainties related to the way of settlement raised when Rial started to depreciate dramatically due to political issues and volatile economic situation during 2011. Thereafter, the loan recipients from one side and the banks from the other side, were not able to repay their debts due to high volatility in the value of foreign currencies versus Rial. Therefore, in this matter, the government was required to determine the details of the repayment’s structure. So, a committee has been formed to work on this issue and after considering different effective aspects, they published the legislation that the result of their studies also is included.

According to the mentioned instruction, the loans which can be categorized in this group and have been allocated before 1391 (20th March 2011) can be converted to Rial with the rate of the day the loan have been allocated, and for those which have been allocated after 1391 (20th March 2011), the conversion of currency rate will be the rate in 1391 (20th March 2011). This situation applies under one condition. The loan recipients should repay the differed within six months after the instruction is announced. In this condition the differed interest will be waived.

One of the necessities of this decision was to barter the banks and the government’s debt. In this procedure, banks will settle all the loans in foreign currencies by the end of 1395 (20th March 2016) by bartering debts with government. For this reason Banks are allowed to issue asset backed securities. Loan recipients will deal with banks and should pay their loan settlements to them with the mentioned condition. The rest of their loans since then, will be converted to a loan which is not in foreign currency anymore and the interest rate of this new loan is negotiable.

The effects caused by this decision on the banks’ financial statements from one side and the loan recipients’ financial statements from the other side would be considerable.

For recipients, the discussed conversion of foreign currency rate has leaded to a considerable decrease in these sectors liabilities in Rail. This will decrease the assets value and consequently, with one year lag, the assets depreciation will decrease and this would cause an increase in their profit.

It would be essential for investors to know how this instruction can affect the recipients’ financial statements in order to make efficient investment decisions.