IAS 21

International Accounting Standard 21

The Effects of Changes in Foreign Exchange Rates
This version includes amendments resulting from IFRSs issued up to 31 December 2006
IAS 21 The !ffects of "hanges in Foreign !#change Rates was issued by the International Accounting Standards
Committee in ecember 1!!"# It re$laced IAS 21 $ccounting for the !ffects of "hanges in Foreign !#change Rates
%issued in &uly 1!'"(#
)imited amendments were made to cross*references in IAS 21 in 1!!' and 1!!!#
The Standing Inter$retations Committee issued four Inter$retations relating to IAS 21+
, SIC*- Introduction of the !uro %issued .ay 1!!'(
, SIC*11 Foreign !#change%"apitalisation of &osses Resulting from Severe "urrenc' Devaluations %issued &uly
1!!'(
, SIC*1! Reporting "urrenc'%(easurement and )resentation of Financial Statements under I$S 21 and I$S 2*
%issued /o0ember 2111(
, SIC*"1 Reporting "urrenc'%Translation from (easurement "urrenc' to )resentation "urrenc' %issued
ecember 2111(#
In A$ril 2111 the International Accounting Standards 2oard %IAS2( resol0ed that all Standards and Inter$retations issued
under $re0ious Constitutions continued to be a$$licable unless and until they were amended or withdrawn#
In ecember 211" the IAS2 issued a re0ised IAS 21# The re0ised standard also amended SIC*-3 to which IAS 21 still
refers3 and re$laced SIC*113 SIC*1! and SIC*"1#
Since 211"3 the IAS2 has issued the following amendment to IAS 21+
, /et In0estment in a Foreign 4$eration %issued ecember 2115(#
6 IASCF 1
IAS 21
CONTENTS
paragraphs
INTRODUCTION IN1IN17
INTERNATIONAL ACCOUNTING STANDARD 21
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
OBECTI!E 12
SCO"E #7
DE$INITIONS %1&
Ela'oration on t(e de)inition* +1&
Functional currency 914
Net investment in a foreign operation 1515A
Monetary items 16
SU,,AR- O$ T.E A""ROAC. RE/UIRED B- T.IS STANDARD 171+
RE"ORTING $OREIGN CURRENC- TRANSACTIONS IN T.E $UNCTIONAL CURRENC- 20#7
Initial recognition 2022
Re1orting at *u'*e2uent 'alance *(eet date* 2#2&
Recognition o) e3c(ange di))erence* 27#4
C(ange in )unctional currenc5 #6#7
USE O$ A "RESENTATION CURRENC- OT.ER T.AN T.E $UNCTIONAL CURRENC- #%4+
Tran*lation to t(e 1re*entation currenc5 #%4#
Tran*lation o) a )oreign o1eration 4447
Di*1o*al o) a )oreign o1eration 4%4+
TA7 E$$ECTS O$ ALL E7C.ANGE DI$$ERENCES 60
DISCLOSURE 6167
E$$ECTI!E DATE AND TRANSITION 6%&0
8IT.DRA8AL O$ OT.ER "RONOUNCE,ENTS &1&2
A11endi3
A9end9ent* to ot(er 1ronounce9ent*
A""RO!AL O$ IAS 21 B- T.E BOARD
A""RO!AL O$ A,END,ENT TO IAS 21 B- T.E BOARD
BASIS $OR CONCLUSIONS
2 6 IASCF
IAS 21
International Accounting Standard 21 The !ffects of "hanges in Foreign !#change Rates %IAS 21( is set out in $aragra$hs
1782 and the A$$endix# All the $aragra$hs ha0e e9ual authority but retain the IASC format of the Standard when it was
ado$ted by the IAS2# IAS 21 should be read in the context of its ob:ecti0e and the 2asis for Conclusions3 the )reface to
International Financial Reporting Standards and the Frame+or, for the )reparation and )resentation of Financial
Statements# IAS ' $ccounting )olicies- "hanges in $ccounting !stimates and !rrors $ro0ides a basis for selecting and
a$$lying accounting $olicies in the absence of ex$licit guidance#
6 IASCF "
IAS 21
Introduction
I/1 International Accounting Standard 21 The !ffects of "hanges in Foreign !#change Rates %IAS 21( re$laces
IAS 21 The !ffects of "hanges in Foreign !#change Rates %re0ised in 1!!"(3 and should be a$$lied for annual
$eriods beginning on or after 1 &anuary 2115# Earlier a$$lication is encouraged# The Standard also re$laces the
following Inter$retations+
, SIC*11 Foreign !#change%"apitalisation of &osses Resulting from Severe "urrenc' Devaluations
, SIC*1! Reporting "urrenc'%(easurement and )resentation of Financial Statements under I$S 21 and
I$S 2*
, SIC*"1 Reporting "urrenc'%Translation from (easurement "urrenc' to )resentation "urrenc'#
Rea*on* )or re:i*ing IAS 21
I/2 The International Accounting Standards 2oard de0elo$ed this re0ised IAS 21 as $art of its $ro:ect on
Im$ro0ements to International Accounting Standards# The $ro:ect was underta;en in the light of 9ueries and
criticisms raised in relation to the Standards by securities regulators3 $rofessional accountants and other
interested $arties# The ob:ecti0es of the $ro:ect were to reduce or eliminate alternati0es3 redundancies and
conflicts within the Standards3 to deal with some con0ergence issues and to ma;e other im$ro0ements#
I/" For IAS 21 the 2oard<s main ob:ecti0e was to $ro0ide additional guidance on the translation method and on
determining the functional and $resentation currencies# The 2oard did not reconsider the fundamental a$$roach
to accounting for the effects of changes in foreign exchange rates contained in IAS 21#
T(e 9ain c(ange*
I/= The main changes from the $re0ious 0ersion of IAS 21 are described below#
Sco1e
I/5 The Standard excludes from its sco$e foreign currency deri0ati0es that are within the sco$e of IAS "! Financial
Instruments. Recognition and (easurement Similarly3 the material on hedge accounting has been mo0ed to
IAS "!#
De)inition*
I/8 The notion of >re$orting currency< has been re$laced with two notions+
, functional currency3 ie the currency of the $rimary economic en0ironment in which the entity o$erates#
The term >functional currency< is used in $lace of >measurement currency< %the term used in SIC*1!(
because it is the more commonly used term3 but with essentially the same meaning#
, $resentation currency3 ie the currency in which financial statements are $resented#
De)inition*;)unctional currenc5
I/- ?hen a re$orting entity $re$ares financial statements3 the Standard re9uires each indi0idual entity included in
the re$orting entity@whether it is a stand*alone entity3 an entity with foreign o$erations %such as a $arent( or a
foreign o$eration %such as a subsidiary or branch(@to determine its functional currency and measure its results
and financial $osition in that currency# The new material on functional currency incor$orates some of the
guidance $re0iously included in SIC*1! on how to determine a measurement currency# Aowe0er3 the Standard
gi0es greater em$hasis than SIC*1! ga0e to the currency of the economy that determines the $ricing of
transactions3 as o$$osed to the currency in which transactions are denominated#
I/' As a result of these changes and the incor$oration of guidance $re0iously in SIC*1!+
, an entity %whether a stand*alone entity or a foreign o$eration( does not ha0e a free choice of functional
currency#
= 6 IASCF
IAS 21
, an entity cannot a0oid restatement in accordance with IAS 2! Financial Reporting in /'perinflationar'
!conomies by3 for exam$le3 ado$ting a stable currency %such as the functional currency of its $arent( as
its functional currency#
I/! The Standard re0ises the re9uirements in the $re0ious 0ersion of IAS 21 for distinguishing between foreign
o$erations that are integral to the o$erations of the re$orting entity %referred to below as >integral foreign
o$erations<( and foreign entities# The re9uirements are now among the indicators of an entity<s functional
currency# As a result+
, there is no distinction between integral foreign o$erations and foreign entities# Rather3 an entity that
was $re0iously classified as an integral foreign o$eration will ha0e the same functional currency as the
re$orting entity#
, only one translation method is used for foreign o$erations@namely that described in the $re0ious
0ersion of IAS 21 as a$$lying to foreign entities %see $aragra$h I/1"(#
, the $aragra$hs dealing with the distinction between an integral foreign o$eration and a foreign entity
and the $aragra$h s$ecifying the translation method to be used for the former ha0e been deleted#
Re1orting )oreign currenc5 tran*action* in t(e )unctional currenc5;
recognition o) e3c(ange di))erence*
I/11 The Standard remo0es the limited o$tion in the $re0ious 0ersion of IAS 21 to ca$italise exchange differences
resulting from a se0ere de0aluation or de$reciation of a currency against which there is no means of hedging#
Bnder the Standard3 such exchange differences are now recognised in $rofit or loss# Conse9uently3 SIC*113
which outlined restricted circumstances in which such exchange differences may be ca$italised3 has been
su$erseded since ca$italisation of such exchange differences is no longer $ermitted in any circumstances#
Re1orting )oreign currenc5 tran*action* in t(e )unctional currenc5;
c(ange in )unctional currenc5
I/11 The Standard re$laces the $re0ious re9uirement for accounting for a change in the classification of a foreign
o$eration %which is now redundant( with a re9uirement that a change in functional currency is accounted for
$ros$ecti0ely#
U*e o) a 1re*entation currenc5 ot(er t(an t(e )unctional currenc5;
tran*lation to t(e 1re*entation currenc5
I/12 The Standard $ermits an entity to $resent its financial statements in any currency %or currencies(# For this
$ur$ose3 an entity could be a stand*alone entity3 a $arent $re$aring consolidated financial statements or a $arent3
an in0estor or a 0enturer $re$aring se$arate financial statements in accordance with IAS 2- "onsolidated and
Separate Financial Statements#
I/1" An entity is re9uired to translate its results and financial $osition from its functional currency into a $resentation
currency %or currencies( using the method re9uired for translating a foreign o$eration for inclusion in the
re$orting entity<s financial statements# Bnder this method3 assets and liabilities are translated at the closing rate3
and income and ex$enses are translated at the exchange rates at the dates of the transactions %or at the a0erage
rate for the $eriod when this is a reasonable a$$roximation(#
I/1= The Standard re9uires com$arati0e amounts to be translated as follows+
%a( for an entity whose functional currency is not the currency of a hy$erinflationary economy+
%i( assets and liabilities in each balance sheet $resented are translated at the closing rate at the
date of that balance sheet %ie last year<s com$arati0es are translated at last year<s closing rate(#
%ii( income and ex$enses in each income statement $resented are translated at exchange rates at
the dates of the transactions %ie last year<s com$arati0es are translated at last year<s actual or
a0erage rate(#
%b( for an entity whose functional currency is the currency of a hy$erinflationary economy3 and for which
the com$arati0e amounts are translated into the currency of a different hy$erinflationary economy3 all
amounts %eg balance sheet and income statement amounts( are translated at the closing rate of the most
recent balance sheet $resented %ie last year<s com$arati0es3 as ad:usted for subse9uent changes in the
$rice le0el3 are translated at this year<s closing rate(#
6 IASCF 5
IAS 21
%c( for an entity whose functional currency is the currency of a hy$erinflationary economy3 and for which
the com$arati0e amounts are translated into the currency of a non*hy$erinflationary economy3 all
amounts are those $resented in the $rior year financial statements %ie not ad:usted for subse9uent
changes in the $rice le0el or subse9uent changes in exchange rates(#
This translation method3 li;e that described in $aragra$h I/1"3 a$$lies when translating the financial statements
of a foreign o$eration for inclusion in the financial statements of the re$orting entity3 and when translating the
financial statements of an entity into a different $resentation currency#
U*e o) a 1re*entation currenc5 ot(er t(an t(e )unctional currenc5;
tran*lation o) a )oreign o1eration
I/15 The Standard re9uires goodwill and fair 0alue ad:ustments to assets and liabilities that arise on the ac9uisition of
a foreign entity to be treated as $art of the assets and liabilities of the ac9uired entity and translated at the closing
rate#
Di*clo*ure
I/18 The Standard includes most of the disclosure re9uirements of SIC*"1# These a$$ly when a translation method
different from that described in $aragra$hs I/1" and I/1= is used or other su$$lementary information %such as
an extract from the full financial statements( is dis$layed in a currency other than the functional currency or the
$resentation currency#
I/1- In addition3 entities must disclose when there has been a change in functional currency3 and the reasons for the
change#
8 6 IASCF
IAS 21
International Accounting Standard 21
The Effects of Changes in Foreign Exchange Rates
O'<ecti:e
1 An entity may carry on foreign acti0ities in two ways# It may ha0e transactions in foreign currencies or it may
ha0e foreign o$erations# In addition3 an entity may $resent its financial statements in a foreign currency# The
ob:ecti0e of this Standard is to $rescribe how to include foreign currency transactions and foreign o$erations in
the financial statements of an entity and how to translate financial statements into a $resentation currency#
2 The $rinci$al issues are which exchange rate%s( to use and how to re$ort the effects of changes in exchange rates
in the financial statements#
Sco1e
3 This Standard shall be applied:
1
(a) in accounting for transactions and balances in foreign currencies, except for those derivative
transactions and balances that are within the scope of IAS 3 Financial Instruments: Recognition
and Measurement !
(b) in translating the results and financial position of foreign operations that are included in the
financial state"ents of the entit# b# consolidation, proportionate consolidation or the e$uit#
"ethod! and
(c) in translating an entit#%s results and financial position into a presentation currenc#&
= IAS "! a$$lies to many foreign currency deri0ati0es and3 accordingly3 these are excluded from the sco$e of this
Standard# Aowe0er3 those foreign currency deri0ati0es that are not within the sco$e of IAS "! %eg some foreign
currency deri0ati0es that are embedded in other contracts( are within the sco$e of this Standard# In addition3 this
Standard a$$lies when an entity translates amounts relating to deri0ati0es from its functional currency to its
$resentation currency#
5 This Standard does not a$$ly to hedge accounting for foreign currency items3 including the hedging of a net
in0estment in a foreign o$eration# IAS "! a$$lies to hedge accounting#
8 This Standard a$$lies to the $resentation of an entity<s financial statements in a foreign currency and sets out
re9uirements for the resulting financial statements to be described as com$lying with International Financial
Re$orting Standards# For translations of financial information into a foreign currency that do not meet these
re9uirements3 this Standard s$ecifies information to be disclosed#
- This Standard does not a$$ly to the $resentation in a cash flow statement of cash flows arising from transactions
in a foreign currency3 or to the translation of cash flows of a foreign o$eration %see IAS - "ash Flo+ Statements(#
De)inition*
' The following ter"s are used in this Standard with the "eanings specified:
Closing rate is the spot exchange rate at the balance sheet date&
Exchange difference is the difference resulting fro" translating a given nu"ber of units of one currenc#
into another currenc# at different exchange rates&
Exchange rate is the ratio of exchange for two currencies&
Fair value is the a"ount for which an asset could be exchanged, or a liabilit# settled, between
(nowledgeable, willing parties in an ar"%s length transaction&
Foreign currency is a currenc# other than the functional currenc# of the entit#&
Foreign operation is an entit# that is a subsidiar#, associate, )oint venture or branch of a reporting entit#,
the activities of which are based or conducted in a countr# or currenc# other than those of the reporting
entit#&
1 See also SIC*- Introduction of the !uro#
6 IASCF -
IAS 21
Functional currency is the currenc# of the pri"ar# econo"ic environ"ent in which the entit# operates&
A group is a parent and all its subsidiaries&
Monetary items are units of currenc# held and assets and liabilities to be received or paid in a fixed or
deter"inable nu"ber of units of currenc#&
Net investment in a foreign operation is the a"ount of the reporting entit#%s interest in the net assets of that
operation&
Presentation currency is the currenc# in which the financial state"ents are presented&
Spot exchange rate is the exchange rate for i""ediate deliver#&
Ela'oration on t(e de)inition*
$unctional currenc5
! The $rimary economic en0ironment in which an entity o$erates is normally the one in which it $rimarily
generates and ex$ends cash# An entity considers the following factors in determining its functional currency+
%a( the currency+
%i( that mainly influences sales $rices for goods and ser0ices %this will often be the currency in
which sales $rices for its goods and ser0ices are denominated and settled(C and
%ii( of the country whose com$etiti0e forces and regulations mainly determine the sales $rices of
its goods and ser0ices#
%b( the currency that mainly influences labour3 material and other costs of $ro0iding goods or ser0ices %this
will often be the currency in which such costs are denominated and settled(#
11 The following factors may also $ro0ide e0idence of an entity<s functional currency+
%a( the currency in which funds from financing acti0ities %ie issuing debt and e9uity instruments( are
generated#
%b( the currency in which recei$ts from o$erating acti0ities are usually retained#
11 The following additional factors are considered in determining the functional currency of a foreign o$eration3
and whether its functional currency is the same as that of the re$orting entity %the re$orting entity3 in this context3
being the entity that has the foreign o$eration as its subsidiary3 branch3 associate or :oint 0enture(+
%a( whether the acti0ities of the foreign o$eration are carried out as an extension of the re$orting entity3
rather than being carried out with a significant degree of autonomy# An exam$le of the former is when
the foreign o$eration only sells goods im$orted from the re$orting entity and remits the $roceeds to it#
An exam$le of the latter is when the o$eration accumulates cash and other monetary items3 incurs
ex$enses3 generates income and arranges borrowings3 all substantially in its local currency#
%b( whether transactions with the re$orting entity are a high or a low $ro$ortion of the foreign o$eration<s
acti0ities#
%c( whether cash flows from the acti0ities of the foreign o$eration directly affect the cash flows of the
re$orting entity and are readily a0ailable for remittance to it#
%d( whether cash flows from the acti0ities of the foreign o$eration are sufficient to ser0ice existing and
normally ex$ected debt obligations without funds being made a0ailable by the re$orting entity#
12 ?hen the abo0e indicators are mixed and the functional currency is not ob0ious3 management uses its :udgement
to determine the functional currency that most faithfully re$resents the economic effects of the underlying
transactions3 e0ents and conditions# As $art of this a$$roach3 management gi0es $riority to the $rimary indicators
in $aragra$h ! before considering the indicators in $aragra$hs 11 and 113 which are designed to $ro0ide
additional su$$orting e0idence to determine an entity<s functional currency#
1" An entity<s functional currency reflects the underlying transactions3 e0ents and conditions that are rele0ant to it#
Accordingly3 once determined3 the functional currency is not changed unless there is a change in those
underlying transactions3 e0ents and conditions#
1= If the functional currency is the currency of a hy$erinflationary economy3 the entity<s financial statements are
restated in accordance with IAS 2! Financial Reporting in /'perinflationar' !conomies An entity cannot a0oid
restatement in accordance with IAS 2! by3 for exam$le3 ado$ting as its functional currency a currency other than
the functional currency determined in accordance with this Standard %such as the functional currency of its
$arent(#
' 6 IASCF
IAS 21
Net in:e*t9ent in a )oreign o1eration
15 An entity may ha0e a monetary item that is recei0able from or $ayable to a foreign o$eration# An item for which
settlement is neither $lanned nor li;ely to occur in the foreseeable future is3 in substance3 a $art of the entity<s net
in0estment in that foreign o$eration3 and is accounted for in accordance with $aragra$hs "2 and ""# Such
monetary items may include long*term recei0ables or loans# They do not include trade recei0ables or trade
$ayables#
15A The entity that has a monetary item recei0able from or $ayable to a foreign o$eration described in $aragra$h 15
may be any subsidiary of the grou$# For exam$le3 an entity has two subsidiaries3 A and 2# Subsidiary 2 is a
foreign o$eration# Subsidiary A grants a loan to Subsidiary 2# Subsidiary A<s loan recei0able from Subsidiary 2
would be $art of the entity<s net in0estment in Subsidiary 2 if settlement of the loan is neither $lanned nor li;ely
to occur in the foreseeable future# This would also be true if Subsidiary A were itself a foreign o$eration#
,onetar5 ite9*
18 The essential feature of a monetary item is a right to recei0e %or an obligation to deli0er( a fixed or determinable
number of units of currency# Exam$les include+ $ensions and other em$loyee benefits to be $aid in cashC
$ro0isions that are to be settled in cashC and cash di0idends that are recognised as a liability# Similarly3 a contract
to recei0e %or deli0er( a 0ariable number of the entity<s own e9uity instruments or a 0ariable amount of assets in
which the fair 0alue to be recei0ed %or deli0ered( e9uals a fixed or determinable number of units of currency is a
monetary item# Con0ersely3 the essential feature of a non*monetary item is the absence of a right to recei0e %or an
obligation to deli0er( a fixed or determinable number of units of currency# Exam$les include+ amounts $re$aid
for goods and ser0ices %eg $re$aid rent(C goodwillC intangible assetsC in0entoriesC $ro$erty3 $lant and e9ui$mentC
and $ro0isions that are to be settled by the deli0ery of a non*monetary asset#
Su99ar5 o) t(e a11roac( re2uired '5 t(i* Standard
1- In $re$aring financial statements3 each entity@whether a stand*alone entity3 an entity with foreign o$erations
%such as a $arent( or a foreign o$eration %such as a subsidiary or branch(@determines its functional currency in
accordance with $aragra$hs !71=# The entity translates foreign currency items into its functional currency and
re$orts the effects of such translation in accordance with $aragra$hs 217"- and 51#
1' .any re$orting entities com$rise a number of indi0idual entities %eg a grou$ is made u$ of a $arent and one or
more subsidiaries(# Darious ty$es of entities3 whether members of a grou$ or otherwise3 may ha0e in0estments in
associates or :oint 0entures# They may also ha0e branches# It is necessary for the results and financial $osition of
each indi0idual entity included in the re$orting entity to be translated into the currency in which the re$orting
entity $resents its financial statements# This Standard $ermits the $resentation currency of a re$orting entity to be
any currency %or currencies(# The results and financial $osition of any indi0idual entity within the re$orting
entity whose functional currency differs from the $resentation currency are translated in accordance with
$aragra$hs "'751#
1! This Standard also $ermits a stand*alone entity $re$aring financial statements or an entity $re$aring se$arate
financial statements in accordance with IAS 2- "onsolidated and Separate Financial Statements to $resent its
financial statements in any currency %or currencies(# If the entity<s $resentation currency differs from its
functional currency3 its results and financial $osition are also translated into the $resentation currency in
accordance with $aragra$hs "'751#
Re1orting )oreign currenc5 tran*action* in t(e )unctional currenc5
Initial recognition
21 A foreign currency transaction is a transaction that is denominated or re9uires settlement in a foreign currency3
including transactions arising when an entity+
%a( buys or sells goods or ser0ices whose $rice is denominated in a foreign currencyC
%b( borrows or lends funds when the amounts $ayable or recei0able are denominated in a foreign currencyC
or
%c( otherwise ac9uires or dis$oses of assets3 or incurs or settles liabilities3 denominated in a foreign
currency#
6 IASCF !
IAS 21
*1 A foreign currenc# transaction shall be recorded, on initial recognition in the functional currenc#, b#
appl#ing to the foreign currenc# a"ount the spot exchange rate between the functional currenc# and the
foreign currenc# at the date of the transaction&
22 The date of a transaction is the date on which the transaction first 9ualifies for recognition in accordance with
International Financial Re$orting Standards# For $ractical reasons3 a rate that a$$roximates the actual rate at the
date of the transaction is often used3 for exam$le3 an a0erage rate for a wee; or a month might be used for all
transactions in each foreign currency occurring during that $eriod# Aowe0er3 if exchange rates fluctuate
significantly3 the use of the a0erage rate for a $eriod is ina$$ro$riate#
Re1orting at *u'*e2uent 'alance *(eet date*
*3 At each balance sheet date:
(a) foreign currenc# "onetar# ite"s shall be translated using the closing rate!
(b) non+"onetar# ite"s that are "easured in ter"s of historical cost in a foreign currenc# shall be
translated using the exchange rate at the date of the transaction! and
(c) non+"onetar# ite"s that are "easured at fair value in a foreign currenc# shall be translated
using the exchange rates at the date when the fair value was deter"ined&
2= The carrying amount of an item is determined in con:unction with other rele0ant Standards# For exam$le3
$ro$erty3 $lant and e9ui$ment may be measured in terms of fair 0alue or historical cost in accordance with
IAS 18 )ropert'- )lant and !0uipment# ?hether the carrying amount is determined on the basis of historical cost
or on the basis of fair 0alue3 if the amount is determined in a foreign currency it is then translated into the
functional currency in accordance with this Standard#
25 The carrying amount of some items is determined by com$aring two or more amounts# For exam$le3 the carrying
amount of in0entories is the lower of cost and net realisable 0alue in accordance with IAS 2 Inventories#
Similarly3 in accordance with IAS "8 Impairment of $ssets3 the carrying amount of an asset for which there is an
indication of im$airment is the lower of its carrying amount before considering $ossible im$airment losses and
its reco0erable amount# ?hen such an asset is non*monetary and is measured in a foreign currency3 the carrying
amount is determined by com$aring+
%a( the cost or carrying amount3 as a$$ro$riate3 translated at the exchange rate at the date when that amount
was determined %ie the rate at the date of the transaction for an item measured in terms of historical
cost(C and
%b( the net realisable 0alue or reco0erable amount3 as a$$ro$riate3 translated at the exchange rate at the date
when that 0alue was determined %eg the closing rate at the balance sheet date(#
The effect of this com$arison may be that an im$airment loss is recognised in the functional currency but would
not be recognised in the foreign currency3 or 0ice 0ersa#
28 ?hen se0eral exchange rates are a0ailable3 the rate used is that at which the future cash flows re$resented by the
transaction or balance could ha0e been settled if those cash flows had occurred at the measurement date#
If exchangeability between two currencies is tem$orarily lac;ing3 the rate used is the first subse9uent rate at
which exchanges could be made#
Recognition o) e3c(ange di))erence*
2- As noted in $aragra$h "3 IAS "! a$$lies to hedge accounting for foreign currency items# The a$$lication of
hedge accounting re9uires an entity to account for some exchange differences differently from the treatment of
exchange differences re9uired by this Standard# For exam$le3 IAS "! re9uires that exchange differences on
monetary items that 9ualify as hedging instruments in a cash flow hedge are re$orted initially in e9uity to the
extent that the hedge is effecti0e#
*' ,xchange differences arising on the settle"ent of "onetar# ite"s or on translating "onetar# ite"s at
rates different fro" those at which the# were translated on initial recognition during the period or in
previous financial state"ents shall be recognised in profit or loss in the period in which the# arise, except
as described in paragraph 3*&
2! ?hen monetary items arise from a foreign currency transaction and there is a change in the exchange rate
between the transaction date and the date of settlement3 an exchange difference results# ?hen the transaction is
settled within the same accounting $eriod as that in which it occurred3 all the exchange difference is recognised
in that $eriod# Aowe0er3 when the transaction is settled in a subse9uent accounting $eriod3 the exchange
difference recognised in each $eriod u$ to the date of settlement is determined by the change in exchange rates
during each $eriod#
11 6 IASCF
IAS 21
3- .hen a gain or loss on a non+"onetar# ite" is recognised directl# in e$uit#, an# exchange co"ponent of
that gain or loss shall be recognised directl# in e$uit#& /onversel#, when a gain or loss on a non+"onetar#
ite" is recognised in profit or loss, an# exchange co"ponent of that gain or loss shall be recognised in
profit or loss&
"1 4ther Standards re9uire some gains and losses to be recognised directly in e9uity# For exam$le3 IAS 18 re9uires
some gains and losses arising on a re0aluation of $ro$erty3 $lant and e9ui$ment to be recognised directly in
e9uity# ?hen such an asset is measured in a foreign currency3 $aragra$h 2"%c( of this Standard re9uires the
re0alued amount to be translated using the rate at the date the 0alue is determined3 resulting in an exchange
difference that is also recognised in e9uity#
3* ,xchange differences arising on a "onetar# ite" that for"s part of a reporting entit#%s net invest"ent in
a foreign operation (see paragraph 10) shall be recognised in profit or loss in the separate financial
state"ents of the reporting entit# or the individual financial state"ents of the foreign operation,
as appropriate& In the financial state"ents that include the foreign operation and the reporting entit# (eg
consolidated financial state"ents when the foreign operation is a subsidiar#), such exchange differences
shall be recognised initiall# in a separate co"ponent of e$uit# and recognised in profit or loss on disposal
of the net invest"ent in accordance with paragraph 1'&
"" ?hen a monetary item forms $art of a re$orting entity<s net in0estment in a foreign o$eration and is denominated
in the functional currency of the re$orting entity3 an exchange difference arises in the foreign o$eration<s
indi0idual financial statements in accordance with $aragra$h 2'# If such an item is denominated in the functional
currency of the foreign o$eration3 an exchange difference arises in the re$orting entity<s se$arate financial
statements in accordance with $aragra$h 2'# If such an item is denominated in a currency other than the
functional currency of either the re$orting entity or the foreign o$eration3 an exchange difference arises in the
re$orting entity<s se$arate financial statements and in the foreign o$eration<s indi0idual financial statements in
accordance with $aragra$h 2'# Such exchange differences are reclassified to the se$arate com$onent of e9uity in
the financial statements that include the foreign o$eration and the re$orting entity %ie financial statements in
which the foreign o$eration is consolidated3 $ro$ortionately consolidated or accounted for using the e9uity
method(#
"= ?hen an entity ;ee$s its boo;s and records in a currency other than its functional currency3 at the time the entity
$re$ares its financial statements all amounts are translated into the functional currency in accordance with
$aragra$hs 21728# This $roduces the same amounts in the functional currency as would ha0e occurred had the
items been recorded initially in the functional currency# For exam$le3 monetary items are translated into the
functional currency using the closing rate3 and non*monetary items that are measured on a historical cost basis
are translated using the exchange rate at the date of the transaction that resulted in their recognition#
C(ange in )unctional currenc5
30 .hen there is a change in an entit#%s functional currenc#, the entit# shall appl# the translation procedures
applicable to the new functional currenc# prospectivel# fro" the date of the change&
"8 As noted in $aragra$h 1"3 the functional currency of an entity reflects the underlying transactions3 e0ents and
conditions that are rele0ant to the entity# Accordingly3 once the functional currency is determined3 it can be
changed only if there is a change to those underlying transactions3 e0ents and conditions# For exam$le3 a change
in the currency that mainly influences the sales $rices of goods and ser0ices may lead to a change in an entity<s
functional currency#
"- The effect of a change in functional currency is accounted for $ros$ecti0ely# In other words3 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 o$eration $re0iously classified in e9uity in accordance with $aragra$hs "2 and "!%c(
are not recognised in $rofit or loss until the dis$osal of the o$eration#
U*e o) a 1re*entation currenc5 ot(er t(an t(e )unctional currenc5
Tran*lation to t(e 1re*entation currenc5
"' An entity may $resent its financial statements in any currency %or currencies(# If the $resentation currency differs
from the entity<s functional currency3 it translates its results and financial $osition into the $resentation currency#
For exam$le3 when a grou$ contains indi0idual entities with different functional currencies3 the results and
financial $osition of each entity are ex$ressed in a common currency so that consolidated financial statements
may be $resented#
6 IASCF 11
IAS 21
3 The results and financial position of an entit# whose functional currenc# is not the currenc# of a
h#perinflationar# econo"# shall be translated into a different presentation currenc# using the following
procedures:
(a) assets and liabilities for each balance sheet presented (ie including co"paratives) shall be
translated at the closing rate at the date of that balance sheet!
(b) inco"e and expenses for each inco"e state"ent (ie including co"paratives) shall be translated at
exchange rates at the dates of the transactions! and
(c) all resulting exchange differences shall be recognised as a separate co"ponent of e$uit#&
=1 For $ractical reasons3 a rate that a$$roximates the exchange rates at the dates of the transactions3 for exam$le an
a0erage rate for the $eriod3 is often used to translate income and ex$ense items# Aowe0er3 if exchange rates
fluctuate significantly3 the use of the a0erage rate for a $eriod is ina$$ro$riate#
=1 The exchange differences referred to in $aragra$h "!%c( result from+
%a( translating income and ex$enses at the exchange rates at the dates of the transactions and assets and
liabilities at the closing rate# Such exchange differences arise both on income and ex$ense items
recognised in $rofit or loss and on those recognised directly in e9uity#
%b( translating the o$ening net assets at a closing rate that differs from the $re0ious closing rate#
These exchange differences are not recognised in $rofit or loss because the changes in exchange rates ha0e little
or no direct effect on the $resent and future cash flows from o$erations# ?hen the exchange differences relate to
a foreign o$eration that is consolidated but not wholly*owned3 accumulated exchange differences arising from
translation and attributable to minority interests are allocated to3 and recognised as $art of3 minority interest in
the consolidated balance sheet#
1* The results and financial position of an entit# whose functional currenc# is the currenc# of a
h#perinflationar# econo"# shall be translated into a different presentation currenc# using the following
procedures:
(a) all a"ounts (ie assets, liabilities, e$uit# ite"s, inco"e and expenses, including co"paratives) shall
be translated at the closing rate at the date of the "ost recent balance sheet, except that
(b) when a"ounts are translated into the currenc# of a non+h#perinflationar# econo"#, co"parative
a"ounts shall be those that were presented as current #ear a"ounts in the relevant prior #ear
financial state"ents (ie not ad)usted for subse$uent changes in the price level or subse$uent
changes in exchange rates)&
13 .hen an entit#%s functional currenc# is the currenc# of a h#perinflationar# econo"#, the entit# shall
restate its financial state"ents in accordance with IAS * before appl#ing the translation "ethod set out in
paragraph 1*, except for co"parative a"ounts that are translated into a currenc# of a
non+h#perinflationar# econo"# (see paragraph 1*(b))& .hen the econo"# ceases to be h#perinflationar#
and the entit# no longer restates its financial state"ents in accordance with IAS *, it shall use as the
historical costs for translation into the presentation currenc# the a"ounts restated to the price level at the
date the entit# ceased restating its financial state"ents&
Tran*lation o) a )oreign o1eration
== Earagra$hs =57=-3 in addition to $aragra$hs "'7="3 a$$ly when the results and financial $osition of a foreign
o$eration are translated into a $resentation currency so that the foreign o$eration can be included in the financial
statements of the re$orting entity by consolidation3 $ro$ortionate consolidation or the e9uity method#
=5 The incor$oration of the results and financial $osition of a foreign o$eration with those of the re$orting entity
follows normal consolidation $rocedures3 such as the elimination of intragrou$ balances and intragrou$
transactions of a subsidiary %see IAS 2- and IAS "1 Interests in 1oint 2entures(# Aowe0er3 an intragrou$
monetary asset %or liability(3 whether short*term or long*term3 cannot be eliminated against the corres$onding
intragrou$ liability %or asset( without showing the results of currency fluctuations in the consolidated financial
statements# This is because the monetary item re$resents a commitment to con0ert one currency into another and
ex$oses the re$orting entity to a gain or loss through currency fluctuations# Accordingly3 in the consolidated
financial statements of the re$orting entity3 such an exchange difference continues to be recognised in $rofit or
loss or3 if it arises from the circumstances described in $aragra$h "23 it is classified as e9uity until the dis$osal of
the foreign o$eration#
=8 ?hen the financial statements of a foreign o$eration are as of a date different from that of the re$orting entity3
the foreign o$eration often $re$ares additional statements as of the same date as the re$orting entity<s financial
statements# ?hen this is not done3 IAS 2- allows the use of a different re$orting date $ro0ided that the difference
12 6 IASCF
IAS 21
is no greater than three months and ad:ustments are made for the effects of any significant transactions or other
e0ents that occur between the different dates# In such a case3 the assets and liabilities of the foreign o$eration are
translated at the exchange rate at the balance sheet date of the foreign o$eration# Ad:ustments are made for
significant changes in exchange rates u$ to the balance sheet date of the re$orting entity in accordance with
IAS 2-# The same a$$roach is used in a$$lying the e9uity method to associates and :oint 0entures and in
a$$lying $ro$ortionate consolidation to :oint 0entures in accordance with IAS 2' Investments in $ssociates and
IAS "1#
12 An# goodwill arising on the ac$uisition of a foreign operation and an# fair value ad)ust"ents to the
carr#ing a"ounts of assets and liabilities arising on the ac$uisition of that foreign operation shall be
treated as assets and liabilities of the foreign operation& Thus the# shall be expressed in the functional
currenc# of the foreign operation and shall be translated at the closing rate in accordance with
paragraphs 3 and 1*&
Di*1o*al o) a )oreign o1eration
1' 3n the disposal of a foreign operation, the cu"ulative a"ount of the exchange differences deferred in the
separate co"ponent of e$uit# relating to that foreign operation shall be recognised in profit or loss when
the gain or loss on disposal is recognised&
=! An entity may dis$ose of its interest in a foreign o$eration through sale3 li9uidation3 re$ayment of share ca$ital
or abandonment of all3 or $art of3 that entity# The $ayment of a di0idend is $art of a dis$osal only when it
constitutes a return of the in0estment3 for exam$le when the di0idend is $aid out of $re*ac9uisition $rofits# In the
case of a $artial dis$osal3 only the $ro$ortionate share of the related accumulated exchange difference is included
in the gain or loss# A write*down of the carrying amount of a foreign o$eration does not constitute a $artial
dis$osal# Accordingly3 no $art of the deferred foreign exchange gain or loss is recognised in $rofit or loss at the
time of a write*down#
Ta3 e))ect* o) all e3c(ange di))erence*
51 Fains and losses on foreign currency transactions and exchange differences arising on translating the results and
financial $osition of an entity %including a foreign o$eration( into a different currency may ha0e tax effects#
IAS 12 Income Ta#es a$$lies to these tax effects#
Di*clo*ure
01 In paragraphs 03 and 00402 references to 5functional currenc#% appl#, in the case of a group, to the
functional currenc# of the parent&
0* An entit# shall disclose:
(a) the a"ount of exchange differences recognised in profit or loss except for those arising on
financial instru"ents "easured at fair value through profit or loss in accordance with IAS 3!
and
(b) net exchange differences classified in a separate co"ponent of e$uit#, and a reconciliation of the
a"ount of such exchange differences at the beginning and end of the period&
03 .hen the presentation currenc# is different fro" the functional currenc#, that fact shall be stated,
together with disclosure of the functional currenc# and the reason for using a different presentation
currenc#&
01 .hen there is a change in the functional currenc# of either the reporting entit# or a significant foreign
operation, that fact and the reason for the change in functional currenc# shall be disclosed&
00 .hen an entit# presents its financial state"ents in a currenc# that is different fro" its functional
currenc#, it shall describe the financial state"ents as co"pl#ing with International 6inancial 7eporting
Standards onl# if the# co"pl# with all the re$uire"ents of each applicable Standard and each applicable
Interpretation of those Standards including the translation "ethod set out in paragraphs 3 and 1*&
58 An entity sometimes $resents its financial statements or other financial information in a currency that is not its
functional currency without meeting the re9uirements of $aragra$h 55# For exam$le3 an entity may con0ert into
another currency only selected items from its financial statements# 4r3 an entity whose functional currency is not
the currency of a hy$erinflationary economy may con0ert the financial statements into another currency by
6 IASCF 1"
IAS 21
translating all items at the most recent closing rate# Such con0ersions are not in accordance with International
Financial Re$orting Standards and the disclosures set out in $aragra$h 5- are re9uired#
02 .hen an entit# displa#s its financial state"ents or other financial infor"ation in a currenc# that is
different fro" either its functional currenc# or its presentation currenc# and the re$uire"ents of
paragraph 00 are not "et, it shall:
(a) clearl# identif# the infor"ation as supple"entar# infor"ation to distinguish it fro" the
infor"ation that co"plies with International 6inancial 7eporting Standards!
(b) disclose the currenc# in which the supple"entar# infor"ation is displa#ed! and
(c) disclose the entit#%s functional currenc# and the "ethod of translation used to deter"ine the
supple"entar# infor"ation&
E))ecti:e date and tran*ition
0' An entit# shall appl# this Standard for annual periods beginning on or after 1 8anuar# *--0& ,arlier
application is encouraged& If an entit# applies this Standard for a period beginning before 1 8anuar# *--0,
it shall disclose that fact&
0'A Net Investment in a Foreign peration (A"end"ent to IAS *1), issued in 9ece"ber *--0, added
paragraph 10A and a"ended paragraph 33& An entit# shall appl# those a"end"ents for annual periods
beginning on or after 1 8anuar# *--:& ,arlier application is encouraged&
0 An entit# shall appl# paragraph 12 prospectivel# to all ac$uisitions occurring after the beginning of the
financial reporting period in which this Standard is first applied& 7etrospective application of paragraph
12 to earlier ac$uisitions is per"itted& 6or an ac$uisition of a foreign operation treated prospectivel# but
which occurred before the date on which this Standard is first applied, the entit# shall not restate prior
#ears and accordingl# "a#, when appropriate, treat goodwill and fair value ad)ust"ents arising on that
ac$uisition as assets and liabilities of the entit# rather than as assets and liabilities of the foreign operation&
Therefore, those goodwill and fair value ad)ust"ents either are alread# expressed in the entit#%s functional
currenc# or are non+"onetar# foreign currenc# ite"s, which are reported using the exchange rate at the
date of the ac$uisition&
:- All other changes resulting fro" the application of this Standard shall be accounted for in accordance with
the re$uire"ents of IAS ' !ccounting Policies" Changes in !ccounting Estimates and Errors&
8it(dra=al o) ot(er 1ronounce9ent*
81 This Standard su$ersedes IAS 21 The !ffects of "hanges in Foreign !#change Rates %re0ised in 1!!"(#
82 This Standard su$ersedes the following Inter$retations+
%a( SIC*11 Foreign !#change%"apitalisation of &osses Resulting from Severe "urrenc' DevaluationsC
%b( SIC*1! Reporting "urrenc'%(easurement and )resentation of Financial Statements under I$S 21 and
I$S 2*C and
%c( SIC*"1 Reporting "urrenc'%Translation from (easurement "urrenc' to )resentation "urrenc'#
1= 6 IASCF
IAS 21
A11endi3
A9end9ent* to ot(er 1ronounce9ent*
The amendments in this appendi# shall be applied for annual periods beginning on or after 1 1anuar' 2003 If an entit'
applies this Standard for an earlier period- these amendments shall be applied for that earlier period
G G G G G
The amendments contained in this appendi# +hen this Standard +as issued in 2003 have been incorporated into the
relevant pronouncements published in this volume
6 IASCF 15
IAS 21
A11ro:al o) IAS 21 '5 t(e Board
International Accounting Standard 21 The !ffects of "hanges in Foreign !#change Rates was a$$ro0ed for issue by the
fourteen members of the International Accounting Standards 2oard#
Sir a0id Tweedie Chairman
Thomas E &ones Dice*Chairman
.ary E 2arth
Aans*Feorg 2runs
Anthony T Co$e
Robert E Farnett
Filbert FHlard
&ames & )eisenring
?arren & .cFregor
Eatricia ) 4<.alley
Aarry I Schmid
&ohn T Smith
Feoffrey ?hittington
Tatsumi Jamada
18 6 IASCF
IAS 21
A11ro:al o) A9end9ent to IAS 21 '5 t(e Board
The amendment to International Accounting Standard 21 The Effects of Changes in Foreign Exchange Rates@4et
Investment in a Foreign 5peration was a$$ro0ed for issue by the fourteen members of the International Accounting
Standards 2oard#
Sir a0id Tweedie Chairman
Thomas E &ones Dice*Chairman
.ary E 2arth
Aans*Feorg 2runs
Anthony T Co$e
&an EngstrKm
Robert E Farnett
Filbert FHlard
&ames & )eisenring
?arren & .cFregor
Eatricia ) 4<.alley
&ohn T Smith
Feoffrey ?hittington
Tatsumi Jamada
6 IASCF 1-
IAS 21 2C
Ba*i* )or Conclu*ion* on
IAS 21 The Effects of Changes in Foreign Exchange
Rates
This 6asis for "onclusions accompanies- but is not part of- I$S 21
)aragraph 6"1 +as amended and paragraphs 6"23$76"23F +ere added in relation to the amendment to I$S 21 issued
in December 2003
Introduction
2C1 This 2asis for Conclusions summarises the International Accounting Standards 2oard<s considerations in
reaching its conclusions on re0ising IAS 21 The !ffects of "hanges in Foreign !#change Rates in 211"3 and on
the amendment to IAS 21 4et Investment in a Foreign 5peration in ecember 2115# Indi0idual 2oard members
ga0e greater weight to some factors than to others#
2C2 In &uly 2111 the 2oard announced that3 as $art of its initial agenda of technical $ro:ects3 it would underta;e a
$ro:ect to im$ro0e a number of Standards3 including IAS 21# The $ro:ect was underta;en in the light of 9ueries
and criticisms raised in relation to the Standards by securities regulators3 $rofessional accountants and other
interested $arties# The ob:ecti0es of the Im$ro0ements $ro:ect were to reduce or eliminate alternati0es3
redundancies and conflicts within Standards3 to deal with some con0ergence issues and to ma;e other
im$ro0ements# In .ay 2112 the 2oard $ublished its $ro$osals in an Ex$osure raft of Improvements to
International $ccounting Standards3 with a comment deadline of 18 Se$tember 2112# The 2oard recei0ed o0er
181 comment letters on the Ex$osure raft#
2C" 2ecause the 2oard<s intention was not to reconsider the fundamental a$$roach to accounting for the effects of
changes in foreign exchange rates established by IAS 213 this 2asis for Conclusions does not discuss
re9uirements in IAS 21 that the 2oard has not reconsidered#
$unctional currenc5
2C= The term >re$orting currency< was $re0iously defined as >the currency used in $resenting the financial
statements<# This definition com$rises two se$arate notions %which were identified in SIC*1! Reporting
"urrenc'%(easurement and )resentation of Financial Statements under I$S 21 and I$S 2*(+
, the measurement currency %the currency in which the entity measures the items in the financial
statements(C and
, the $resentation currency %the currency in which the entity $resents its financial statements(#
The 2oard decided to re0ise the $re0ious 0ersion of IAS 21 to incor$orate the SIC*1! a$$roach of se$arating
these two notions# The 2oard also noted that the term >functional currency< is more commonly used than
>measurement currency< and decided to ado$t the more common term#
2C5 The 2oard noted a concern that the guidance in SIC*1! on determining a measurement currency could $ermit
entities to choose one of se0eral currencies3 or to select an ina$$ro$riate currency# In $articular3 some belie0ed
that SIC*1! $laced too much em$hasis on the currency in which transactions are denominated and too little
em$hasis on the underlying economy that determines the $ricing of those transactions# To meet these concerns3
the 2oard defined functional currency as >the currency of the $rimary economic en0ironment in which the entity
o$erates<# The 2oard also $ro0ided guidance on how to determine the functional currency %see $aragra$hs !71=
of the Standard(# This guidance draws hea0ily on SIC*1! and e9ui0alent guidance in BS and other national
standards3 but also reflects the 2oard<s decision that some factors merit greater em$hasis than others#
2C8 The 2oard also discussed whether a foreign o$eration that is integral to the re$orting entity %as described in the
$re0ious 0ersion of IAS 21( could ha0e a functional currency that is different from that of its >$arent<#
2
The
2oard decided that the functional currencies will always be the same3 because it would be contradictory for an
2 The term >$arent< is used broadly in this context to mean an entity that has a branch3 associate or :oint 0enture3 as well as one with a
subsidiary#
1' 6 IASCF
IAS 21 2C
integral foreign o$eration that >carries on business as if it were an extension of the re$orting enter$rise<s
o$erations<
"
to o$erate in a $rimary economic en0ironment different from its $arent#
2C- It follows that it is not necessary to translate the results and financial $osition of an integral foreign o$eration
when incor$orating them into the financial statements of the $arent@they will already be measured in the
$arent<s functional currency# Furthermore3 it is not necessary to distinguish between an integral foreign o$eration
and a foreign entity# ?hen a foreign o$eration<s functional currency is different from that of its $arent3 it is a
foreign entity3 and the translation method in $aragra$hs "'7=! of the Standard a$$lies#
2C' The 2oard also decided that the $rinci$les in the $re0ious 0ersion of IAS 21 for distinguishing an integral
foreign o$eration from a foreign entity are rele0ant in determining an o$eration<s functional currency# Aence it
incor$orated these $rinci$les into the Standard in that context#
2C! The 2oard agreed that the indicators in $aragra$h ! are the $rimary indicators for determining the functional
currency and that $aragra$hs 11 and 11 are secondary# This is because the indicators in $aragra$hs 11 and 11 are
not lin;ed to the $rimary economic en0ironment in which the entity o$erates but $ro0ide additional su$$orting
e0idence to determine an entity<s functional currency#
"re*entation currenc5
2C11 A further issue is whether an entity should be $ermitted to $resent its financial statements in a currency %or
currencies( other than its functional currency# Some belie0e it should not# They belie0e that the functional
currency3 being the currency of the $rimary economic en0ironment in which the entity o$erates3 most usefully
$ortrays the economic effect of transactions and e0ents on the entity# For a grou$ that com$rises o$erations with
a number of functional currencies3 they belie0e that the consolidated financial statements should be $resented in
the functional currency that management uses when controlling and monitoring the $erformance and financial
$osition of the grou$# They also belie0e that allowing an entity to $resent its financial statements in more than
one currency may confuse3 rather than hel$3 users of those financial statements# Su$$orters of this 0iew belie0e
that any $resentation in a currency other than that described abo0e should be regarded as a >con0enience
translation< that is outside the sco$e of IFRSs#
2C11 4thers belie0e that the choice of $resentation currency should be limited3 for exam$le3 to the functional currency
of one of the substanti0e entities within a grou$# Aowe0er3 such a restriction might be easily o0ercome@an
entity that wished to $resent its financial statements in a different currency might establish a substanti0e3 but
relati0ely small o$eration with that functional currency#
2C12 Still others belie0e that3 gi0en the rising trend towards globalisation3 entities should be $ermitted to $resent their
financial statements in any currency# They note that most large grou$s do not ha0e a single functional currency3
but rather com$rise o$erations with a number of functional currencies# For such entities3 they belie0e it is not
clear which currency should be the $resentation currency3 or why one currency is $referable to another# They also
$oint out that management may not use a single currency when controlling and monitoring the $erformance and
financial $osition of such a grou$# In addition3 they note that in some :urisdictions3 entities are re9uired to $resent
their financial statements in the local currency3 e0en when this is not the functional currency#
=
Aence3 if IFRSs
re9uired the financial statements to be $resented in the functional currency3 some entities would ha0e to $resent
two sets of financial statements+ financial statements that com$ly with IFRSs $resented in the functional
currency and financial statements that com$ly with local regulations $resented in a different currency#
2C1" The 2oard was $ersuaded by the arguments in the $re0ious $aragra$h# Accordingly3 it decided that entities
should be $ermitted to $resent their financial statements in any currency %or currencies(#
2C1= The 2oard also clarified that the Standard does not $rohibit the entity from $ro0iding3 as su$$lementary
information3 a >con0enience translation<# Such a >con0enience translation< may dis$lay financial statements %or
selected $ortions of financial statements( in a currency other than the $resentation currency3 as a con0enience to
some users# The >con0enience translation< may be $re$ared using a translation method other than that re9uired by
the Standard# These ty$es of >con0enience translations< should be clearly identified as su$$lementary information
to distinguish them from information re9uired by IFRSs and translated in accordance with the Standard#
Tran*lation 9et(od
2C15 The 2oard debated which method should be used to translate financial statements from an entity<s functional
currency into a different $resentation currency#
" IAS 21 %re0ised 1!!"(3 $aragra$h 2=
= This includes entities o$erating in another country and3 for exam$le3 $ublishing financial statements to com$ly with a listing re9uirement of
that country#
6 IASCF 1!
IAS 21 2C
2C18 The 2oard agreed that the translation method should not ha0e the effect of substituting another currency for the
functional currency# Eut another way3 $resenting the financial statements in a different currency should not
change the way in which the underlying items are measured# Rather3 the translation method should merely
ex$ress the underlying amounts3 as measured in the functional currency3 in a different currency#
2C1- Fi0en this3 the 2oard considered two $ossible translation methods# The first is to translate all amounts %including
com$arati0es( at the most recent closing rate# This method has se0eral ad0antages+ it is sim$le to a$$lyC it does
not generate any new gains and lossesC and it does not change ratios such as return on assets# This method is
su$$orted by those who belie0e that the $rocess of merely ex$ressing amounts in a different currency should
$reser0e the relationshi$s among amounts as measured in the functional currency and3 as such3 should not lead to
any new gains or losses#
2C1' The second method considered by the 2oard is the one that the $re0ious 0ersion of IAS 21 re9uired for
translating the financial statements of a foreign o$eration#
5
This method results in the same amounts in the
$resentation currency regardless of whether the financial statements of a foreign o$eration are+
%a( first translated into the functional currency of another grou$ entity %eg the $arent( and then into the
$resentation currency3 or
%b( translated directly into the $resentation currency#
2C1! This method a0oids the need to decide the currency in which to ex$ress the financial statements of a
multinational grou$ before they are translated into the $resentation currency# As noted abo0e3 many large grou$s
do not ha0e a single functional currency3 but com$rise o$erations with a number of functional currencies# For
such entities it is not clear which functional currency should be chosen in which to ex$ress amounts before they
are translated into the $resentation currency3 or why one currency is $referable to another# In addition3 this
method $roduces the same amounts in the $resentation currency for a stand*alone entity as for an identical
subsidiary of a $arent whose functional currency is the $resentation currency#
2C21 The 2oard decided to re9uire the second method3 ie that the financial statements of any entity %whether a
stand*alone entity3 a $arent or an o$eration within a grou$( whose functional currency differs from the
$resentation currency used by the re$orting entity are translated using the method set out in $aragra$hs "'7=! of
the Standard#
2C21 ?ith res$ect to translation of com$arati0e amounts3 the 2oard ado$ted the a$$roach re9uired by SIC*"1 for+
%a( an entity whose functional currency is not the currency of the hy$erinflationary economy %assets and
liabilities in the com$arati0e balance sheet are translated at the closing rate at the date of that balance
sheet and income and ex$enses in the com$arati0e income statement are translated at exchange rates at
the dates of the transactions(C and
%b( an entity whose functional currency is the currency of a hy$erinflationary economy3 and for which the
com$arati0e amounts are being translated into the currency of a hy$erinflationary economy %both
balance sheet and income statement items are translated at the closing rate of the most recent balance
sheet $resented(#
2C22 Aowe0er3 the 2oard decided not to ado$t the SIC*"1 a$$roach for the translation of com$arati0es for an entity
whose functional currency is the currency of a hy$erinflationary economy3 and for which the com$arati0e
amounts are being translated into a $resentation currency of a non*hy$erinflationary economy# The 2oard noted
that in such a case3 the SIC*"1 a$$roach re9uires restating the com$arati0e amounts from those shown in last
year<s financial statements for both the effects of inflation and for changes in exchange rates# If exchange rates
fully reflect differing $rice le0els between the two economies to which they relate3 the SIC*"1 a$$roach will
result in the same amounts for the com$arati0es as were re$orted as current year amounts in the $rior year
financial statements# Furthermore3 the 2oard noted that in the $rior year3 the rele0ant amounts had been already
ex$ressed in the non*hy$erinflationary $resentation currency3 and there was no reason to change them# For these
reasons the 2oard decided to re9uire that all com$arati0e amounts are those $resented in the $rior year financial
statements %ie there is no ad:ustment for either subse9uent changes in the $rice le0el or subse9uent changes in
exchange rates(#
2C2" The 2oard decided to incor$orate into the Standard most of the disclosure re9uirements of SIC*"1 Reporting
"urrenc'%Translation from (easurement "urrenc' to )resentation "urrenc' that a$$ly when a different
translation method is used or other su$$lementary information3 such as an extract from the full financial
statements3 is dis$layed in a currency other than the functional currency %see $aragra$h 5- of the Standard(#
These disclosures enable users to distinguish information $re$ared in accordance with IFRSs from information
that may be useful to users but is not the sub:ect of IFRSs3 and also tell users how the latter information has been
$re$ared#
5 This is to translate balance sheet items at the closing rate and income and ex$ense items at actual %or a0erage( rates3 exce$t for an entity
whose functional currency is that of a hy$erinflationary economy#
21 6 IASCF
IAS 21 2C
Ca1itali*ation o) e3c(ange di))erence*
2C2= The $re0ious 0ersion of IAS 21 allowed a limited choice of accounting for exchange differences that arise >from
a se0ere de0aluation or de$reciation of a currency against which there is no $ractical means of hedging and that
affects liabilities which cannot be settled and which arise directly on the recent ac9uisition of an asset<#
8
The
benchmar; treatment was to recognise such exchange differences in $rofit or loss# The allowed alternati0e was to
recognise them as an asset#
2C25 The 2oard noted that the allowed alternati0e %of recognition as an asset( was not in accordance with the
Frame+or, for the )reparation and )resentation of Financial Statements because exchange losses do not meet
the definition of an asset# .oreo0er3 recognition of exchange losses as an asset is neither allowed nor re9uired by
any liaison standard*setter3 so its deletion would im$ro0e con0ergence# Finally3 in many cases when the
conditions for recognition as an asset are met3 the asset would be restated in accordance with IAS 2! Financial
Reporting in /'perinflationar' !conomies# Thus3 to the extent that an exchange loss reflects hy$erinflation3 this
effect is ta;en into account by IAS 2!# For all of these reasons3 the 2oard remo0ed the allowed alternati0e
treatment and the related SIC Inter$retation is su$erseded#
Net in:e*t9ent in a )oreign o1eration
2C25A The $rinci$le in $aragra$h "2 is that exchange differences arising on a monetary item that is3 in substance3 $art
of the re$orting entity<s net in0estment in a foreign o$eration are initially recognised in a se$arate com$onent of
e9uity in the consolidated financial statements of the re$orting entity# Among the re0isions to IAS 21 made in
211" was the $ro0ision of guidance on this $rinci$le that re9uired the monetary item to be denominated in the
functional currency of either the re$orting entity or the foreign o$eration# The $re0ious 0ersion of IAS 21 did not
include such guidance#
2C252 The re9uirements can be illustrated by the following exam$le# Earent E owns 111 $er cent of Subsidiary S#
Earent E has a functional currency of BI sterling# Subsidiary S has a functional currency of .exican $esos#
Earent E grants a loan of 111 BS dollars to Subsidiary S3 for which settlement is neither $lanned nor li;ely to
occur in the foreseeable future# IAS 21 %as re0ised in 211"( re9uires the exchange differences arising on the loan
to be recognised in $rofit or loss in the consolidated financial statements of Earent E3 whereas those differences
would be recognised initially in e9uity in the consolidated financial statements of Earent E3 if the loan were to be
denominated in sterling or .exican $esos#
2C25C After the re0ised IAS 21 was issued in 211"3 constituents raised the following concerns+
%a( It is common $ractice for a monetary item that forms $art of an entity<s in0estment in a foreign
o$eration to be denominated in a currency that is not the functional currency of either the re$orting
entity or the foreign o$eration# An exam$le is a monetary item denominated in a currency that is more
readily con0ertible than the local domestic currency of the foreign o$eration#
%b( An in0estment in a foreign o$eration denominated in a currency that is not the functional currency of
the re$orting entity or the foreign o$eration does not ex$ose the grou$ to a greater foreign currency
exchange difference than arises when the in0estment is denominated in the functional currency of the
re$orting entity or the foreign o$eration# It sim$ly results in exchange differences arising in the foreign
o$eration<s indi0idual financial statements and the re$orting entity<s se$arate financial statements#
%c( It is not clear whether the term >re$orting entity< in $aragra$h "2 should be inter$reted as the single
entity or the grou$ com$rising a $arent and all its subsidiaries# As a result3 constituents 9uestioned
whether the monetary item must be transacted between the foreign o$eration and the re$orting entity3 or
whether it could be transacted between the foreign o$eration and any member of the consolidated
grou$3 ie the re$orting entity or any of its subsidiaries#
2C25 The 2oard noted that the nature of the monetary item referred to in $aragra$h 15 is similar to an e9uity
in0estment in a foreign o$eration3 ie settlement of the monetary item is neither $lanned nor li;ely to occur in the
foreseeable future# Therefore3 the $rinci$le in $aragra$h "2 to recognise exchange differences arising on a
monetary item initially in a se$arate com$onent of e9uity effecti0ely results in the monetary item being
accounted for in the same way as an e9uity in0estment in the foreign o$eration when consolidated financial
statements are $re$ared# The 2oard concluded that the accounting treatment in the consolidated financial
statements should not be de$endent on the currency in which the monetary item is denominated3 nor on which
entity within the grou$ conducts the transaction with the foreign o$eration#
2C25E Accordingly3 in 2115 the 2oard decided to amend IAS 21# The amendment re9uires exchange differences arising
on a monetary item that forms $art of a re$orting entity<s net in0estment in a foreign o$eration to be recognised
initially in a se$arate com$onent of e9uity in the consolidated financial statements# This re9uirement a$$lies
8 IAS 21 %re0ised 1!!"(3 $aragra$h 21#
6 IASCF 21
IAS 21 2C
irres$ecti0e of the currency of the monetary item and of whether the monetary item results from a transaction
with the re$orting entity or any of its subsidiaries#
2C25F The 2oard also $ro$osed amending IAS 21 to clarify that an in0estment in a foreign o$eration made by an
associate of the re$orting entity is not $art of the re$orting entity<s net in0estment in that foreign o$eration#
Res$ondents to the ex$osure draft disagreed with this $ro$osal# .any res$ondents said that the $ro$osed
amendment added a detailed rule that was not re9uired because the $rinci$le in $aragra$h 15 was clear# In
redeliberations3 the 2oard agreed with those comments and decided not to $roceed with that $ro$osed
amendment#
Good=ill and )air :alue ad<u*t9ent*
2C28 The $re0ious 0ersion of IAS 21 allowed a choice of translating goodwill and fair 0alue ad:ustments to assets and
liabilities that arise on the ac9uisition of a foreign entity at %a( the closing rate or %b( the historical transaction
rate#
2C2- The 2oard agreed that3 conce$tually3 the correct treatment de$ends on whether goodwill and fair 0alue
ad:ustments are $art of+
%a( the assets and liabilities of the ac9uired entity %which would im$ly translating them at the closing rate(C
or
%b( the assets and liabilities of the $arent %which would im$ly translating them at the historical rate(#
2C2' The 2oard agreed that fair 0alue ad:ustments clearly relate to the identifiable assets and liabilities of the ac9uired
entity and should therefore be translated at the closing rate#
2C2! Foodwill is more com$lex3 $artly because it is measured as a residual# In addition3 the 2oard noted that difficult
issues can arise when the ac9uired entity com$rises businesses that ha0e different functional currencies %eg if the
ac9uired entity is a multinational grou$(# The 2oard discussed how to assess any resulting goodwill for
im$airment and3 in $articular3 whether the goodwill would need to be >$ushed down< to the le0el of each different
functional currency or could be accounted for and assessed at a higher le0el#
2C"1 4ne 0iew is that when the $arent ac9uires a multinational o$eration com$rising businesses with many different
functional currencies3 any goodwill may be treated as an asset of the $arentLac9uirer and tested for im$airment at
a consolidated le0el# Those who su$$ort this 0iew belie0e that3 in economic terms3 the goodwill is an asset of the
$arent because it is $art of the ac9uisition $rice $aid by the $arent# Thus3 they belie0e3 it would be incorrect to
allocate the goodwill to the many ac9uired businesses and translate it into their 0arious functional currencies#
Rather3 the goodwill3 being treated as an asset of the $arent3 is not ex$osed to foreign currency ris;s3 and
translation differences associated with it should not be recognised# In addition3 they belie0e that such goodwill
should be tested for im$airment at a consolidated le0el# Bnder this 0iew3 allocating or >$ushing down< the
goodwill to a lower le0el3 such as each different functional currency within the ac9uired foreign o$eration3 would
not ser0e any $ur$ose#
2C"1 4thers ta;e a different 0iew# They belie0e that the goodwill is $art of the $arent<s net in0estment in the ac9uired
entity# In their 0iew3 goodwill should be treated no differently from other assets of the ac9uired entity3 in
$articular intangible assets3 because a significant $art of the goodwill is li;ely to com$rise intangible assets that
do not 9ualify for se$arate recognition# They also note that goodwill arises only because of the in0estment in the
foreign entity and has no existence a$art from that entity# )astly3 they $oint out that when the ac9uired entity
com$rises a number of businesses with different functional currencies3 the cash flows that su$$ort the continued
recognition of goodwill are generated in those different functional currencies#
2C"2 The 2oard was $ersuaded by the reasons set out in the $receding $aragra$h and decided that goodwill is treated
as an asset of the foreign o$eration and translated at the closing rate# Conse9uently3 goodwill should be allocated
to the le0el of each functional currency of the ac9uired foreign o$eration# This means that the le0el to which
goodwill is allocated for foreign currency translation $ur$oses may be different from the le0el at which the
goodwill is tested for im$airment# Entities follow the re9uirements in IAS "8 Impairment of $ssets to determine
the le0el at which goodwill is tested for im$airment#
22 6 IASCF
6 IASCF 2"