IAS 21 The Effects of Changes in Foreign Exchange Rates

An entity may carry on foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. IAS 21 prescribes how an entity should:

• account for  foreign currency transactions; 
• translate financial statements of a foreign operation into the entity’s functional currency; and
• translate the entity’s financial statements into a presentation currency, if different from the entity’s functional currency. IAS 21 permits an entity to present its financial statements in any currency (or currencies).

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.

An entity’s functional currency is the currency of the primary economic environment in which the entity operates (ie the environment in which it primarily generates and expends cash). Any other currency is a foreign currency.

In April 2001 the International Accounting Standards Board (IASB) adopted IAS 21 The Effects of Changes in Foreign Exchange Rates, which had originally been issued by the International Accounting Standards Committee in December 1983. IAS 21 The Effects of Changes in Foreign Exchange Rates replaced IAS 21 Accounting for the Effects of Changes in Foreign Exchange Rates (issued in July 1983).

In December 2003 the IASB issued a revised IAS 21 as part of its initial agenda of technical projects. The revised IAS 21 also incorporated the guidance contained in three related Interpretations (SIC‑11 Foreign Exchange—Capitalisation of Losses Resulting from Severe Currency Devaluations, SIC‑19 Reporting Currency—Measurement and Presentation of Financial Statements under IAS 21 and IAS 29 and SIC‑30 Reporting Currency—Translation from Measurement Currency to Presentation Currency). The Board also amended SIC‑7 Introduction of the Euro.

The IASB amended IAS 21 in December 2005 to require that some types of exchange differences arising from a monetary item should be separately recognised as equity.

In August 2023 the Board issued Lack of Exchangeability (Amendments to IAS 21) to require an entity to apply a consistent approach to assessing whether a currency is exchangeable into another currency and, when it is not, to determining the exchange rate to use and the disclosures to provide.

Other Standards have made minor consequential amendments to IAS 21. They include Improvements to IFRSs (issued May 2010), IFRS 10 Consolidated Financial Statements (issued May 2011), IFRS 11 Joint Arrangements (issued May 2011), IFRS 13 Fair Value Measurement (issued May 2011), Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) (issued June 2011), IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013), IFRS 9 Financial Instruments (issued July 2014), IFRS 16 Leases (issued January 2016), Amendments to References to the Conceptual Framework in IFRS Standards (issued March 2018) and IFRS 18 Presentation and Disclosure in Financial Statements (issued April 2024).