IAS 21 | The Effects of Changes in Foreign Exchange Rates

1

Objective

The objective of this standard is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency.

2

Principal Issues

The main issues addressed are which exchange rates to use and how to report the effects of changes in exchange rates in the financial statements.

3

Scope

The standard applies to accounting for transactions and balances in foreign currencies (except derivatives under IFRS 9), translating results and financial position of foreign operations, and translating results into a presentation currency.

4

Derivatives

IFRS 9 applies to many foreign currency derivatives, which are excluded from this standard. However, those not within the scope of IFRS 9 (e.g., some embedded derivatives) are included. This standard also applies when translating amounts relating to derivatives from functional to presentation currency.

5

Hedge Accounting

This standard does not apply to hedge accounting for foreign currency items, including hedging of a net investment in a foreign operation. IFRS 9 applies to hedge accounting.

6

Presentation Currency

The standard applies to the presentation of financial statements in a foreign currency and sets requirements for compliance with IFRSs. It specifies disclosures for translations that do not meet these requirements.

7

Cash Flows Exclusion

The standard does not apply to the presentation of cash flows arising from foreign currency transactions or the translation of cash flows of a foreign operation, which are covered by IAS 7.

8

Definitions

The following terms are used in this Standard with the meanings specified:

• Closing rate is the spot exchange rate at the end of the reporting period.
• A currency is exchangeable into another currency when an entity is able to obtain the other currency within a time frame that allows for a normal administrative delay and through a market or exchange mechanism in which an exchange transaction would create enforceable rights and obligations.
• Exchange difference is the difference resulting from translating a given number of units of one currency into another currency at different exchange rates.
• Exchange rate is the ratio of exchange for two currencies.
• Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
• Foreign currency is a currency other than the functional currency of the entity.
• Foreign operation is an entity that is a subsidiary, associate, joint arrangement or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity.
• Functional currency is the currency of the primary economic environment in which the entity operates.
• A group is a parent and all its subsidiaries.
• Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.
• Net investment in a foreign operation is the amount of the reporting entity's interest in the net assets of that operation.
• Presentation currency is the currency in which the financial statements are presented.
• Spot exchange rate is the exchange rate for immediate delivery.

8A

Exchangeability Assessment

An entity assesses whether a currency is exchangeable into another currency at a measurement date and for a specified purpose.

8B

Insignificant Amount

If an entity is able to obtain no more than an insignificant amount of the other currency at the measurement date for the specified purpose, the currency is not exchangeable into the other currency.

9

Functional Currency Indicators

The primary economic environment is normally where the entity primarily generates and expends cash. An entity considers the following factors: (a) the currency that mainly influences sales prices for goods and services; and (b) the currency that mainly influences labour, material, and other costs of providing goods or services.

10

Secondary Indicators

Other factors providing evidence of an entity's functional currency include the currency in which funds from financing activities are generated and the currency in which receipts from operating activities are usually retained.

11

Foreign Operation Indicators

Additional factors are considered for foreign operations to determine if their functional currency is the same as the reporting entity. These include whether activities are an extension of the reporting entity, the proportion of transactions with the reporting entity, the impact of cash flows on the reporting entity, and financial autonomy.

12

Judgement

When indicators are mixed, management uses judgement to determine the functional currency that most faithfully represents the economic effects of underlying transactions, events, and conditions, giving priority to the primary indicators in paragraph 9.

13

Consistency

An entity's functional currency reflects underlying transactions, events, and conditions. Once determined, it is not changed unless there is a change in those underlying factors.

14

Hyperinflation

If the functional currency is that of a hyperinflationary economy, financial statements are restated in accordance with IAS 29. An entity cannot avoid this by adopting a different functional currency (e.g., that of its parent).

15

Net Investment

An entity may have a monetary item receivable from or payable to a foreign operation. If settlement is neither planned nor likely in the foreseeable future, the item is, in substance, part of the net investment in that foreign operation.

16

Monetary Items

The essential feature of a monetary item is a right to receive (or obligation to deliver) a fixed or determinable number of units of currency. Examples include pensions paid in cash, provisions settled in cash, lease liabilities, and cash dividends. Non-monetary items lack this right, such as inventory, goodwill, and property, plant and equipment.

17

General Approach

Each entity (stand-alone, parent, or foreign operation) determines its functional currency. It translates foreign currency items into its functional currency and reports the effects of such translation.

18

Reporting Entity

Many reporting entities comprise individual entities (groups). It is necessary for the results and financial position of each individual entity to be translated into the presentation currency of the reporting entity.

19

Presentation Flexibility

A stand-alone entity may also present its financial statements in any currency. If the presentation currency differs from the functional currency, results and position are translated into the presentation currency.

19A

Lack of Exchangeability

An entity shall estimate the spot exchange rate at a measurement date when a currency is not exchangeable into another currency. The objective is to reflect the rate at which an orderly exchange transaction would take place between market participants under prevailing economic conditions.

20

Initial Recognition

A foreign currency transaction is recorded, on initial recognition in the functional currency, by applying the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.

21

Transaction Date

The date of a transaction is when it first qualifies for recognition. For practical reasons, a rate that approximates the actual rate (e.g., an average weekly or monthly rate) is often used, provided exchange rates do not fluctuate significantly.

23

Subsequent Reporting

At the end of each reporting period: (a) foreign currency monetary items are translated using the closing rate; (b) non-monetary items measured at historical cost are translated using the exchange rate at the date of the transaction; and (c) non-monetary items measured at fair value are translated using the exchange rates at the date when the fair value was measured.

24

Carrying Amount

The carrying amount is determined under other relevant standards (e.g., IAS 16 for PPE). Regardless of whether it is historical cost or fair value, if the amount is determined in a foreign currency, it is translated into the functional currency under this standard.

25

Comparisons

For items like inventory (lower of cost and net realisable value) or impaired assets (lower of carrying amount and recoverable amount), the carrying amount is determined by comparing the translated cost/carrying amount with the translated net realisable value/recoverable amount. This may result in recognising an impairment loss in the functional currency that would not exist in the foreign currency.

26

Exchange Rate Selection

When several exchange rates are available, the rate used is that at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred at the measurement date.

28

Exchange Differences

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at initial recognition shall be recognised in profit or loss in the period in which they arise.

29

Settlement Timing

When a transaction is settled in a subsequent accounting period, the exchange difference recognised in each period up to the date of settlement is determined by the change in exchange rates during each period.

30

Non-Monetary Items

When a gain or loss on a non-monetary item is recognised in other comprehensive income (e.g., revaluation of property), any exchange component of that gain or loss shall be recognised in other comprehensive income. Conversely, if recognised in profit or loss, the exchange component is recognised in profit or loss.

32

Net Investment Differences

Exchange differences arising on a monetary item that forms part of a net investment in a foreign operation shall be recognised in profit or loss in the separate financial statements. In the financial statements that include the foreign operation (e.g., consolidated), such differences shall be recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment.

34

Books and Records

When an entity keeps its books in a currency other than its functional currency, amounts are translated into the functional currency when preparing financial statements. This produces the same amounts as if items had been recorded initially in the functional currency.

35

Change in Functional Currency

When there is a change in an entity's functional currency, the entity shall apply the translation procedures applicable to the new functional currency prospectively from the date of the change.

37

Accounting for Change

The effect of a change in functional currency is accounted for prospectively. All items are translated into the new functional currency using the exchange rate at the date of the change. Resulting amounts for non-monetary items are treated as historical cost.

38

Translation to Presentation Currency

An entity may present its financial statements in any currency. If the presentation currency differs from the functional currency, it translates its results and financial position into the presentation currency.

39

Translation Procedures

For an entity whose functional currency is not that of a hyperinflationary economy: (a) assets and liabilities are translated at the closing rate; (b) income and expenses are translated at exchange rates at the dates of the transactions; and (c) all resulting exchange differences are recognised in other comprehensive income.

40

Average Rates

For practical reasons, an average rate for the period is often used to translate income and expense items, provided exchange rates do not fluctuate significantly.

41

Nature of Differences

Exchange differences arise from translating income and expenses at transaction rates and assets/liabilities at closing rates, and from translating opening net assets at a closing rate that differs from the previous closing rate. These are recognised in other comprehensive income as they have little direct effect on operating cash flows.

42

Hyperinflationary Translation

For an entity whose functional currency is that of a hyperinflationary economy, all amounts (assets, liabilities, equity, income, expenses) are translated at the closing rate at the date of the most recent statement of financial position.

43

Restatement First

When an entity's functional currency is hyperinflationary, it restates its financial statements in accordance with IAS 29 before applying the translation method.

44

Consolidation

When translating a foreign operation for consolidation, normal consolidation procedures apply (e.g., elimination of intragroup balances). However, intragroup monetary assets/liabilities cannot be eliminated against each other without showing currency fluctuation results, so exchange differences are recognised in profit or loss (or OCI if part of net investment).

45

Different Dates

If a foreign operation's financial statements are of a different date, adjustments are made for significant changes in exchange rates between that date and the reporting entity's date. The difference must be no greater than three months.

47

Goodwill and Fair Value

Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation. They are expressed in the functional currency of the foreign operation and translated at the closing rate.

48

Disposal of Foreign Operation

On the disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation, recognised in other comprehensive income, shall be reclassified from equity to profit or loss when the gain or loss on disposal is recognised.

48A

Partial Disposal

Partial disposals include loss of control of a subsidiary, or retained interest in a joint arrangement or associate that becomes a financial asset. These are accounted for as disposals.

48C

Subsidiary Partial Disposal

On partial disposal of a subsidiary that includes a foreign operation, the entity re-attributes the proportionate share of cumulative exchange differences to non-controlling interests. In other partial disposals, the proportionate share is reclassified to profit or loss.

49

Write-Downs

A write-down of the carrying amount of a foreign operation (due to losses or impairment) does not constitute a partial disposal, so no deferred exchange gain or loss is reclassified to profit or loss.

50

Tax Effects

Gains and losses on foreign currency transactions and exchange differences may have tax effects, which are accounted for under IAS 12 Income Taxes.

52

Disclosures

An entity shall disclose: (a) the amount of exchange differences recognised in profit or loss (except for financial instruments at fair value through profit or loss); and (b) net exchange differences recognised in other comprehensive income and accumulated in equity, with a reconciliation.

53

Presentation Currency Disclosure

When the presentation currency is different from the functional currency, that fact shall be stated, along with the functional currency and the reason for using a different presentation currency.

54

Change Disclosure

When there is a change in the functional currency of the reporting entity or a significant foreign operation, that fact and the reason for the change shall be disclosed.

55

Compliance Statement

When presenting financial statements in a currency different from the functional currency, an entity shall describe them as complying with IFRSs only if they comply with all requirements, including the translation method.

57

Non-Compliant Information

If an entity displays financial information in a currency that is different from its functional or presentation currency and does not meet the requirements of paragraph 55, it must clearly identify the information as supplementary, disclose the currency, and disclose the functional currency and translation method used.

57A

Lack of Exchangeability Disclosure

When an entity estimates a spot exchange rate because a currency is not exchangeable, it shall disclose information about the nature and financial effects of the non-exchangeability, the spot rate used, the estimation process, and the risks exposed.

58

Effective Date

An entity shall apply this Standard for annual periods beginning on or after 1 January 2005. Earlier application is encouraged.