Status & recent changes
- Amendments effective from 1 January 2025 ('Lack of Exchangeability') explain how to assess whether a currency can be exchanged into another and how to estimate a spot rate when it cannot.
Objective
Sets out how to include foreign currency transactions and foreign operations in the financial statements, and how to translate them into a presentation currency.
Scope
- Foreign currency transactions and balances (other than derivatives within IFRS 9), translation of foreign operations on consolidation or equity accounting, and translation into a presentation currency.
- Hedge accounting is dealt with in IFRS 9.
Key definitions
- Functional currency
- The currency of the primary economic environment in which the entity operates — mainly the currency that drives its sales prices and costs.
- Presentation currency
- The currency in which the financial statements are presented.
- Monetary items
- Units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of currency units (e.g. receivables, payables, loans).
- Foreign operation
- A subsidiary, associate, joint arrangement or branch whose activities are based or conducted in a country or currency other than the reporting entity's.
Recognition & measurement
Individual transactions
- Initially record at the spot rate on the transaction date (an average rate may be used if rates do not fluctuate significantly).
- At each reporting date, retranslate monetary items at the closing rate.
- Non-monetary items at historical cost stay at the historical rate; those at fair value use the rate at the date fair value was measured.
- Exchange differences on monetary items go to profit or loss, including those on settlement.
- If a gain or loss on a non-monetary item goes to OCI (e.g. a revaluation), its exchange component also goes to OCI.
Translating a foreign operation
- Assets and liabilities, including goodwill and fair value adjustments, at the closing rate.
- Income and expenses at the rates on the transaction dates (an average rate is often used as an approximation).
- Resulting exchange differences go to OCI and accumulate in equity; they are reclassified to profit or loss on disposal of the foreign operation.
- Exchange differences on a monetary item forming part of the net investment in a foreign operation go to OCI in the consolidated statements.
Key disclosures
- Exchange differences recognised in profit or loss, and net differences in OCI with a reconciliation.
- Functional currency and, if different, the presentation currency and reason for the difference.
- Any change in functional currency and the reason.
Common exam traps
- Inventory and PPE at cost are not retranslated at the closing rate.
- Goodwill on acquiring a foreign subsidiary is retranslated at the closing rate each year.
- Functional currency is a matter of fact, not choice; it changes only when underlying conditions change, and the change is prospective.
Worked example: Foreign currency payable
Scenario. An entity with a $ functional currency buys goods on credit for €10,000 when €1 = $1.20. At the year end the invoice is unpaid and €1 = $1.25.
- Initial recognition: inventory and payable at 10,000 × 1.20 = $12,000.
- Payable is monetary: retranslate at closing rate 10,000 × 1.25 = $12,500.
- Exchange loss = $500 to profit or loss. Inventory (non-monetary) stays at $12,000.
Answer: Payable $12,500; exchange loss $500; inventory $12,000.
Practise MCQs on this standard
Test your understanding of IAS 21 with free chapter-wise MCQs and explanations in these question banks.
CAF-6 Corporate ReportingICAP CAFACCA FR Financial ReportingACCACA Inter P1 Advanced AccountingICAI CA Intermediate
ICAI CA Intermediate examines Indian Accounting Standards, which are based on but can differ from IFRS. Check your syllabus.