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IAS 21 The Effects of Changes in Foreign Exchange Rates

 

Summary

 

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.

IAS 21  became effective for financial statements covering periods beginning on or after 1 January 2005.

 

Key Definitions

Functional currency-the currency of the primary economic environment in which the entity operates

Presentation currency - the currency in which financial statements are presented.

3. the entity reports the effects of such translation in accordance with paragraphs 20-37 [reporting foreign currency transactions in the functional currency] and 50 [reporting the tax effects of exchange differences].\

Reporting foreign currency transactions in the functional currency.

A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.[IAS 21.21]

At the end of each reporting period:

(a) foreign currency monetary items shall be translated using the closing rate;

(b) non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction; and

(c) non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was measured [IAS 21.23]

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognised in profit or loss in the period in which they arise,  [IAS 21.28]

When a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange component of that gain or loss shall be recognised in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss shall be recognised in profit or loss. [IAS 21.30]

Disclosure

An entity shall disclose:

(a) the amount of exchange differences recognised in profit or loss except for those arising on financial instruments measured at fair value through profit or loss in accordance with IFRS 9; and

(b) net exchange differences recognised in other comprehensive income and accumulated in a separate component of equity, and a reconciliation of the amount of such exchange differences at the beginning and end of the period. [IAS 21.52]

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