IAS 21 The Effects of Changes in Foreign Exchange Rates
Determine functional currency from the primary economic environment. Initially translate a foreign-currency transaction at its transaction-date exchange rate; subsequently translate monetary items at the closing rate, while non-monetary items follow rules based on their measurement. Foreign operations are translated into the reporting presentation currency under separate rules, with exchange differences presented as required. Special rules apply to hyperinflationary functional currencies.
Worked example
A euro-functional entity owes $1,000 at year end, when $1 is €0.90. The monetary liability translates to €900, and the exchange difference from its previous carrying amount is accounted for under IAS 21.
Common mistake
Using a closing rate for every non-monetary item or assuming a foreign operation’s income and expenses always use the closing rate.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | FR | Direct | September 2026–June 2027 |
| ACCA | SBR | Direct | September 2026–June 2027 |