IAS 21 The Effects of Changes in Foreign Exchange Rates

Synopsis

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.

• Read the unaccompanied version of IAS 21

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Which version of the standard?

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The following interpretation refers to IAS 21

• IFRIC 22 Foreign Currency Transactions and Advance Consideration

  clarifies the accounting treatment applicable to transactions that include the receipt or payment of foreign currency consideration in advance.

• IFRIC 16 Hedges of a Net Investment in a Foreign Operation

  provides guidance on what can be an eligible hedged risk, which entities may hold the hedging instrument and reclassification adjustments.

• SIC 7 Introduction of the Euro

  The effective start of the EMU after the reporting date does not alter the requirements of IAS 21 at the reporting date.

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.

• Read ED/2021/4 Lack of Exchangeability - Proposed amendments to IAS 21

This page was last updated 4 February 2022.