Contents
International Accounting Standard 21 The Effects of Changes in Foreign Exchange Rates (IAS 21) is set out in paragraphs 1–62 and Appendices A–B. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 21 should be read in the context of its objective and the Basis for Conclusions, the Preface to IFRS Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance. [Refer:IAS 8 paragraphs 10–12]
International Accounting Standard 21The Effects of Changes in Foreign Exchange Rates
Objective
1 | An entity may carry on foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. In addition, an entity may present its financial statements in a foreign currency. 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 | The principal issues are which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements. |
Scope
3 | This Standard shall be applied:1
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4 | IFRS 9 applies to many foreign currency derivatives and, accordingly, these are excluded from the scope of this Standard. However, those foreign currency derivatives that are not within the scope of IFRS 9 (eg some foreign currency derivatives that are embedded in other contracts) are within the scope of this Standard. In addition, this Standard applies when an entity translates amounts relating to derivatives from its functional currency to its presentation currency. |
5 | This Standard does not apply to hedge accounting for foreign currency items, including the hedging of a net investment in a foreign operation. [Refer:paragraphs 15 and 15A and IFRS 9 paragraphs 6.5.13 and 6.5.14] IFRS 9 applies to hedge accounting. [Refer:IFRS 9 Chapter 6] |
6 | This Standard applies to the presentation of an entity’s financial statements in a foreign currency and sets out requirements for the resulting financial statements to be described as complying [Refer:IAS 1 paragraphs 15–24] with International Financial Reporting Standards (IFRSs). For translations of financial information into a foreign currency that do not meet these requirements, this Standard specifies information to be disclosed. [Refer:paragraph 57] |
7 | This Standard does not apply to the presentation in a statement of cash flows of the cash flows arising from transactions in a foreign currency, or to the translation of cash flows of a foreign operation (see IAS 7 Statement of Cash Flows [Refer:IAS 7 paragraphs 25–28]). |
Definitions
8 | 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. (See IFRS 13 Fair Value Measurement.) 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. [Refer:paragraph 16]
Net investment in a foreign operation is the amount of the reporting entity’s interest in the net assets of that operation. [Refer:paragraphs 15 and 15A]
Presentation currency is the currency in which the financial statements are presented. Spot exchange rate is the exchange rate for immediate delivery. |
Elaboration on the definitions
Exchangeable (paragraphs A2–A10)
8A | An entity assesses whether a currency is exchangeable into another currency:
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8B | 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. |
Functional currency
9 | The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. An entity considers the following factors in determining its functional currency:
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10 | The following factors may also provide evidence of an entity’s functional currency:
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11 | The following additional factors are considered in determining the functional currency of a foreign operation, and whether its functional currency is the same as that of the reporting entity (the reporting entity, in this context, being the entity that has the foreign operation as its subsidiary, branch, associate or joint arrangement):
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12 | When the above indicators are mixed and the functional currency is not obvious, management uses its judgement to determine the functional currency that most faithfully represents [Refer:Conceptual Framework paragraphs 2.12 and 2.13] the economic effects of the underlying transactions, events and conditions.E1 As part of this approach, management gives priority to the primary indicators in paragraph 9 before considering the indicators in paragraphs 10 and 11, which are designed to provide additional supporting evidence to determine an entity’s functional currency. |
| E1 | [IFRIC® Update, March 2010, Agenda Decision, ‘IAS 21 The Effects of Changes in Foreign Exchange Rates—Determination of functional currency of an investment holding company’ The IFRIC received a request for guidance on whether the underlying economic environment of subsidiaries should be considered in determining, in its separate financial statements, the functional currency of an investment holding company. IAS 21 paragraphs 9–11 provide factors to be considered in determining the functional currency of an entity. Paragraph 12 states that when the ‘indicators are mixed and the functional currency is not obvious, management uses its judgement to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions’. In addition, paragraph 17 of IAS 21 requires an entity to determine its functional currency in accordance with paragraphs 9–14 of the standard. Therefore, paragraph 9 should not be considered in isolation when determining the functional currency of an entity. Consequently, how an entity applies IAS 21 for the purpose of determining its functional currency—whether it is an investment holding company or any other type of entity—requires the exercise of judgement. IAS 1 Presentation of Financial Statements requires disclosure of significant accounting policies and judgements that are relevant to an understanding of the financial statements. The IFRIC noted that any guidance it could provide would be in the nature of application guidance rather than an interpretation. Therefore, the IFRIC decided not to add the issue to its agenda.] |
13 | An entity’s functional currency reflects the underlying transactions, events and conditions that are relevant to it. Accordingly, once determined, the functional currency is not changed unless there is a change in those underlying transactions, events and conditions. |
14 | If the functional currency is the currency of a hyperinflationary economy, [Refer:IAS 29 paragraph 3] the entity’s financial statements are restated in accordance with IAS 29 Financial Reporting in Hyperinflationary Economies. An entity cannot avoid restatement in accordance with IAS 29 by, for example, adopting as its functional currency a currency other than the functional currency determined in accordance with this Standard (such as the functional currency of its parent). |
Net investment in a foreign operation
15 | An entity may have a monetary item that is receivable from or payable to a foreign operation. An item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, a part of the entity’s net investment in that foreign operation, and is accounted for in accordance with paragraphs 32 and 33. Such monetary items may include long‑term receivables or loans. They do not include trade receivables or trade payables. |
15A | The entity that has a monetary item receivable from or payable to a foreign operation described in paragraph 15 may be any subsidiary of the group. For example, an entity has two subsidiaries, A and B. Subsidiary B is a foreign operation. Subsidiary A grants a loan to Subsidiary B. Subsidiary A’s loan receivable from Subsidiary B would be part of the entity’s net investment in Subsidiary B if settlement of the loan is neither planned nor likely to occur in the foreseeable future. This would also be true if Subsidiary A were itself a foreign operation. |
Monetary items
16 | The essential feature of a monetary item is a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency. Examples include: pensions and other employee benefits to be paid in cash; provisions that are to be settled in cash; lease liabilities; and cash dividends that are recognised as a liability. Similarly, a contract to receive (or deliver) a variable number of the entity’s own equity instruments or a variable amount of assets in which the fair value to be received (or delivered) equals a fixed or determinable number of units of currency is a monetary item. Conversely, the essential feature of a non‑monetary item is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency. Examples include: amounts prepaid for goods and services; goodwill; intangible assets; inventories; property, plant and equipment; right‑of‑use assets [Refer:IFRS 16 Appendix A (definition of right-of-use asset)]; and provisions that are to be settled by the delivery of a non‑monetary asset. |
Summary of the approach required by this Standard
17 | In preparing financial statements, each entity—whether a stand‑alone entity, an entity with foreign operations (such as a parent) or a foreign operation (such as a subsidiary or branch)—determines its functional currency in accordance with paragraphs 9–14. The entity translates foreign currency items into its functional currency and reports the effects of such translation in accordance with paragraphs 20–37 and 50.E2 [Refer:IFRS 1 paragraph 7]
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| E2 | [IFRIC® Update, October 2004, Agenda Decision, ‘Transition issues under IFRS 1’ The IFRIC considered two issues regarding first-time adoption of IFRSs. ... The second issue was whether a specific exception should be granted to first-time adopters to permit entities to translate all assets and liabilities at the transition date exchange rate rather than applying the functional currency approach in IAS 21 The Effects of Changes in Foreign Exchange Rates. The IFRIC agreed that the position under IFRS 1 and IAS 21 was clear, and that there was no scope for an Interpretation on this topic that would provide any relief.] |
18 | Many reporting entities comprise a number of individual entities (eg a group is made up of a parent and one or more subsidiaries). Various types of entities, whether members of a group or otherwise, may have investments in associates or joint arrangements. They may also have branches. It is necessary for the results and financial position of each individual entity included in the reporting entity to be translated into the currency in which the reporting entity presents its financial statements. This Standard permits the presentation currency of a reporting entity to be any currency (or currencies). The results and financial position of any individual entity within the reporting entity whose functional currency differs from the presentation currency are translated in accordance with paragraphs 38–50. |
19 | This Standard also permits a stand‑alone entity preparing financial statements or an entity preparing separate financial statements in accordance with IAS 27 Separate Financial Statements to present its financial statements in any currency (or currencies). If the entity’s presentation currency differs from its functional currency, its results and financial position are also translated into the presentation currency in accordance with paragraphs 38–50. |
Estimating the spot exchange rate when a currency is not exchangeable (paragraphs A11–A17)
19A | An entity shall estimate the spot exchange rate at a measurement date when a currency is not exchangeable into another currency (as described in paragraphs 8, 8A–8B and A2–A10) at that date. An entity’s objective in estimating the spot exchange rate is to reflect the rate at which an orderly exchange transaction would take place at the measurement date between market participants under prevailing economic conditions. |
Reporting foreign currency transactions in the functional currency
Initial recognition
20 | A foreign currency transaction is a transaction that is denominated or requires settlement in a foreign currency, including transactions arising when an entity:
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21 | A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction [Refer:paragraph 22]. |
22 | The date of a transaction is the date on which the transaction first qualifies for recognition in accordance with IFRSs. [Note:IFRIC 22 addresses the exchange rate to use in transactions in which an entity has received advance consideration in a foreign currency] For practical reasons, a rate that approximates the actual rate at the date of the transaction is often used, for example, an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate. |
Reporting at the ends of subsequent reporting periods
23 | At the end of each reporting period:
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| E3 | [IFRIC® Update, September 2022, Agenda Decision, 'IFRS 17 Insurance Contracts and IAS 21 The Effects of Changes in Foreign Exchange Rates—Multi-currency Groups of Insurance Contracts' The Committee received a request about how an entity accounts for insurance contracts with cash flows in more than one currency. ... [The text of the agenda decision is reproduced after paragraph 30 of IFRS 17.]] |
24 | The carrying amount of an item is determined in conjunction with other relevant Standards. For example, property, plant and equipment may be measured in terms of fair value [Refer:IAS 16 paragraph 31] or historical cost [Refer:IAS 16 paragraph 30] in accordance with IAS 16 Property, Plant and Equipment. Whether the carrying amount is determined on the basis of historical cost or on the basis of fair value, if the amount is determined in a foreign currency it is then translated into the functional currency in accordance with this Standard. |
25 | The carrying amount of some items is determined by comparing two or more amounts. For example, the carrying amount of inventories is the lower of cost [Refer:IAS 2 paragraphs 10–27] and net realisable value [Refer:IAS 2 paragraphs 28–33] in accordance with IAS 2 Inventories [Refer:IAS 2 paragraph 9]. Similarly, in accordance with IAS 36 Impairment of Assets, the carrying amount of an asset for which there is an indication of impairment [Refer:IAS 36 paragraphs 7–17] is the lower of its carrying amount before considering possible impairment losses and its recoverable amount. [Refer:IAS 36 paragraph 59] When such an asset is non‑monetary and is measured in a foreign currency, the carrying amount is determined by comparing:
The effect of this comparison may be that an impairment loss is recognised in the functional currency but would not be recognised in the foreign currency, or vice versa. |
26 | 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. |
Recognition of exchange differences
27 | As noted in paragraphs 3(a) and 5, IFRS 9 applies to hedge accounting for foreign currency items. The application of hedge accounting requires an entity to account for some exchange differences differently from the treatment of exchange differences required by this Standard. For example, IFRS 9 requires that exchange differences on monetary items that qualify as hedging instruments in a cash flow hedge are recognised initially in other comprehensive income to the extent that the hedge is effective. [Refer:IFRS 9 paragraph 6.5.11(b)] |
28 | Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognised in profit or loss in the period in which they arise, except as described in paragraph 32. |
29 | When monetary items arise from a foreign currency transaction and there is a change in the exchange rate between the transaction date [Refer:paragraph 22] and the date of settlement, an exchange difference results. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognised in that period. However, when the 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 | When a gain or loss on a non‑monetary item is recognised in other comprehensive income, any exchange component of that gain or loss shall be recognised in other comprehensive income. Conversely, when a gain or loss on a non‑monetary item is recognised in profit or loss, any exchange component of that gain or loss shall be recognised in profit or loss. |
31 | Other IFRSs require some gains and losses to be recognised in other comprehensive income. For example, IAS 16 requires some gains and losses arising on a revaluation of property, plant and equipment to be recognised in other comprehensive income. When such an asset is measured in a foreign currency, paragraph 23(c) of this Standard requires the revalued amount to be translated using the rate at the date the value is determined, resulting in an exchange difference that is also recognised in other comprehensive income. |
32 | Exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation (see paragraph 15) shall be recognised in profit or loss in the separate financial statements of the reporting entity or the individual financial statements of the foreign operation, as appropriate. In the financial statements that include the foreign operation and the reporting entity (eg consolidated financial statements when the foreign operation is a subsidiary), such exchange differences shall be recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment in accordance with paragraph 48. |
33 | When a monetary item forms part of a reporting entity’s net investment in a foreign operation [Refer:paragraphs 15 and 15A] and is denominated in the functional currency of the reporting entity, an exchange difference arises in the foreign operation’s individual financial statements in accordance with paragraph 28. If such an item is denominated in the functional currency of the foreign operation, an exchange difference arises in the reporting entity’s separate financial statements in accordance with paragraph 28. If such an item is denominated in a currency other than the functional currency of either the reporting entity or the foreign operation, an exchange difference arises in the reporting entity’s separate financial statements and in the foreign operation’s individual financial statements in accordance with paragraph 28. Such exchange differences are recognised in other comprehensive income in the financial statements that include the foreign operation and the reporting entity (ie financial statements in which the foreign operation is consolidated or accounted for using the equity method). |
34 | When an entity keeps its books and records in a currency other than its functional currency, at the time the entity prepares its financial statements all amounts are translated into the functional currency in accordance with paragraphs 20–26. This produces the same amounts in the functional currency as would have occurred had the items been recorded initially in the functional currency. For example, monetary items are translated into the functional currency using the closing rate, and non‑monetary items that are measured on a historical cost basis are translated using the exchange rate at the date of the transaction [Refer:paragraph 22] that resulted in their recognition. |
Change in functional currency
35 | 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 [Refer:paragraph 37] from the date of the change. |
36 | As noted in paragraph 13, the functional currency of an entity reflects the underlying transactions, events and conditions that are relevant to the entity. Accordingly, once the functional currency is determined, it can be changed only if there is a change to those underlying transactions, events and conditions. For example, a change in the currency that mainly influences the sales prices of goods and services may lead to a change in an entity’s functional currency. |
37 | The effect of a change in functional currency is accounted for prospectively. In other words, an entity translates all items into the new functional currency using the exchange rate at the date of the change. The resulting translated amounts for non‑monetary items are treated as their historical cost. Exchange differences arising from the translation of a foreign operation previously recognised in other comprehensive income in accordance with paragraphs 32 and 39(c) are not reclassified from equity to profit or loss until the disposal of the operation. |
Use of a presentation currency other than the functional currency
Translation to the presentation currency
38 | An entity may present its financial statements in any currency (or currencies). If the presentation currency differs from the entity’s functional currency, it translates its results and financial position into the presentation currency. For example, when a group contains individual entities with different functional currencies, the results and financial position of each entity are expressed in a common currency so that consolidated financial statements may be presented. |
39 | The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy [Refer:IAS 29 paragraph 3] shall be translated into a different presentation currency using the following procedures:
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40 | For practical reasons, a rate that approximates the exchange rates at the dates of the transactions, [Refer:paragraph 22] for example an average rate for the period, is often used to translate income and expense items. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate. |
41 | The exchange differences referred to in paragraph 39(c) result from:
These exchange differences are not recognised in profit or loss because the changes in exchange rates have little or no direct effect on the present and future cash flows from operations. The cumulative amount of the exchange differences is presented in a separate component of equity until disposal of the foreign operation. When the exchange differences relate to a foreign operation that is consolidated but not wholly‑owned, accumulated exchange differences arising from translation and attributable to non‑controlling interests are allocated to, and recognised as part of, non‑controlling interests in the consolidated statement of financial position. |
42 | The results and financial position of an entity whose functional currency is the currency of a hyperinflationary economy [Refer:IAS 29 paragraph 3] shall be translated into a different presentation currency using the following procedures:E4,E5
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| E4 | [IFRIC® Update, March 2020, Agenda Decision, ‘IAS 21 The Effects of Changes in Foreign Exchange Rates and IAS 29 Financial Reporting in Hyperinflationary Economies—Translation of a Hyperinflationary Foreign Operation—Presenting Exchange Differences’ The Committee received a request about the application of IAS 21 and IAS 29. In the fact pattern described in the request, the entity:
Paragraph 43 of IAS 21 requires an entity to restate the results and financial position of a hyperinflationary foreign operation applying IAS 29 before applying the translation method set out in paragraph 42 of IAS 21 (restate/translate approach). The application of the restate/translate approach may result in a change to the entity’s net investment in the hyperinflationary foreign operation. This change would include two effects:
To illustrate this using a simple example, assume at the beginning of the reporting period that an entity has a 100% interest in a hyperinflationary foreign operation that has a non-monetary asset of 1,000 in local currency (LC), no other assets and no liabilities. Therefore, the foreign operation has net assets (and equity) of LC1,000. The change in the general price index of the hyperinflationary economy during the reporting period is 200%. The entity could, for example, calculate:
The request asked how the entity presents the restatement and translation effects in its statement of financial position. Do the restatement and translation effects meet the definition of an exchange difference? Paragraph 8 of IAS 21 defines an exchange difference as the difference ‘resulting from translating a given number of units of one currency into another currency at different exchange rates’. The Committee concluded that, in the fact pattern described in the request, either the translation effect alone meets the definition of an exchange difference, or the combination of the restatement and translation effects meets that definition. How does an entity present any exchange difference arising from translating a hyperinflationary foreign operation? The Committee observed that all requirements in IAS 21 that specify the recognition (or presentation) of exchange differences require an entity to recognise (or present) exchange differences in profit or loss or other comprehensive income (OCI). IAS 21 requires the recognition of exchange differences in profit or loss or OCI—with no reference to equity—because exchange differences meet the definition of income or expenses. Accordingly, the Committee concluded that an entity does not recognise exchange differences directly in equity. Paragraph 7 of IAS 1 Presentation of Financial Statements states that components of OCI include ‘gains and losses arising from translating the financial statements of a foreign operation’. Paragraph 41 of IAS 21 explains that exchange differences arising from translating the financial statements of a non-hyperinflationary foreign operation are recognised in OCI––and not in profit or loss––because ‘the changes in exchange rates have little or no direct effect on the present and future cash flows from operations’. The Committee observed that this explanation is also relevant if the foreign operation’s functional currency is hyperinflationary. Accordingly, the Committee concluded that an entity presents in OCI any exchange difference resulting from the translation of a hyperinflationary foreign operation. Applying the requirements in IFRS Standards to the restatement and translation effects The Committee concluded that, in the fact pattern described in the request, the entity presents:
In the light of its analysis, the Committee considered whether to add a project on the presentation of exchange differences resulting from the restatement and translation of hyperinflationary foreign operations to its standard-setting agenda. The Committee has not obtained evidence that a project with that scope—undertaken in isolation of other aspects of the accounting for hyperinflationary foreign operations—would result in an improvement in financial reporting that would be sufficient to outweigh the costs. Consequently, the Committee decided not to add the matter to its standard-setting agenda.] |
| E5 | [IFRIC® Update, March 2020, Agenda Decision, ‘IAS 21 The Effects of Changes in Foreign Exchange Rates and IAS 29 Financial Reporting in Hyperinflationary Economies—Cumulative Exchange Differences before a Foreign Operation becomes Hyperinflationary’ The Committee received a request about the application of IAS 21 and IAS 29. In the fact pattern described in the request, the entity:
Before the foreign operation becomes hyperinflationary, IAS 21 requires an entity to:
The request asked whether the entity reclassifies within equity the cumulative pre-hyperinflation exchange differences once the foreign operation becomes hyperinflationary––that is, whether the entity transfers the cumulative pre-hyperinflation exchange differences to a component of equity that is not subsequently reclassified to profit or loss. Paragraph 41 of IAS 21 requires an entity to present the cumulative amount of exchange differences recognised in OCI in a separate component of equity ‘until disposal of the foreign operation’. Further, paragraphs 48 and 48C of IAS 21 require an entity to reclassify the cumulative amount of those exchange differences—or a proportionate share of that cumulative amount—from equity to profit or loss on disposal—or partial disposal—of a foreign operation (except as specified in paragraph 48C). Accordingly, the Committee concluded that, in the fact pattern described in the request, the entity presents the cumulative amount of the exchange differences as a separate component of equity (to which paragraph 48 or 48C of IAS 21 applies) until disposal or partial disposal of the foreign operation. The entity does not reclassify within equity the cumulative pre-hyperinflation exchange differences once the foreign operation becomes hyperinflationary. The Committee concluded that the principles and requirements in IAS 21 provide an adequate basis for an entity to determine how to present the cumulative pre-hyperinflation exchange differences once a foreign operation becomes hyperinflationary. Consequently, the Committee decided not to add the matter to its standard-setting agenda.] |
43 | When an entity’s functional currency is the currency of a hyperinflationary economy, [Refer:IAS 29 paragraph 3] the entity shall restate its financial statements in accordance with IAS 29 before applying the translation method set out in paragraph 42, except for comparative amounts that are translated into a currency of a non‑hyperinflationary economy (see paragraph 42(b)). When the economy ceases to be hyperinflationary and the entity no longer restates its financial statements in accordance with IAS 29, it shall use as the historical costs for translation into the presentation currency the amounts restated to the price level at the date the entity ceased restating its financial statements.E6 |
| E6 | [IFRIC® Update, March 2020, Agenda Decision, ‘IAS 21 The Effects of Changes in Foreign Exchange Rates and IAS 29 Financial Reporting in Hyperinflationary Economies—Presenting Comparative Amounts when a Foreign Operation first becomes Hyperinflationary’ The Committee received a request about the application of IAS 21 and IAS 29. In the fact pattern described in the request, the entity:
The request asked whether the entity restates comparative amounts presented for the foreign operation in:
On the basis of responses to outreach, comment letters received and additional research, the Committee observed little diversity in the application of IAS 21 with respect to the questions in the request––in applying paragraph 42(b) of IAS 21, entities generally do not restate comparative amounts in their interim or annual financial statements in the situations described above. Therefore, the Committee has not obtained evidence that the matter has widespread effect. Consequently, the Committee decided not to add the matter to its standard-setting agenda.] |
Translation of a foreign operation
44 | Paragraphs 45–47, in addition to paragraphs 38–43, apply when the results and financial position of a foreign operation are translated into a presentation currency so that the foreign operation can be included in the financial statements of the reporting entity by consolidation [Refer:IFRS 10 Appendix A (definition of consolidated financial statements) and paragraphs 19–26 and B86–B99] or the equity method. |
45 | The incorporation of the results and financial position of a foreign operation with those of the reporting entity follows normal consolidation procedures, [Refer:IFRS 10 paragraph B86] such as the elimination of intragroup balances and intragroup transactions of a subsidiary (see IFRS 10 Consolidated Financial Statements). However, an intragroup monetary asset (or liability), whether short‑term or long‑term, cannot be eliminated against the corresponding intragroup liability (or asset) without showing the results of currency fluctuations in the consolidated financial statements. This is because the monetary item represents a commitment to convert one currency into another and exposes the reporting entity to a gain or loss through currency fluctuations. Accordingly, in the consolidated financial statements of the reporting entity, such an exchange difference is recognised in profit or loss or, if it arises from the circumstances described in paragraph 32, it is recognised in other comprehensive income and accumulated in a separate component of equity until the disposal of the foreign operation. |
46 | When the financial statements of a foreign operation are as of a date different from that of the reporting entity, the foreign operation often prepares additional statements as of the same date as the reporting entity’s financial statements. When this is not done, IFRS 10 allows the use of a different date provided that the difference is no greater than three months and adjustments are made for the effects of any significant transactions or other events that occur between the different dates. [Refer:IFRS 10 paragraph B93] In such a case, the assets and liabilities of the foreign operation are translated at the exchange rate at the end of the reporting period of the foreign operation. Adjustments are made for significant changes in exchange rates up to the end of the reporting period of the reporting entity in accordance with IFRS 10. The same approach is used in applying the equity method to associates and joint ventures in accordance with IAS 28 (as amended in 2011). |
47 | Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation. Thus they shall be expressed in the functional currency of the foreign operation and shall be translated at the closing rate in accordance with paragraphs 39 and 42. |
Disposal or partial disposal of a foreign operation
48 | On the disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation, recognised in other comprehensive income and accumulated in the separate component of equity, shall be reclassified from equity to profit or loss (as a reclassification adjustment) when the gain or loss on disposal is recognised (see IAS 1 Presentation of Financial Statements (as revised in 2007)). [Refer:IFRIC 16 paragraph 17]
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48A | In addition to the disposal of an entity’s entire interest in a foreign operation, the following partial disposals are accounted for as disposals:
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48B | On disposal of a subsidiary that includes a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation that have been attributed to the non‑controlling interests shall be derecognised, but shall not be reclassified to profit or loss. |
48C | On the partial disposal of a subsidiary that includes a foreign operation, the entity shall re‑attribute the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income to the non‑controlling interests in that foreign operation. In any other partial disposal of a foreign operation the entity shall reclassify to profit or loss only the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income. |
48D | A partial disposal of an entity’s interest in a foreign operation is any reduction in an entity’s ownership interest in a foreign operation, except those reductions in paragraph 48A that are accounted for as disposals.E7 |
| E7 | [IFRIC® Update, September 2010, Agenda Decision, ‘IAS 21 The Effects of Changes in Foreign Exchange Rates—Repayments of investments and foreign currency translation reserve’ The Committee received a request for guidance on the reclassification of the foreign currency translation reserve (FCTR) when a repayment of a foreign investment occurs. The request specifically sought guidance on whether FCTR should be recycled for transactions in which there is a reduction in:
The Committee noted that paragraph 48D of IAS 21 requires that an entity must treat ‘any reduction in an entity’s ownership interest in a foreign operation’ as a partial disposal, apart from those reductions in paragraph 48A that are accounted for as disposals. How an entity applies the requirements in paragraph 48D is largely dependent on whether it interprets ‘any reduction in an entity’s ownership interest in a foreign operation’ to mean an absolute reduction, a proportionate reduction, or both. The Committee considers that different interpretations could lead to diversity in practice in the application of IAS 21 on the reclassification of the FCTR when repayment of investment in a foreign operation occurs. However, the Committee decided neither to add this issue to its agenda nor to recommend the Board to address this issue through Annual Improvements because it did not think that it would be able to reach a consensus on the issue on a timely basis. The Committee recommends that the IASB should consider this issue within a broad review of IAS 21 as a potential item for its post‑2011 agenda.] |
49 | An entity may dispose or partially dispose of its interest in a foreign operation through sale, liquidation, repayment of share capital or abandonment of all, or part of, that entity. A write‑down of the carrying amount of a foreign operation, either because of its own losses or because of an impairment recognised by the investor, does not constitute a partial disposal. Accordingly, no part of the foreign exchange gain or loss recognised in other comprehensive income is reclassified to profit or loss at the time of a write‑down. |
Tax effects of all exchange differences
50 | Gains and losses on foreign currency transactions and exchange differences arising on translating the results and financial position of an entity (including a foreign operation) into a different currency may have tax effects. IAS 12 Income Taxes applies to these tax effects. |
Disclosure
| Disclosure of effect of changes in foreign exchange rates [text block] Disclosure | Text block | 800500, 842000 |
51 | In paragraphs 53 and 55–57 references to ‘functional currency’ apply, in the case of a group, to the functional currency of the parent. |
52 | An entity shall disclose:
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53 | When the presentation currency is different from the functional currency, that fact shall be stated, together with disclosure of the functional currency and the reason for using a different presentation currency.
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54 | When there is a change in the functional currency of either the reporting entity or a significant foreign operation, that fact and the reason for the change in functional currency shall be disclosed.
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55 | When an entity presents its financial statements in a currency that is different from its functional currency, it shall describe the financial statements as complying with IFRSs only if they comply with all the requirements of IFRSs including the translation method set out in paragraphs 39 and 42. |
56 | An entity sometimes presents its financial statements or other financial information in a currency that is not its functional currency without meeting the requirements of paragraph 55. For example, an entity may convert into another currency only selected items from its financial statements. Or, an entity whose functional currency is not the currency of a hyperinflationary economy [Refer:IAS 29 paragraph 3] may convert the financial statements into another currency by translating all items at the most recent closing rate. Such conversions are not in accordance with IFRSs and the disclosures set out in paragraph 57 are required. [Refer:Basis for Conclusions paragraph BC14] |
57 | When an entity displays its financial statements or other financial information in a currency that is different from either its functional currency or its presentation currency and the requirements of paragraph 55 are not met, it shall:
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57A | When an entity estimates a spot exchange rate because a currency is not exchangeable into another currency (see paragraph 19A), the entity shall disclose information that enables users of its financial statements to understand how the currency not being exchangeable into the other currency affects, or is expected to affect, the entity’s financial performance, financial position and cash flows. To achieve this objective, an entity shall disclose information about:
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57B | Paragraphs A18–A20 specify how an entity applies paragraph 57A. |
Effective date and transition
58 | An entity shall apply this Standard for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. If an entity applies this Standard for a period beginning before 1 January 2005, it shall disclose that fact. |
58A | Net Investment in a Foreign Operation (Amendment to IAS 21), issued in December 2005, added paragraph 15A and amended paragraph 33. An entity shall apply those amendments for annual periods beginning on or after 1 January 2006. Earlier application is encouraged. |
59 | An entity shall apply paragraph 47 prospectively to all acquisitions occurring after the beginning of the financial reporting period in which this Standard is first applied. Retrospective application of paragraph 47 to earlier acquisitions is permitted. For an acquisition of a foreign operation treated prospectively but which occurred before the date on which this Standard is first applied, the entity shall not restate prior years and accordingly may, when appropriate, treat goodwill and fair value adjustments arising on that acquisition as assets and liabilities of the entity rather than as assets and liabilities of the foreign operation. Therefore, those goodwill and fair value adjustments either are already expressed in the entity’s functional currency or are non‑monetary foreign currency items, which are reported using the exchange rate at the date of the acquisition. |
60 | All other changes resulting from the application of this Standard shall be accounted for in accordance with the requirements of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. |
60A | IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs. In addition it amended paragraphs 27, 30–33, 37, 39, 41, 45, 48 and 52. An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. If an entity applies IAS 1 (revised 2007) for an earlier period, the amendments shall be applied for that earlier period. |
60B | IAS 27 (as amended in 2008) added paragraphs 48A–48D and amended paragraph 49. An entity shall apply those amendments prospectively for annual periods beginning on or after 1 July 2009. If an entity applies IAS 27 (amended 2008) for an earlier period, the amendments shall be applied for that earlier period. |
60C | [Deleted] |
60D | Paragraph 60B was amended by Improvements to IFRSs issued in May 2010. An entity shall apply that amendment for annual periods beginning on or after 1 July 2010. Earlier application is permitted. |
60E | [Deleted] |
60F |
60G | IFRS 13, issued in May 2011, amended the definition of fair value in paragraph 8 and amended paragraph 23. An entity shall apply those amendments when it applies IFRS 13. |
60H | Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued in June 2011, amended paragraph 39. An entity shall apply that amendment when it applies IAS 1 as amended in June 2011. |
60I | [Deleted] |
60J | IFRS 9, as issued in July 2014, amended paragraphs 3, 4, 5, 27 and 52 and deleted paragraphs 60C, 60E and 60I. An entity shall apply those amendments when it applies IFRS 9. |
60K | IFRS 16 Leases, issued in January 2016, amended paragraph 16. An entity shall apply that amendment when it applies IFRS 16. |
60L | Lack of Exchangeability, issued in August 2023, amended paragraphs 8 and 26, and added paragraphs 8A–8B, 19A, 57A–57B and Appendix A. An entity shall apply those amendments for annual reporting periods beginning on or after 1 January 2025. Earlier application is permitted. If an entity applies the amendments for an earlier period, it shall disclose that fact. The date of initial application is the beginning of the annual reporting period in which an entity first applies those amendments. |
60M | In applying Lack of Exchangeability, an entity shall not restate comparative information. Instead:
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Withdrawal of other pronouncements
61 | This Standard supersedes IAS 21 The Effects of Changes in Foreign Exchange Rates (revised in 1993). |
62 | This Standard supersedes the following Interpretations:
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Appendices
Appendix AApplication guidance
This appendix is an integral part of the Standard.
Exchangeability
A1 | The purpose of the following diagram is to help entities assess whether a currency is exchangeable and estimate the spot exchange rate when a currency is not exchangeable.  Step I: Assessing whether a currency is exchangeable (paragraphs 8 and 8A–8B)
Time frame
Ability to obtain the other currency
Markets or exchange mechanisms
Purpose of obtaining the other currency
Ability to obtain only limited amounts of the other currency
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Step II: Estimating the spot exchange rate when a currency is not exchangeable (paragraph 19A)
A11 | This Standard does not specify how an entity estimates the spot exchange rate to meet the objective in paragraph 19A. An entity can use an observable exchange rate without adjustment (see paragraphs A12–A16) or another estimation technique (see paragraph A17). |
Using an observable exchange rate without adjustment
A12 | In estimating the spot exchange rate as required by paragraph 19A, an entity may use an observable exchange ratespot exchange rate without adjustment if that observable exchange rate meets the objective in paragraph 19A. Examples of an observable exchange rate include:
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Using an observable exchange rate for another purpose
A13 | A currency that is not exchangeable into another currency for one purpose might be exchangeable into that currency for another purpose. For example, an entity might be able to obtain a currency to import specific goods but not to pay dividends. In such situations, the entity might conclude that an observable exchange rate for another purpose meets the objective in paragraph 19A. If the rate meets the objective in paragraph 19A, an entity may use that rate as the estimated spot exchange rate. |
A14 | In assessing whether such an observable exchange rate meets the objective in paragraph 19A, an entity shall consider, among other factors:
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Using the first subsequent exchange rate
A15 | A currency that is not exchangeable into another currency at the measurement date for a specified purpose might subsequently become exchangeable into that currency for that purpose. In such situations, an entity might conclude that the first subsequent exchange rate [Refer:paragraph A12(b)] meets the objective in paragraph 19A. If the rate meets the objective in paragraph 19A, an entity may use that rate as the estimated spot exchange rate. |
A16 | In assessing whether the first subsequent exchange rate [Refer:paragraph A12(b)] meets the objective in paragraph 19A, an entity shall consider, among other factors:
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Using another estimation technique
A17 | An entity using another estimation technique may use any observable exchange rate—including rates from exchange transactions in markets or exchange mechanisms that do not create enforceable rights and obligations—and adjust that rate, as necessary, to meet the objective in paragraph 19A. |
Disclosure when a currency is not exchangeable
A18 | An entity shall consider how much detail is necessary to satisfy the disclosure objective in paragraph 57A. An entity shall disclose the information specified in paragraphs A19–A20 and any additional information necessary to meet the disclosure objective in paragraph 57A. |
A19 | In applying paragraph 57A, an entity shall disclose:
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A20 | When a foreign operation’s functional currency is not exchangeable into the presentation currency or, if applicable, the presentation currency is not exchangeable into a foreign operation’s functional currency, an entity shall also disclose:
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Appendix BAmendments to other pronouncements
The amendments in this appendix shall be applied for annual periods beginning on or after 1 January 2005. If an entity applies this Standard for an earlier period, these amendments shall be applied for that earlier period.
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The amendments contained in this appendix when this Standard was issued in 2003 have been incorporated into the relevant pronouncements published in this volume.
Board Approvals
Approval by the Board of IAS 21 issued in December 2003
International Accounting Standard 21 The Effects of Changes in Foreign Exchange Rates (as revised in 2003) was approved for issue by the fourteen members of the International Accounting Standards Board.
| Sir David Tweedie | Chairman |
| Thomas E Jones | Vice-Chairman |
| Mary E Barth | |
| Hans-Georg Bruns | |
| Anthony T Cope | |
| Robert P Garnett | |
| Gilbert Gélard | |
| James J Leisenring | |
| Warren J McGregor | |
| Patricia L O’Malley | |
| Harry K Schmid | |
| John T Smith | |
| Geoffrey Whittington | |
| Tatsumi Yamada |
Approval by the Board of Net Investment in a Foreign Operation (Amendment to IAS 21) issued in December 2005
Net Investment in a Foreign Operation (Amendment to IAS 21) was approved for issue by the fourteen members of the International Accounting Standards Board.
| Sir David Tweedie | Chairman |
| Thomas E Jones | Vice‑Chairman |
| Mary E Barth | |
| Hans‑Georg Bruns | |
| Anthony T Cope | |
| Jan Engström | |
| Robert P Garnett | |
| Gilbert Gélard | |
| James J Leisenring | |
| Warren J McGregor | |
| Patricia L O’Malley | |
| John T Smith | |
| Geoffrey Whittington | |
| Tatsumi Yamada |
Approval by the IASB of Lack of Exchangeability issued in August 2023
Lack of Exchangeability, which amended IAS 21 The Effects of Changes in Foreign Exchange Rates, was approved for issue by 12 of 14 members of the International Accounting Standards Board (IASB). Mr Esterer and Ms Keren abstained from voting in view of their recent appointment to the IASB.
| Andreas Barckow | Chair |
| Linda Mezon-Hutter | Vice-Chair |
| Nick Anderson | |
| Patrina Buchanan | |
| Tadeu Cendon | |
| Florian Esterer | |
| Zach Gast | |
| Hagit Keren | |
| Jianqiao Lu | |
| Bruce Mackenzie | |
| Bertrand Perrin | |
| Rika Suzuki | |
| Ann Tarca | |
| Robert Uhl |
Footnotes
| 1 | See also SIC‑7 Introduction of the Euro (back) |