IAS 21: The Effects

of Changes in Foreign
Exchange Rates
BA 118.2
 Objective

How to include in FS
Transaction in FC
of entity

How to include in FS
Foreign activities Foreign operations
of entity

How to translate to
Present FS in FC
presentation currency
Issues

1. Which exchange rate to use?

2. How to report changes in exchange rate?
Definitions

• Spot rate – exchange rate for immediate delivery

• Closing rate – spot rate at end of period
• Exchange difference – difference arising from change in exchange
rate
Currencies

• Functional
 Currency of primary economic environment which entity
operates
 Criteria for determination (IAS 21 par. 9-12)

• Foreign
 Currency other than functional

• Presentation
 Currency in which FS are presented
 Monetary Items

Fixed / determinable
units of currency
Right to receive /
Monetary items Entity’s equity
obligation to deliver
Variable number*
Entity’s assets

• *FV received/delivered = fixed/determinable units of currency

• Ex. pension, dividends payable, provided to be settled in cash
Non-monetary Items

• Absence of a right to receive/obligation to deliver fixed units of

currency
• Examples: prepaid goods/services, inventories, goodwill, intangible
asset, PPE, provisions
Steps

1. Determine functional currency (par. 9-14)

2. Translate foreign to functional or functional to presentation
accordingly
3. Report effects of translation (par. 20-37 & 50)
Foreign to Functional

(1) Spot at trans’n date

Initial recognition
(2) Ave. rate – Except wild/ significant
week/month fluctuations

FC Trans’n
Monetary Closing rate

Subsequent end period

Historical cost ER at trans’n date

Non-monetary
ER at date of
At FV
measurement of FV
Functional to Presentation

A/L (including Closing rate at B/S

comparatives) date

(1) ER at date of
trans’n
I/E (including
Item
comparatives)
If fluctuations
(2) Ave. except
significant

Exchange
OCI – FCTA
difference