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 IASB 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.

Other IFRSs have made minor consequential amendments to IAS 21. They include IFRS 9 Financial Instruments (issued November 2009 and October 2010), 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) and IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013).

CONTENTS

INTRODUCTION                                                                                           

INTERNATIONAL ACCOUNTING STANDARD 21

THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

OBJECTIVE

SCOPE

DEFINITIONS

Elaboration on the definitions

Functional currency

Net investment in a foreign operation

Monetary items

SUMMARY OF THE APPROACH REQUIRED BY THIS STANDARD

REPORTING FOREIGN CURRENCY TRANSACTIONS IN THE FUNCTIONAL

CURRENCY

Initial recognition

Reporting at the ends of subsequent reporting periods

Recognition of exchange differences

Change in functional currency

USE OF A PRESENTATION CURRENCY OTHER THAN THE FUNCTIONAL

CURRENCY

Translation to the presentation currency

Translation of a foreign operation

Disposal or partial disposal of a foreign operation TAX EFFECTS OF ALL EXCHANGE DIFFERENCES

DISCLOSURE

EFFECTIVE DATE AND TRANSITION

WITHDRAWAL OF OTHER PRONOUNCEMENTS

APPENDIX

Amendments to other pronouncements

FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS

EDITION

APPROVAL BY THE BOARD OF IAS 21 ISSUED IN DECEMBER 2003

APPROVAL BY THE BOARD OF NET INVESTMENT IN A FOREIGN

OPERATION (AMENDMENT TO IAS 21) ISSUED IN DECEMBER 2005

BASIS FOR CONCLUSIONS

International Accounting Standard 21 The Effects of Changes in Foreign Exchange Rates (IAS 21) is set out in paragraphs 1-62 and the Appendix. 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 International Financial Reporting 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.

Introduction

 

International Accounting Standard 21 The Effects of Changes in Foreign Exchange Rates (IAS 21) replaces IAS 21 The Effects of Changes in Foreign Exchange Rates (revised in 1993), and should be applied for annual periods beginning on or after 1 January 2005. Earlier application is encouraged. The Standard also replaces

the following 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

         SIC-30 Reporting Currency—Translation from Measurement Currency to

Presentation Currency.

Reasons for revising IAS 21

 

The International Accounting Standards Board developed this revised IAS 21 as part of its project on Improvements to International Accounting Standards. The project was undertaken in the light of queries and criticisms raised in relation to the Standards by securities regulators, professional accountants and other interested parties. The objectives of the project were to reduce or eliminate alternatives, redundancies and conflicts within the Standards, to deal with some convergence issues and to make other improvements.

For IAS 21 the Board's main objective was to provide additional guidance on the translation method and on determining the functional and presentation currencies. The Board did not reconsider the fundamental approach to accounting for the effects of changes in foreign exchange rates contained in IAS 21.

 

The main changes

 

The main changes from the previous version of IAS 21 are described below.

Scope

The Standard excludes from its scope foreign currency derivatives that are

within the scope of IFRS 9 Financial Instruments. Similarly, the material on hedge accounting has been moved to IAS 39 Financial Instruments: Recognition and

Measurement.1

Definitions

The notion of 'reporting currency' has been replaced with two notions:

     In November 2013 the Board replaced the hedge accounting requirements in IAS 39 and relocated

them to IFRS 9.

          functional currency, ie the currency of the primary economic

environment in which the entity operates. The term 'functional currency' is used in place of 'measurement currency' (the term used in SIC-19) because it is the more commonly used term, but with essentially the same meaning.

          presentation currency, ie the currency in which financial statements are

presented.

 

Definitions—functional currency

When a reporting entity prepares financial statements, the Standard requires

each individual entity included in the reporting entity—whether it is a stand-alone entity, an entity with foreign operations (such as a parent) or a foreign operation (such as a subsidiary or branch)—to determine its functional currency and measure its results and financial position in that currency. The new material on functional currency incorporates some of the guidance previously included in SIC-19 on how to determine a measurement currency. However, the Standard gives greater emphasis than SIC-19 gave to the currency of the economy that determines the pricing of transactions, as opposed to the currency in which transactions are denominated.

As a result of these changes and the incorporation of guidance previously in

SIC-19:

          an entity (whether a stand-alone entity or a foreign operation) does not

have a free choice of functional currency.

          an entity cannot avoid restatement in accordance with IAS 29 Financial

Reporting in Hyperinflationary Economies by, for example, adopting a stable currency (such as the functional currency of its parent) as its functional currency.

 

The Standard revises the requirements in the previous version of IAS 21 for distinguishing between foreign operations that are integral to the operations of the reporting entity (referred to below as 'integral foreign operations') and foreign entities. The requirements are now among the indicators of an entity's

functional currency. As a result:

          there is no distinction between integral foreign operations and foreign

entities. Rather, an entity that was previously classified as an integral foreign operation will have the same functional currency as the reporting entity.

          only one translation method is used for foreign operations—namely that

described in the previous version of IAS 21 as applying to foreign entities (see paragraph IN13).

          the paragraphs dealing with the distinction between an integral foreign

operation and a foreign entity and the paragraph specifying the

translation method to be used for the former have been deleted.

 

Reporting foreign currency transactions in the functional

currency—recognition of exchange differences

The Standard removes the limited option in the previous version of IAS 21 to

capitalise exchange differences resulting from a severe devaluation or depreciation of a currency against which there is no means of hedging. Under the Standard, such exchange differences are now recognised in profit or loss. Consequently, SIC-11, which outlined restricted circumstances in which such exchange differences may be capitalised, has been superseded since capitalisation of such exchange differences is no longer permitted in any circumstances.

Reporting foreign currency transactions in the functional

currency—change in functional currency

The Standard replaces the previous requirement for accounting for a change in

the classification of a foreign operation (which is now redundant) with a requirement that a change in functional currency is accounted for prospectively.

Use of a presentation currency other than the functional

currency—translation to the presentation currency

The Standard permits an entity to present its financial statements in any

currency (or currencies). For this purpose, an entity could be a stand-alone entity, a parent preparing consolidated financial statements in accordance with IFRS 10 Consolidated Financial Statements or a parent, an investor with joint control

of, or significant influence over, an investee preparing separate financial

statements in accordance with IAS 27 Separate Financial Statements.

An entity is required to translate its results and financial position from its functional currency into a presentation currency (or currencies) using the method required for translating a foreign operation for inclusion in the reporting entity's financial statements. Under this method, assets and liabilities are translated at the closing rate, and income and expenses are translated at the exchange rates at the dates of the transactions (or at the average rate for the period when this is a reasonable approximation).

The Standard requires comparative amounts to be translated as follows:

         for an entity whose functional currency is not the currency of a

hyperinflationary economy:

 

assets and liabilities in each statement of financial position presented are translated at the closing rate at the date of that statement of financial position (ie last year's comparatives are translated at last year's closing rate).

income and expenses in each statement presenting profit or loss

and other comprehensive income are translated at exchange rates at the dates of the transactions (ie last year's comparatives are translated at last year's actual or average rate).

         for an entity whose functional currency is the currency of a

hyperinflationary economy, and for which the comparative amounts are translated into the currency of a different hyperinflationary economy, all

amounts (eg amounts in a statement of financial position and statement of comprehensive income) are translated at the closing rate of the most recent statement of financial position presented (ie last year's comparatives, as adjusted for subsequent changes in the price level, are translated at this year's closing rate).

 

for an entity whose functional currency is the currency of a hyperinflationary economy, and for which the comparative amounts are translated into the currency of a non-hyperinflationary economy, all amounts are those presented in the prior year financial statements (ie not adjusted for subsequent changes in the price level or subsequent changes in exchange rates).

This translation method, like that described in paragraph IN13, applies when translating the financial statements of a foreign operation for inclusion in the financial statements of the reporting entity, and when translating the financial statements of an entity into a different presentation currency.

Use of a presentation currency other than the functional

currency—translation of a foreign operation

 

The Standard requires goodwill and fair value adjustments to assets and

liabilities that arise on the acquisition of a foreign entity to be treated as part of the assets and liabilities of the acquired entity and translated at the closing rate.

Disclosure

The Standard includes most of the disclosure requirements of SIC-30. These

apply when a translation method different from that described in paragraphs IN13 and IN14 is used or other supplementary information (such as an extract from the full financial statements) is displayed in a currency other than the functional currency or the presentation currency.

In addition, entities must disclose when there has been a change in functional currency, and the reasons for the change.

International Accounting Standard 21

The Effects of Changes in Foreign Exchange Rates

Objective

Scope

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.

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.

This Standard shall be applied:

 

in accounting for transactions and balances in foreign currencies, except for those derivative transactions and balances that are

within the scope of IFRS 9 Financial Instruments;

in translating the results and financial position of foreign

operations that are included in the financial statements of the

entity by consolidation or the equity method; and

in translating an entity's results and financial position into a presentation currency.

              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.

              This Standard does not apply to hedge accounting for foreign currency items,

including the hedging of a net investment in a foreign operation. IFRS 9 applies to hedge accounting.

              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 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.

              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).