IAS 21

IAS 21 is an International Accounting Standard issued by the International Accounting Standards Board (IASB) that outlines 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. ^[1] 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. ^[2]

Core Concepts: Functional vs. Presentation Currency

IAS 21 introduces a hierarchy for determining the currencies used by an entity: ^[3]

• Functional Currency: The currency of the primary economic environment in which the entity operates. This is the currency in which the entity generates and expends cash. ^[4]
• Presentation Currency: The currency in which the financial statements are presented. ^[5]
• Foreign Currency: Any currency other than the functional currency of the entity. ^[6]

Determining Functional Currency

In determining the functional currency, an entity considers primary indicators, such as the currency that mainly influences sales prices for goods and services and the currency of the country whose competitive forces and regulations mainly determine those prices. ^[7] If these are inconclusive, management uses judgment to determine the currency that most faithfully represents the economic effects of the underlying transactions. ^[8]

Reporting Foreign Currency Transactions

A foreign currency transaction is recorded, on initial recognition in the functional currency, by applying the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. ^[9]

At the end of each reporting period: ^[10]

• Monetary items (e.g., cash, receivables, payables) are translated using the closing rate.
• Non-monetary items measured at historical cost are translated using the exchange rate at the date of the transaction.
• Non-monetary items measured at fair value are translated using the exchange rate at the date when the fair value was determined.

Recognition of Exchange Differences

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were initially recorded are recognized in profit or loss in the period in which they arise. ^[11]

Translation to Presentation Currency

When an entity translates its results and financial position from a functional currency to a different presentation currency (e.g., when consolidating a foreign subsidiary), it must follow these rules: ^[12]

1. Assets and liabilities are translated at the closing rate at the date of the balance sheet.
2. Income and expenses are translated at exchange rates at the dates of the transactions (for practical reasons, an average rate is often used).
3. All resulting exchange differences are recognized in other comprehensive income (OCI) and accumulated in a separate component of equity. ^[13]

Summary of IAS 21 Translation Rates

Item	Rate used for Functional Currency	Rate used for Presentation Currency
Monetary Assets	Closing Rate	Closing Rate
Non-monetary Assets (Cost)	Historical Rate	Closing Rate
Income / Expenses	Transaction Date Rate	Transaction Date Rate (or Average)
Equity	N/A	Historical Rate

Hyperinflationary Economies

If an entity's functional currency is the currency of a hyperinflationary economy, its financial statements are first restated in accordance with IAS 29 Financial Reporting in Hyperinflationary Economies before being translated into a different presentation currency. ^[14]

Disclosure Requirements (IAS 21)

IAS 21 prescribes 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. ^[15]

Paragraph	Category	Disclosure Requirement	Description / Examples
IAS 21.52(a)	Exchange Differences	Recognized in P&L	The amount of exchange differences recognized in profit or loss (except for those arising on financial instruments measured at fair value through profit or loss).
IAS 21.52(b)		Net Differences in OCI	Net exchange differences recognized in other comprehensive income (OCI) and accumulated in a separate component of equity, and a reconciliation of the amount.
IAS 21.53	Currency Selection	Presentation vs. Functional	When the presentation currency is different from the functional currency, that fact shall be stated, together with the disclosure of the functional currency and the reason for using a different presentation currency.
IAS 21.54	Policy Changes	Change in Functional Currency	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.
IAS 21.55	Translation Basis	Convenience Translations	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 each applicable Standard.
IAS 21.57	Supplementary Info	Non-IFRS Translations	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 (e.g., as a courtesy), it must clearly identify the info as supplementary and disclose the method of translation.

References

1. IAS 21.1; IAS 21.BC1.
2. IAS 21.2; IAS 21.BC4.
3. IAS 21.8.
4. IAS 21.9; IAS 21.BC14.
5. IAS 21.8.
6. IAS 21.8.
7. IAS 21.9.
8. IAS 21.10; IAS 21.BC15.
9. IAS 21.21.
10. IAS 21.23.
11. IAS 21.28; IAS 21.BC24.
12. IAS 21.39.
13. IAS 21.39(c); IAS 21.BC32.
14. IAS 21.42; IAS 21.BC33.
15. IASB. IAS 21, Paragraph 51-57.