Entities conduct business internationally in two main ways. First, entities might enter into transactions in foreign currencies (such as buying goods and services from overseas suppliers and selling to overseas customers). Secondly, they might conduct business through overseas subsidiaries, branches and joint arrangements. In addition, an entity might present its financial statements in a foreign currency. IAS 21 sets out requirements for each of the above. Applying these requirements in practice can be complex.

IAS 21 The Effects of Changes in Foreign Exchange Rates outlines how to account for foreign currency transactions and operations in financial statements, and also 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 generally records foreign currency transactions using the spot conversion rate to that functional currency on the date of the transaction.

Scope

The standard is applied in:

• accounting for transactions and balances in foreign currencies, except for those derivative transactions and balances that are within the scope of IFRS 9;
• translating the results and financial position of foreign operations that are included in the entity’s financial statements by consolidation or equity accounting; and
• translating an entity’s results and financial position into a presentation currency.

Foreign currency derivatives that are within the scope of IFRS 9 are excluded from the scope of IAS 21.

Foreign currency derivatives that are embedded in various contracts and that require separate accounting under IFRS 9 are similarly excluded from IAS 21’s scope; whereas embedded foreign currency derivatives that do not require separate accounting under IFRS 9 are included in IAS 21.

However, IAS 21 applies to translation of foreign currency derivatives from a functional currency to a presentation currency.

The standard does not apply to hedge accounting for foreign currency items, including the hedging of a net investment in a foreign operation. These issues are addressed in IFRS 9.

Foreign currency items excluded from the scope of IAS 21 IAS 21 excludes from its scope those foreign currency derivatives to which IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39) applies. Foreign currency derivatives that are not within the scope of IFRS 9 (IAS 39) (e.g., some foreign currency derivatives that are embedded in other contracts) are within the scope of IAS 21. In addition, IAS 21 applies when an entity translates amounts relating to derivatives from its functional currency to its presentation currency. Although IAS 21 defines a net investment in a foreign operation, the accounting treatment for a hedge of a net investment of a foreign operation is dealt with in IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39). Similarly, IFRS 9 (IAS 39) applies to hedge accounting for a designated item hedged for foreign exchange risk. IAS 21 specifically excludes from its scope the measurement of foreign currency items that are subject to hedge accounting.