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IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 21 The Effects of Changes in Foreign Exchange Rates prescribes 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.

Revised December 2003. Effective 1 January 2005.

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IAS 21 prescribes the accounting for:

  • Transactions in foreign currencies
  • Translating the accounts of foreign operations prior to consolidation

Individual transactions in foreign currencies are initially recorded at the exchange rate prevailing on the date of the transaction. At the date of settlement, cash transferred is recorded at the rate prevailing on the settlement date. Any exchange difference arising is recognised in profit or loss.

The statement of financial position of a foreign operation is translated using the closing rate, being the exchange rate at the reporting date. The statement of profit or loss and other comprehensive income is translated using the exchange rates at the dates of the transactions. Where this is impracticable, an average rate for the year may be used provided that exchange rates do not fluctuate significantly. Exchange differences arising are reported as other comprehensive income.

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The following interpretation refers to IAS 21

Current proposals

IAS 21 does not include guidance on the exchange rate that an entity should use when the spot exchange rate is not observable. ED/2021/4 Lack Exchangeability was issued in April 2021 and proposes amendments to the standard to:

  • Specify when a currency is exchangeable into another currency and when is it not;
  • Clarify how a reporting entity should determine the exchange rate to apply when a currency is not exchangeable; and
  • Introduce additional disclosures that apply when a currency is not exchangeable.

This page was last updated 4 February 2022.