Prescribes how to include foreign currency transactions and foreign operations in an entity's financial statements.
Specifies how to translate financial statements into a chosen presentation currency.
Key issues are determining the functional currency, how to translate transactions/balances, and how to report exchange differences.
Accounting for transactions and balances in foreign currencies (except derivative transactions within IFRS 9 scope).
Translating the results and financial position of foreign operations that are included in the financial statements via consolidation, proportionate consolidation, or the equity method.
Translating an entity's results and financial position into a presentation currency.
Hedge accounting for foreign currency items, including hedges of net investments in foreign operations (covered by IFRS 9).
Presentation of cash flows arising from foreign currency transactions or translation of cash flows of a foreign operation in the Statement of Cash Flows (covered by IAS 7).
Functional Currency:
The currency of the primary economic environment in which the entity operates. This is normally the environment where it primarily generates and expends cash.
Determining the functional currency is crucial as it dictates how foreign currency transactions are initially recorded and how balances are subsequently measured.
Presentation Currency:
The currency in which the financial statements are presented. Can be any currency; need not be the functional currency.
Foreign Currency:
Any currency other than the entity's functional currency.
Exchange Rate Terms:
| Term | Definition |
| Spot Rate | Exchange rate for immediate delivery; the rate prevailing at the date of a transaction. |
| Closing Rate | The spot exchange rate at the end of the reporting period. |
| Exchange Difference | Difference resulting from translating the same number of units of one currency into another at different exchange rates. |
Monetary Items:
Units of currency held, and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.
Key characteristic: the right to receive (or obligation to deliver) a fixed/determinable number of currency units.
Examples: Monetary vs. Non-Monetary Items:
| Type | Examples | Classification |
| Cash & Bank Balances | Cash on hand, demand deposits | Monetary |
| Receivables | Trade receivables, loans receivable, notes receivable | Monetary |
| Payables | Trade payables, loans payable, notes payable, lease liabilities, cash-settled provisions | Monetary |
| Property, Plant & Equipment | Land, buildings, machinery | Non-Monetary |
| Intangible Assets | Goodwill, patents, licences | Non-Monetary |
| Inventories | Raw materials, WIP, finished goods | Non-Monetary |
| Equity Investments | Shares held in another company | Non-Monetary |
| Prepayments | Prepaid rent, prepaid insurance | Non-Monetary |
| Deferred Tax Assets/Liabilities | Calculated per IAS 12 | Generally treated as Monetary* |
*Treatment of DTA/DTL can be debated, but they are usually retranslated at closing rate, consistent with monetary items.
Foreign Operation:
An entity that is a subsidiary, associate, joint venture, or branch whose activities are based or conducted in a country or currency other than that of the reporting entity.
Net Investment in a Foreign Operation:
The amount of the reporting entity's interest in the net assets of that operation.
Can include monetary items (like long-term intercompany loans) for which settlement is neither planned nor likely to occur in the foreseeable future ā€“ effectively part of the entity's net investment.
Recap: Currency of the primary economic environment. Determined based on facts; management judgment needed if indicators are mixed.
Primary Indicators (Strongest Influence):
| Factor | Indicator Points Towards Currency... |
| Sales Prices | ...that mainly influences sales prices for goods/services (often currency in which prices are denominated/settled). |
| Competitive Forces & Regulation | ...of the country whose competitive forces and regulations mainly determine the sales prices. |
| Costs (Labour, Material, etc.) | ...that mainly influences the labor, material, and other costs of providing goods/services (often currency in which costs are denominated/settled). |
Secondary Indicators (Supporting Evidence):
| Factor | Indicator Points Towards Currency... |
| Financing Activities | ...in which funds from financing activities (issuing debt/equity instruments) are generated. |
| Receipts from Operating Activities | ...in which receipts from operating activities are usually retained. |
Foreign Operation Functional Currency:
Determined using the same indicators, considering the degree of autonomy from the reporting entity.
Consistency & Review:
Functional currency should be used consistently once determined.
Only change if there is a change in underlying transactions, events, and conditions.
Change in Functional Currency:
Accounted for prospectively from the date of the change.
Translate all items into the new functional currency using the exchange rate at the date of the change.
Translated amounts for non-monetary items are treated as their historical cost after the change. Exchange differences previously in OCI are not reclassified.
Initial Recognition:
Record the foreign currency transaction on initial recognition in the functional currency by applying the spot exchange rate at the date of the transaction.
Using an average rate for a period (e.g., weekly, monthly) is permitted if exchange rates do not fluctuate significantly.
Reporting at Subsequent Reporting Dates:
| Item Type | Translation Rule | Rate Used |
| Foreign Currency Monetary Items | Re-translate | Closing rate |
| Non-Monetary Items (at Historical Cost) | Do NOT re-translate | Rate at date of transaction (Historical rate) |
| Non-Monetary Items (at Fair Value) | Re-translate | Rate when fair value was determined |
Recognition of Exchange Differences:
General Rule (Profit or Loss):
Exchange differences arising on the settlement of monetary items, or on re-translating monetary items at rates different from initial recognition or previous reporting, are recognised in Profit or Loss (P&L) in the period they arise.
Exception (Other Comprehensive Income - OCI):
Recognise exchange differences in OCI when a gain or loss on a related non-monetary item is recognised in OCI (e.g., property revaluation under IAS 16 - the exchange difference follows the revaluation gain/loss to OCI).
Recognise exchange differences in OCI for monetary items that form part of the reporting entity's net investment in a foreign operation (see below).
Recognise exchange differences in OCI when they arise on liabilities accounted for as hedges of a net investment (IFRS 9) or qualifying cash flow hedges (IFRS 9).
Choosing a Presentation Currency:
An entity may present its financial statements in any currency (or currencies).
If the presentation currency differs from the functional currency, the entity must translate its results and financial position.
Translation Process (Functional Currency ā‰ Presentation Currency):
| Financial Statement Item | Translation Rate Used |
| Assets & Liabilities | Closing rate (at the date of the statement of financial position) |
| Income & Expenses | Rates at the dates of the transactions (or average rate if reasonable approximation) |
| Equity Items (e.g., Share Capital, Retained Earnings opening) | Historical rates (rate at date of original transaction) |
| Resulting Exchange Differences | Recognised in OCI (as a separate component of equity - often 'Currency Translation Reserve' or 'Foreign Currency Translation Adjustment' - FCTA) |
Translation of a Foreign Operation (for Consolidation, Equity Method etc.):
Follows the same process as translating into a presentation currency.
| Item (of Foreign Operation) | Translation Rate Used |
| Assets & Liabilities (incl. goodwill & FV adjustments on acquisition) | Closing rate at the reporting date |
| Income & Expenses | Transaction date rates (or average rate) |
| Resulting Exchange Differences | Recognised in OCI (and attributed to parent and NCI if applicable) |
Translation of Hyperinflationary Economy Results:
First, restate the foreign operation's financials according to IAS 29 *Financial Reporting in Hyperinflationary Economies*.
Then, translate all amounts (Assets, Liabilities, Equity, Income, Expenses) at the closing rate at the end of the reporting period.
Comparative amounts are those presented in the prior year financial statements (i.e., not adjusted for subsequent price level or exchange rate changes).
Definition Recap:
Reporting entity's interest in the net assets, including certain long-term intercompany balances.
Exchange Differences (OCI Treatment):
Exchange differences on monetary items forming part of the net investment (e.g., long-term loans not expected to be settled) are recognised in OCI in the consolidated financial statements until disposal.
This treatment applies similarly in separate financials (parent) or individual financials (foreign op) where applicable.
Accumulated OCI amount is reclassified from equity to P&L on the disposal of the foreign operation.
Reclassification from Equity (OCI) to P&L:
On disposal, the cumulative amount of exchange differences relating to that foreign operation, previously recognised in OCI and accumulated in equity, shall be reclassified from equity to profit or loss as a reclassification adjustment.
This reclassification occurs when the gain or loss on disposal is recognized.
What Constitutes Disposal:
Loss of control over a subsidiary.
Loss of significant influence over an associate.
Loss of joint control over a joint venture.
Partial disposal (e.g., reducing stake but retaining some level of control/influence) may trigger recognition of a proportionate share of the cumulative exchange differences in P&L.
Accounting Treatment:
Any income tax effects associated with gains and losses arising from foreign currency exchange differences are accounted for under IAS 12 *Income Taxes*.
This often involves considering temporary differences arising from exchange rate changes affecting the tax base vs carrying amount.
Key Disclosures:
Amount of exchange differences recognized in profit or loss (except those on financial instruments measured at FVTPL per IFRS 9).
Net exchange differences recognized in OCI and accumulated in equity (a reconciliation of this equity component is required).
The entity's functional currency and the reason for using it, especially if different from the currency of the country where domiciled.
Reason for using a presentation currency different from the functional currency (if applicable).
The fact and reason for any change in the functional currency.
When presenting financial statements in a currency different from the functional currency, state that statements comply with IFRS only if they comply with all IFRS requirements, including the translation method outlined in IAS 21.
Disclosure about exposure to foreign exchange risk and risk management policies is encouraged by IAS 21, but largely covered by IFRS 7 *Financial Instruments: Disclosures*.
