IAS 21 – New pocket guide

IAS 21 – The Effects of Changes in Foreign Exchange Rates outlines how to account for foreign currency transactions and operations in financial statements, and how to translate financial statements into a presentation currency. An entity is required to determine a functional currency (for each of its operations if necessary) based on the primary economic environment in which it operates and records foreign currency transactions using the spot conversion rate to that functional currency on the date of the transaction.

Functional currency is the currency of the primary economic environment in which it operates.

When determining the appropriate functional currency, management should give priority to the following primary factors:

  • Currency influencing sales prices for goods and services.
  • The currency of the country whose competitive forces and regulations determine sale prices.
  • Currency influencing input costs.

The primary indicators may be determinative. However, the following two indicators serve as supporting evidence.

  • Currency in which funds/receipts:
  • from financing activities are generated
  • from operating activities are retained.



Spot exchange rate is applied to the foreign currency amount at the date of transaction. For practical reasons, an average rate over a period may be used if it approximates the actual rate at the date of transaction.  

Units of currency held and assets/ liabilities to be received/paid in a fixed or determinable amount of money. Translated at closing rate at reporting date.Gain or loss is recognised in profit or loss.

-Rate at transaction date (if item at historical cost)
-Rate at revaluation date (if item carried at revalued amount).

Impairment test

Non-monetary assets are measured at the lower of:
-Carrying amount (at historical rate)
-Net realizable value/recoverable amount (at closing rate at the end of the period).

Exchange gains or losses on asset/liability recognised where gain/loss on non-monetary item is recognized i.e profit or loss, or other comprehensive income.

All foreign exchange gains or losses are charged to profit or loss. However, there is one exception where a gain or loss on a non-monetary item is recognised in equity, the foreign exchange gain or loss is also recognised in equity.


Translation method

– Assets & liabilities at closing rate.
-Income and expenses – Exchange rate at transaction date or average rate (for practical purposes a monthly or quarterly rate might approximate the transaction date rates)

The resulting exchange differences are recognised in other comprehensive income (foreign currency translation reserve).
Disposal of a foreign operation

The cumulative amount of exchange differences that was recognised in equity is reclassified to profit and loss.
Loan forming part of net investment in foreign operation

Exchange gains and losses to equity on consolidation only. Recorded in profit or loss in the separate (entity only) financial statements.


An entity is required to disclose:

  • The amount of exchange differences recognised in profit or loss (except for those on financial instruments measured at fair value through profit or loss in accordance with IFRS 9).
  • The net exchange differences recognised in other comprehensive income and accumulated in a separate component of equity, and a reconciliation of the amount of exchange differences at the beginning and end of the period.
  • The fact and reason for a change in functional currency of either the reporting entity or significant foreign operation.
  • The fact for a difference in the presentation and functional currency of the financial statements. In this situation, an entity can only confirm that the financial statements comply with IFRS if they comply with the requirements of IFRS, including the translation method covered above.

Where an entity presents its financial statements or other financial information in a currency that is not it functional currency without meeting the requirements of IAS 21. For example, an entity may convert into another currency only selected items from its financial statements. Or an entity whose functional currency is not the currency of a hyperinflationary economy may convert the financial statements into another currency by translating all items at the most recent closing rate. Such conversions are not in accordance with IFRSs, and the entity shall:

  • clearly identify the information that does not comply as supplementary.
  • disclose the currency in which the supplementary information is displayed; and
  • disclose the entity’s functional currency and the method of translation used to determine the supplementary information.


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