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Effects of Changes in Foreign Exchange Rates (IAS 21)

Last updated: 13 June 2024

Entities may engage in transactions denominated in foreign currencies. These transactions must be translated into the currency that the company uses to present its financial statements. In addition, a parent company may conduct foreign operations through subsidiaries, associates or joint arrangements. In such cases, the financial statements of these investees need to be translated to the currency used in the consolidated financial statements. Furthermore, an entity may opt to present its financial statements in a currency different from the one used in its economic environment. All these considerations are addressed by IAS 21.

Let’s dive in.

Translating foreign currency transactions

Initial recognition.

Initially, a foreign currency transaction is recognised at the spot exchange rate (i.e., the rate for immediate delivery) between the functional currency and the foreign currency at the date of the transaction (IAS 21.21). A foreign currency transaction is a transaction denominated or requiring settlement in a foreign currency, including transactions arising when an entity (IAS 21.20):

• Buys or sells goods or services priced in a foreign currency,
• Borrows or lends funds with amounts payable or receivable denominated in a foreign currency, or
• Otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency.

The transaction date is when the transaction first qualifies for recognition under applicable IFRS standard (IAS 21.22).

IAS 21 permits the use of simplifications in determining the foreign exchange rate, such as using an average rate, as long as exchange rates don’t fluctuate significantly (IAS 21.22). In practice, entities often use the average of monthly rates, as central banks publish these for most currencies.

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Translation at reporting dates

At the end of each reporting period (IAS 21.23):

• Foreign currency monetary items are translated using the closing rate (i.e., the spot exchange rate at the end of the reporting period).
• Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. They are not re-translated using the closing rate.
• Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

Specific procedures for translating foreign operations are discussed below.

Monetary and non-monetary items

Monetary items are defined as units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency (IAS 21.8). Common examples of monetary items include trade receivables and payables or loans. Other examples are given in paragraph IAS 21.16.

Non-monetary items lack the right to receive (or the obligation to deliver) a fixed or determinable number of units of currency. Examples of non-monetary items include advance consideration paid or received, goodwill, items of PP&E, intangible assets and inventories (IAS 21.16).

Investments in equity instruments are also non-monetary items (IFRS 9.B5.7.3), but they are measured at fair value and therefore their carrying amount is effectively impacted by foreign exchange movements.

Recognition of exchange differences

As a general rule, exchange differences arising from the settlement or translation of a monetary asset are recognised in P/L (IAS 21.28).

When non-monetary assets are measured at fair value (or revalued amount) in a foreign currency, exchange differences are treated similarly to gains or losses on remeasurement. That is, they can be recognised in other comprehensive income under circumstances specified by other IFRS standards (IAS 21.30-31).

Example: Recognition of exchange differences

Suppose Entity A buys an item of PP&E on 1 January 20X1. Entity A’s functional and presentation currency is the Euro (EUR), but the invoice for the PP&E is for 1,000 US dollars (USD). The EUR/USD exchange rate on 1 January 20X1 is 1.1 (i.e., 1 EUR = 1.1 USD). The invoice is paid on 1 May 20X1 when the EUR/USD rate is 1.2. All calculations used in this example are available for download in an  Excel file .

Entity A would make the following entries in EUR:

As shown, the PP&E item is carried at historical cost and is not subsequently retranslated to reflect exchange rate movements between initial recognition and invoice payment.

Use of multiple exchange rates

When several exchange rates are available, the rate used is the one at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred at the measurement date (IAS 21.26).

Lack of exchangeability

In 2023, the IASB issued amendments to IAS 21 that will require companies to provide more information in their financial statements when a currency cannot be exchanged into another currency, an issue that wasn’t previously covered. The amendments are effective for annual reporting periods beginning from 1 January 2025, with early application permitted. Read more in ​Deloitte’s publication​ .

Advance Consideration (IFRIC 22)

IFRIC Interpretation 22 ‘Foreign Currency Transactions and Advance Consideration’ stipulates that the transaction date for determining the exchange rate used for initial recognition of the related asset, expense, or income is the date an entity first recognises the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration (IFRIC 22.8-9).

Exchange differences on borrowings

According to paragraph IAS 23.6(e), borrowing costs may include exchange differences resulting from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

Exchange differences on deferred tax

Exchange differences on deferred foreign tax liabilities or assets may be classified as deferred tax expense or income if that presentation is considered to be the most useful to financial statement users (IAS 12.78).

Change in functional currency

A change in functional currency can only occur if there are changes to the underlying transactions, events, and conditions that the functional currency reflects. Any change in functional currency is accounted for prospectively (IAS 21.35-37).

Translating a foreign operation

When an entity within a group uses a different presentation currency from that of the consolidated financial statements, translations are performed using the following procedures as per IAS 21.39:

• Assets, including goodwill and fair value adjustments (IAS 21.47), and liabilities, are translated at the closing rate at the reporting date. This includes comparatives translated using historical rates.
• Income and expenses are translated at exchange rates applicable at the transaction dates. This also includes comparatives translated using historical rates.
• All resulting exchange differences are recognised in other comprehensive income (OCI).

IAS 21.40 allows for simplifications in determining the foreign exchange rate, for example, using an average rate, assuming exchange rates do not significantly fluctuate. In practice, an average rate for each month is most commonly used.

Cumulative translation adjustment (CTA)

Exchange differences referred to in IAS 21.39(c) are commonly identified as either ‘Cumulative Translation Adjustment’ (CTA) or ‘Foreign Currency Translation Reserve’ (FCTR). The two primary sources for CTA, as per IAS 21.41, include:

• Translating income and expenses at the transaction date exchange rates, while assets and liabilities are translated at the closing rate.
• Translating opening assets and liabilities at a closing rate that differs from the opening rate.

CTA is recognised in OCI, presented as a distinct item within equity, and not recycled to P/L until the foreign operation is disposed of. CTA is further divided between controlling and non-controlling interests (IAS 21.41). It is also recognised in OCI for investments accounted for using the equity method (IAS 21.44).

Example: Illustrative translation of a foreign operation

Consider Group A with the Euro as its presentation currency. Entity X, one of Group A’s subsidiaries, uses the US Dollar as its presentation currency. The following EUR/USD exchange rates apply:

• Opening rate at 1 January 20X1: 1.1
• Average rate in 20X1: 1.2
• Closing rate at 31 December 20X1: 1.3

All calculations and tables presented in this example can be downloaded in an Excel file .

Entity X is consolidated to Group A consolidated financial statements as follows:

Entity X stand-alone data

Statement of financial position in USD:

P/L in USD:

Consolidation of Group A

Consolidated statement of financial position in EUR at 1 January 20X1:

Consolidated statement of financial position in EUR at 31 December 20X1:

Consolidated P/L for 20X1 in EUR:

Intragroup balances

Exchange differences on intragroup balances.

Although intragroup balances are eliminated during consolidation, any exchange differences arising from those balances are not. This is because the group is effectively exposed to foreign exchange gains and losses, even on intragroup transactions, including dividend receivables and payables (IAS 21.45).

Goodwill considerations

Goodwill, as previously stated, is considered an asset of a foreign operation and is retranslated at each reporting date. For multinational group acquisitions, goodwill should be allocated to each functional currency level of the acquired foreign operation (IAS 21.BC32).

Net investment in a foreign operation

A net investment in a foreign operation represents the reporting entity’s interest in the net assets of that operation (IAS 21.8). Monetary items receivable from, or payable to, a foreign operation, where settlement is neither planned nor likely to occur in the foreseeable future, are treated as part of the entity’s net investment in that operation (IAS 21.15-15A). Exchange differences arising from such monetary items are recognised in P/L in separate financial statements, but in OCI (as part of CTA) in consolidated financial statements (IAS 21.32-33).

Disposal or partial disposal of a foreign operation

Upon disposing of a foreign operation, the cumulative amount of exchange differences relating to that operation, recognised in OCI and accumulated in the separate component of equity (i.e. CTA), is reclassified from equity to P/L (as a reclassification adjustment ) when the gain or loss on disposal is recognised (IAS 21.48). Furthermore, paragraph IAS 21.48A outlines accounting procedures for partial disposals.

Translation from the currency of a hyperinflationary economy

IAS 21.42-43 provides specific provisions for translating from the currency of a hyperinflationary economy.

Functional and foreign currencies

Defining functional and foreign currencies.

The functional currency is defined as the currency of the primary economic environment in which an entity operates, i.e. primarily generates and spends cash. IAS 21.9-10 details the factors that should be considered in determining an entity’s functional currency.

The foreign currency, as defined by IAS 21.8, is any currency that is different from the entity’s functional currency.

Functional currency of a foreign operation

Identifying the functional currency can be particularly complex when a reporting entity is a foreign operation of another entity and fundamentally an extension of its operations. For instance, a ‘financial’ subsidiary (i.e., a subsidiary primarily holding financial assets or issuing debt) whose core financial assets and liabilities are denominated in the parent’s functional currency may have the same functional currency as the parent, regardless of its operational country. IAS 21.11 outlines additional factors to be considered when determining the functional currency of a foreign operation. If these indicators are mixed, priority is given to the primary indicators described in IAS 21.9.

Use of a presentation currency other than the functional currency

The rules regarding the translation of a foreign operation are equally applicable to the use of a presentation currency that is different from the functional currency.

Presentation in financial statements

IAS 21 does not specify in which part of the income statement foreign exchange differences should be presented. Therefore, entities must develop an accounting policy. The most common approach is to report exchange differences in the same section of the income statement where the original income or expense was (or will be) recognised for the item that subsequently led to exchange differences. For example, exchange differences on trade receivables are presented within operating profit, while exchange differences on debt are presented within finance costs. This method aligns with the one mandated by IFRS 18 .

Cash flows in foreign currency

IAS 21 does not cover the statement of cash flows as it falls under the scope of IAS 7. This includes the presentation of cash flows resulting from transactions in a foreign currency and the translation of cash flows from a foreign operation (IAS 21.7).

The disclosure requirements are provided in IAS 21.51-57.

© 2018-2024 Marek Muc

The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). You can access full versions of IFRS Standards at shop.ifrs.org. IFRScommunity.com is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org.

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CPD technical article

01 March 2009

IAS 21 the effects of changes in foreign exchange rates

Multiple-choice questions

Graham Holt

Graham holt explains the importance of exchange rates when it comes to accounting for any transactions carried out in foreign currencies, this article was first published in the march 2009 edition of  accounting and business  magazine., studying this technical article and answering the related questions can count towards your verifiable cpd if you are following the unit route to cpd and the content is relevant to your learning and development needs. one hour of learning equates to one unit of cpd. we'd suggest that you use this as a guide when allocating yourself cpd units..

The purpose of IAS 21 is to set out how to account for transactions in foreign currencies and foreign operations.

The standard shows how to translate financial statements into a presentation currency, which is the currency in which the financial statements are presented. This contrasts with the functional currency, which is the currency of the primary economic environment in which the entity operates.

Key issues are the exchange rates, which should be used, and where the effects of changes in exchange rates are recorded in the financial statements.

Functional currency is a concept that was introduced into IAS 21, The Effects of Changes in Foreign Exchange Rates , when it was revised in 2003. The previous version of IAS 21 used a concept of reporting currency. In revising IAS 21 in 2004, the IASB’s main aim was to provide additional guidance on the translation method and determining the functional and presentation currencies.

The functional currency should be determined by looking at several factors. This currency should be the one in which the entity normally generates and spends cash, and that in which transactions are normally denominated. All transactions in currencies other than the functional currency are treated as transactions in foreign currencies.

The entity’s functional currency reflects the transactions, events and conditions under which the entity conducts its business. Once decided on, the functional currency does not change unless there is a change in the underlying nature of the transactions and relevant conditions and events. Foreign currency transactions should initially be recorded at the spot rate of exchange at the date of the transaction. An approximate rate can be used. Subsequently, at each balance sheet date, foreign currency monetary amounts should be reported using the closing rate. Non-monetary items measured at historical cost should be reported using the exchange rate at the date of the transaction. Non-monetary items carried at fair value, however, should be reported at the rate that existed when the fair values were determined.

Exchange differences arising on monetary items are reported in profit or loss in the period, with one exception. The exception is that exchange differences arising on monetary items that form part of the reporting entity’s net investment in a foreign operation are recognised in the group financial statements, within a separate component of equity. They are recognised in profit or loss on disposal of the net investment. If a gain or loss on a non-monetary item is recognised in equity (for example, property, plant and equipment revalued under IAS 16), any foreign exchange gain or loss element is also recognised in equity.

Presentation currency and functional currency

An entity can present its financial statements in any currency. If the presentation currency differs from the functional currency, the financial statements are retranslated into the presentation currency. If the financial statements of the entity are not in the functional currency of a hyperinflationary economy, then they are translated into the presentation currency as follows:

• Assets and liabilities (including any goodwill arising on the acquisition and any fair value adjustment) are translated at the closing spot rate at the date of that balance sheet
• Income statements are translated at the spot rate at the date of the transactions (average rates are allowed if there is no great fluctuation in the exchange rates)
• All exchange differences are recognised in a separate component of equity.

At the entity level, management should determine the functional currency of the entity based on the requirements of IAS 21.

An entity does not have a choice of functional currency. All currencies, other than the functional one, are treated as foreign currencies. An entity’s management may choose a different currency from its functional one – the presentation currency – in which to present financial statements.

At the group level, various entities within a multinational group will often have different functional currencies. The functional currency is identified at entity level for each group entity. Each group entity translates its results and financial position into the presentation currency of the reporting entity.

Normal consolidation procedures are followed for the preparation of the consolidated financial statements, once all the consolidated entities have prepared their financial information in the appropriate presentation currency.

Translation of a foreign operation

When preparing group accounts, the financial statements of a foreign subsidiary should be translated into the presentation currency as set out above. Any goodwill and fair value adjustments are treated as assets and liabilities of the foreign entity, and therefore retranslated at each balance sheet date at the closing spot rate.

Exchange differences on intra-group items are recognised in profit or loss, unless they are a result of the retranslation of an entity’s net investment in a foreign operation when it is classified as equity.

Dividends paid in a foreign currency by a subsidiary to its parent firm may lead to exchange differences in the parent’s financial statements. They will not be eliminated on consolidation, but recognised in profit or loss. When a foreign operation is disposed of, the cumulative amount of the exchange differences in equity relating to that foreign operation is recognised in profit or loss when the gain or loss on disposal is recognised.

The notion of a group functional currency does not exist under IFRS; functional currency is purely an individual entity or business operation-based concept. This has resulted in IAS 21 becoming one of the more complex standards for firms converting to IFRS.

In addition, many multinational groups have found the process time-consuming and challenging, particularly when considering non-trading group entities where the standard’s emphasis on external factors suggests that the functional currency of corporate subsidiaries might well be that of the parent, regardless of their country of incorporation or the currency in which their transactions are denominated.

Entities applying IFRS need to remember that the assessment of functional currency is a key step when considering any change in the group structure or when implementing any new hedging or tax strategies. Furthermore, should the activities of the entity within the group change for any reason, the determination of the functional currency of that entity should be reconsidered to identify the changes required. Management must take care to document the approach followed in the determination of functional currency for each entity within the group, using a consistent methodology across all cases, particularly when an exercise of judgment is required.

Case study 1

An entity, with the dollar as its functional currency, purchases plant from a foreign entity for €18m on 31 May 2008 when the exchange rate was €2 to $1. The entity also sells goods to a foreign customer for €10.5m on 30 September 2008, when the exchange rate was €1.75 to $1. At the entity’s year end of 31 December 2008, both amounts are still outstanding and have not been paid. The closing exchange rate was €1.5 to $1. The accounting for the items for the period ending 31 December 2008 would be as follows:

The entity records the plant and liability at $9m at 31 May 2008. At the year-end, the amount has not been paid. Thus using the closing rate of exchange, the amount payable would be retranslated at $12m, which would give an exchange loss of $3m in profit or loss. The asset remains at $9m before depreciation.

The entity will record a sale and trade receivable of $6m. At the year-end, the trade receivable would be stated at $7m, which would give an exchange gain of $1m that would be reported in profit or loss. IAS 21 does not specify where exchange gains and losses should be shown in the statement of comprehensive income.

Case study 2

An entity has a 100%-owned foreign subsidiary, which has a carrying value at a cost of $25m. It sells the subsidiary on 31 December 2008 for €45m. As at 31 December 2008, the credit balance on the exchange reserve, which relates to this subsidiary, was $6m. The functional currency of the entity is the dollar and the exchange rate on 31 December 2008 is $1 to €1.5. The net asset value of the subsidiary at the date of disposal was $28m.

The subsidiary is sold for $45m divided by 1.5 million, therefore $30m. In the parent entity’s accounts a gain of $5m will be shown. In the group financial statements, the cumulative exchange gain in reserves will be transferred to profit or loss, together with the gain on disposal. The gain on disposal is $30m minus $28m, therefore $2m, which is the difference between the sale proceeds and the net asset value of the subsidiary. To this is added the exchange reserve balance of $6m to give a total gain of $8m, which will be included in the group statement of comprehensive income.

Graham Holt is an ACCA examiner and principal lecturer in accounting and finance at Manchester Metropolitan University Business School

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IAS 21 The Effects of Changes in Foreign Exchange Rates

Ias 21 the effects of changes in foreign exchange rates prescribes how to include foreign currency transactions and foreign operations in the financial statements of an entity, and how to translate financial statements into a presentation currency., access the standard, recent amendments, related ifric interpretations, other resources.

• 2023 Issued Standard – IAS 21 The 2023 Issued Standards include all amendments issued up to and including 1 January 2023.

Registration is required to access the free version of the Issued Standards, which do not include additional documents that accompany the full standard (such as illustrative examples, implementation guidance and basis for conclusions).

IAS 21 prescribes the accounting for:

• Transactions in foreign currencies
• Translating the accounts of foreign operations prior to consolidation.

Individual transactions in foreign currencies are initially recorded at the exchange rate prevailing on the date of the transaction. At the date of settlement, cash transferred is recorded at the rate prevailing on the settlement date. Any exchange difference arising is recognised in profit or loss.

The statement of financial position of a foreign operation is translated using the closing rate, being the exchange rate at the reporting date. The statement of profit or loss and other comprehensive income is translated using the exchange rates at the dates of the transactions. Where this is impracticable, an average rate for the year may be used provided that exchange rates do not fluctuate significantly. Exchange differences arising are reported as other comprehensive income.

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IAS 21 The Effects of Changes in Foreign Exchange Rates

These days people use about 180 currencies world wide!

The truth is that  we, people, don’t want to stay isolated.  We love to sell, buy, import, export, trade together and do many other things,  all in foreign currencies!

When you look at the business world, you’ll see that business go global in two ways: they either have individual transactions in foreign currencies, or when they grow bigger, they often set up foreign operations (separate business abroad).

Moreover, the exchange rates change every minute. So how to bring a bit of organization into this currency mix-up? That’s why there is the standard IAS 21 The Effects of Changes in Foreign Exchange Rates.

What is the objective of IAS 21?

The objective of IAS 21 The Effects of Changes in Foreign Exchange Rates is to prescribe:

• How to include foreign currency transactions and foreign operations in the financial statements of an entity; and
• How to translate financial statements into a presentation currency .

In other words, IAS 21 answers 2 basic questions:

• What exchange rates shall we use?
• How to report gains or losses from foreign exchange rates in the financial statements?

Functional vs. Presentation Currency

IAS 21 defines both functional and presentation currency and it’s crucial to understand the difference:

Functional currency is the currency of the primary economic environment in which the entity operates. It is the own entity’s currency and all other currencies are “foreign currencies”.

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

In most cases, functional and presentation currencies are the same.

Also, while an entity has only 1 functional currency, it can have 1 or more presentation currencies, if an entity decides to present its financial statements in more currencies.

You also need to realize that an entity can actually choose its presentation currency , but it CANNOT choose its functional currency. The functional currency needs to be determined by assessing several factors.

How to determine functional currency

The most important factor in determining the functional currency is the entity’s primary economic environment in which it operates. In most cases, it will be the country where an entity operates, but this is not necessarily true.

The primary economic environment is normally the one in which the entity primarily generates and expends the cash . The following factors can be considered:

• What currency does mainly influence sales prices for goods and services?
• In what currency are the labor, material and other costs denominated and settled?
• In what currency are funds from financing activities generated (loans, issued equity instruments)?
• And other factors, too.

Sometimes, sales prices, labor and material costs and other items might be denominated in various currencies and therefore, the functional currency is not obvious.

In this case, management must use its judgment to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions.

How to report transactions in Functional Currency

Initial recognition.

Initially , all foreign currency transactions shall be translated to functional currency by applying the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.

The date of transaction is the date when the conditions for the initial recognition of an asset or liability are met in line with IFRS.

Subsequent reporting

Subsequently, at the end of each reporting period , you should translate:

• All monetary items in foreign currency using the closing rate ;
• All non-monetary items measured in terms of historical cost using the exchange rate at the date of transaction ( historical rate );
• All non-monetary items measured at fair value using the exchange rate at the date when the fair value was measured.

How to report foreign exchange differences

All exchange rate differences shall be recognized in profit or loss , with the following exceptions:

• Exchange rate gains or losses on non-monetary items are recognized consistently with the recognition of gains or losses on an item itself.For example, when an item is revalued with the changes recognized in other comprehensive income, then also exchange rate component of that gain or loss is recognized in OCI, too.
• In the separate entity’s  or foreign operation’s financial statements: in profit or loss ;
• In the consolidated financial statements: initially in other comprehensive income and subsequently, on disposal of net investment in the foreign operation, they shall be reclassified to profit or loss .

Change in functional currency

When there is a change in a functional currency, then the entity applies the translation procedures related to the new functional currency prospectively from the date of the change.

How to translate financial statements into a Presentation Currency

When an entity presents its financial in the presentation currency different from its functional currency, then the rules depend on whether the entity operates in a non-hyperinflationary economy or not.

Non-hyperinflationary economy

When an entity’s functional currency is NOT the currency of a hyperinflationary economy, then an entity should translate:

• All assets and liabilities for each statement of financial position presented (including comparatives) using the closing rate at the date of that statement of financial position. Here, this rule applies for goodwill and fair value adjustments , too.
• All income and expenses and other comprehensive income items (including comparatives) using the exchange rates at the date of transactions. Standard IAS 21 permits using some period average rates for the practical reasons, but if the exchange rates fluctuate a lot during the reporting period, then the use of averages is not appropriate.

All resulting exchange differences shall be recognized in other comprehensive income as a separate component of equity.

However, when an entity disposes the foreign operation, then the cumulative amount of exchange differences relating to that foreign operation shall be reclassified from equity to profit or loss when the gain or loss on disposal is recognized.

Hyperinflationary economy

When an entity’s functional currency IS the currency of a hyperinflationary economy, then the approach slightly changes:

• The entity’s current year’s financial statements are restated first, as required by IAS 29 Financial Reporting in Hyperinflationary Economies. Comparative figures are used the same as current year’s figures in the financial statements from previous reporting period.
• Only then, the same procedures as described above are applied.

IAS 21 prescribes the number of disclosures, too. Please watch the following video with the summary of IAS 21 here:

Have you ever been unsure what foreign exchange rate to use? Please comment below this video and don’t forget to share it with your friends by clicking HERE. Thank you!

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235 Comments

Thank you dear Silvia for I’m inspired a lot from your lecture.

Inventory & Foreign Exchange Rate. What happened if inventory which was purchased with foreign currency is required to be recorded based on NRV, do we need to record changes in the exchange rates at closing date?

Hi Silvia, thanks for the always helpful articles and videos. I read/watched both this article and the article about translating entities to a presentation currency. If one applies these rules to companies within the same group (eg holding company makes prepayments to a subsidiary who then sells a service back to the holding company where holding company and subsidiary have different functional currencies) does it make sense that one would then end up with an intercompany imbalances between the prepaid asset and prepaid liability and so to “balance” the intercompany elimination entry one would take the imbalance to the FCTR/CTR?

Hi Silvia I am currently doing a research study on this Standard may you kindly assist.

Hi explain how realized and unrealized exchange gain or loss come up.if I have a foreign bank account balance and at the reporting date I translate the closing rate to functional currency will the difference be realized or unrealized

Realized. By the way – IFRS do not know the term “unrealized” FX differences. Once you are required to revalue at some reporting date, these differences are realized because you need to recognize them in your financial statements (through profit or loss).

Good job Silvia. Please how do I reference this your good work

Hi. Thank you for the great article. Question tho – Are there exceptions to the rule which says that exchange difference arising from the conversion of functional to presentation currency should be recorded in OCI?

Hi, In a hyperinflation environment, what will be the appropriate rate to value inventory that were imported . the rate at the date of the LC or the rate at the day of settlement?

Hello Sylvia. How to treat currency exchange effect when the upper edge of currency is frozen per contract? For example i have liability in foreign currency, but no more then 3. How to treat effect when exchange rate becomes 3.2? Could you provide some reference from standards? Also i think that it has to be ifrs 9 issue Thanks in advance

Thank you Silvia for your illustration, I have a question regarding functional currency , if we have a entity that has a functional currency in US Dollar but chose to present financial statements in EUR for stock market, in this case does it need to translate the financial statements using the rules that are applied when translating from foreign operations to presentation currency ? Thanks in advance

Hi Silvia. Thank you for your article. I would like to seek guidance on the settlement of foreign currency translation reserve. I encounter a problem where the company functional currency has cleared to zero balance, but there are still some balances in the forex translation reserve. What are the possible reasons causing the remaining balances in the reserve and how to deal with it? I look forward for your reply, thank you.

Hi Silvia, Thank you for your article. I have one specific question: I have been told like this “Under IAS -21 each company shall prepare separate financial statement on the basis of functional currency and parent shall follow presentation currency in Consolidated FS”

My Query is : I have one Company only. I don’t want to touch Consolidation Part. My Company is in Oman and our functional currency is OMR. But management intends to present the FS in USD as well for the shake of potential investors who prefer to read USD. Or, say for any other purpose. Can we apply IAS 21 Translation of FS from OMR to USD in Case of Standalone FS ?

Hi, How is the industry practice to convert the (1) Stated Capital (2) Retained Earnings Opening Balance ? in the absence of specific guideline in the standard. Would you be able to help me with that ?

I mean when the Financials are converted to another presentation currency ?

Hi Randika, please read this . S.

Dear Silvia,

First of all thank you for all of your articles. I love to read them.

I am writing my thesis and my teacher said that when there was any decrease in equity (like dividend, capital decrease) I should not have translated these transactions with historical rate (the exchange rate at the date of transaction) because the equity should have been decreased like inventory with FIFO or average cost. It is logical, but I have not found any example for that . Do you have maybe an article where it is clearly explained?

Thank you in advance!

Hi Eva, well, there is no guidance on translating the equity items and there are multiple ways of doing it. So perhaps your teacher should explain why she/he thinks that historical cost is the best option. Please try looking here, too. I explained more about translating equity items.

Dear Silvia, Thank you very much for your explanation in the video, it was very helpful, I have a query that I was hoping you could help me, is there a way to calculate the CTD other than by difference or is there a method where we can test if the CTD is determined correctly?

I look forward reading your opinion and response. Thanks in advance!

Hi Silvia, I have a question on this topic. What happens if an entity located in Kenya, with EUR functional currency and KES presentation currency, has bank balances as of the reporting date in the bank accounts in KES? I mean, does the company have to recognize the fx differences to convert first the KES to EUR and then again to translate the EUR to KES because KES is the presentation currency? it would look weird… is it necessary to do it? is it stated anywhere in the IFRS? Thanks in advance. Regards.

Hi, Would a derivative (OTC Forward) be a non-monetary items measured at fair value and therefore use a daily FX rate until it is settled? Would this result in a discrepancy between BS and P&L reporting value? Thanks.

Dear Silvia, Please let me clarify the following situation below: (using fictitious company’s name and numbers including exchange rate for a simple explanation purpose)

I prepare an annual budget of ABC company. It has H/O estimated sales JPY 1000 for Jan, JPY 2000 for Feb, JPY 3000 for March in profit and loss (PL). At the same time, I recognise JPY 1000 for Jan, JPY 3000 (1000+2000) for Feb, and JPY 6000 (1000+2000+3000) as account receivable in Balance Sheet (BS) . As ABC company’s functional & presentational currency is EUR so I translate into EUR. Using average rate let’s say 1EUR=100 YEN, ABC company’s budget sales in PL shows EUR 10 for Jan, EUR 20 for Feb and EUR 30 March. At the same time, using same late average rate as accounting team suggested, (not closing period rate), ABC company’s budget account receivable in BS shows EUR 10 for Jan, EUR 30 for Feb and EUR 60 for March. But I wonder if we use a basic knowledge, when translating items in BS such as account receivable, then we should use closing rate let’s say 1 EUR =110 JPY so it will be EUR 9 for Jan In BS and so on. If I use closing rate then sale figure and account receivable in the same month shows different figures and this is an inconsistency.(sale EUR 10 in PL and Account receivable EUR 9 in BS for Jan)

Could you please give me your advice which rate to use in PL and BS in this case? Thank you for your time in advance.

Hi Silvia, How is profit repatriation from a foreign branch / operation accounted for in the financial statements?

Hi Silvia, I would like to get some clarification on this : –

“For income and expenses and other comprehensive income items (including comparatives) using the exchange rates at the date of transactions.’

i) Let say Company A have a few sales transaction in foreign currency. So during year end closing, Company A would only have recalculate the receivable part ( monetary asset) using the latest foreign exchange rate. For sales revenue that was recognized early in the year using spot exchange rate, no action needed ?

ii) How should the forex gain / loss on receivables be recognized during year end close ? Seems not proper to recognized it directly to P&L as it is still unrealized forex gain / loss ?

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Annual Reporting

Knowledge base for IFRS Reporting

IAS 21 Presentation currency

Ias 21 the effects of changes in foreign exchange rates, use of a presentation currency other than the functional currency, translation to the presentation currency.

38 An entity may present its financial statements in any currency (or currencies). If the presentation currency differs from the entity’s functional currency , it translates its results and financial position into the presentation currency . For example, when a group contains individual entities with different functional currencies, the results and financial position of each entity are expressed in a common currency so that consolidated financial statements may be presented.

39 The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

• assets and liabilities for each statement of financial position presented (ie including comparatives) shall be translated at the closing rate at the date of that statement of financial position;
• income and expenses for each statement presenting profit or loss and other comprehensive income (ie including comparatives) shall be translated at exchange rates at the dates of the transactions; and
• all resulting exchange differences shall be recognised in other comprehensive income .

40 For practical reasons, a rate that approximates the exchange rates at the dates of the transactions, for example an average rate for the period, is often used to translate income and expense items. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate.

41 The exchange differences referred to in paragraph 39(c) result from:

• translating income and expenses at the exchange rates at the dates of the transactions and assets and liabilities at the closing rate .
• translating the opening net assets at a closing rate that differs from the previous closing rate .

These exchange differences are not recognised in profit or loss because the changes in exchange rates have little or no direct effect on the present and future cash flows from operations. The cumulative amount of the exchange differences is presented in a separate component of equity until disposal of the foreign operation .

When the exchange differences relate to a foreign operation that is consolidated but not wholly-owned, accumulated exchange differences arising from translation and attributable to non-controlling interests are allocated to, and recognised as part of, non-controlling interests in the consolidated statement of financial position.

42 The results and financial position of an entity whose functional currency is the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

• all amounts (ie assets, liabilities, equity items, income and expenses , including comparatives) shall be translated at the closing rate at the date of the most recent statement of financial position, except that
• when amounts are translated into the currency of a non-hyperinflationary economy, comparative amounts shall be those that were presented as current year amounts in the relevant prior year financial statements (ie not adjusted for subsequent changes in the price level or subsequent changes in exchange rates).

43 When an entity’s functional currency is the currency of a hyperinflationary economy, the entity shall restate its financial statements in accordance with IAS 29 before applying the translation method set out in paragraph 42, except for comparative amounts that are translated into a currency of a non-hyperinflationary economy (see paragraph 42(b)).

When the economy ceases to be hyperinflationary and the entity no longer restates its financial statements in accordance with IAS 29, it shall use as the historical costs for translation into the presentation currency the amounts restated to the price level at the date the entity ceased restating its financial statements.

Translation of a foreign operation

44 Paragraphs 45–47, in addition to paragraphs 38–43, apply when the results and financial position of a foreign operation are translated into a presentation currency so that the foreign operation can be included in the financial statements of the reporting entity by consolidation or the equity method .

45 The incorporation of the results and financial position of a foreign operation with those of the reporting entity follows normal consolidation procedures, such as the elimination of intragroup balances and intragroup transactions of a subsidiary (see IFRS 10 Consolidated Financial Statements ).

However, an intragroup monetary asset (or liability ), whether short-term or long-term, cannot be eliminated against the corresponding intragroup liability (or asset) without showing the results of currency fluctuations in the consolidated financial statements . This is because the monetary item represents a commitment to convert one currency into another and exposes the reporting entity to a gain or loss through currency fluctuations.

Accordingly, in the consolidated financial statements of the reporting entity , such an exchange difference is recognised in profit or loss or, if it arises from the circumstances described in paragraph 32, it is recognised in other comprehensive income and accumulated in a separate component of equity until the disposal of the foreign operation .

46 When the financial statements of a foreign operation are as of a date different from that of the reporting entity , the foreign operation often prepares additional statements as of the same date as the reporting entity ’s financial statements.

When this is not done, IFRS 10 allows the use of a different date provided that the difference is no greater than three months and adjustments are made for the effects of any significant transactions or other events that occur between the different dates.

In such a case, the assets and liabilities of the foreign operation are translated at the exchange rate at the end of the reporting period of the foreign operation .

Adjustments are made for significant changes in exchange rates up to the end of the reporting period of the reporting entity in accordance with IFRS 10. The same approach is used in applying the equity method to associates and joint ventures in accordance with IAS 28 (as amended in 2011).

47 Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation . Thus they shall be expressed in the functional currency of the foreign operation and shall be translated at the closing rate in accordance with paragraphs 39 and 42.

Disposal or partial disposal of a foreign operation

48 On the disposal of a foreign operation , the cumulative amount of the exchange differences relating to that foreign operation , recognised in other comprehensive income and accumulated in the separate component of equity , shall be reclassified from equity to profit or loss (as a reclassification adjustment) when the gain or loss on disposal is recognised (see IAS 1 Presentation of Financial Statements (as revised in 2007)).

48A In addition to the disposal of an entity’s entire interest in a foreign operation , the following partial disposals are accounted for as disposals:

• when the partial disposal involves the loss of control of a subsidiary that includes a foreign operation , regardless of whether the entity retains a non-controlling interest in its former subsidiary after the partial disposal; and
• when the retained interest after the partial disposal of an interest in a joint arrangement or a partial disposal of an interest in an associate that includes a foreign operation is a financial asset that includes a foreign operation .

48B On disposal of a subsidiary that includes a foreign operation , the cumulative amount of the exchange differences relating to that foreign operation that have been attributed to the non-controlling interests shall be derecognised, but shall not be reclassified to profit or loss .

48C On the partial disposal of a subsidiary that includes a foreign operation , the entity shall re- attribute the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income to the non-controlling interests in that foreign operation .

In any other partial disposal of a foreign operation the entity shall reclassify to profit or loss only the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income .

48D A partial disposal of an entity’s interest in a foreign operation is any reduction in an entity’s ownership interest in a foreign operation , except those reductions in paragraph 48A that are accounted for as disposals.

49 An entity may dispose or partially dispose of its interest in a foreign operation through sale, liquidation, repayment of share capital or abandonment of all, or part of, that entity. A write-down of the carrying amount of a foreign operation , either because of its own losses or because of an impairment recognised by the investor, does not constitute a partial disposal. Accordingly, no part of the foreign exchange gain or loss recognised in other comprehensive income is reclassified to profit or loss at the time of a write-down.

Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). Individual jurisdictions around the world may require or permit the use of (locally authorised and/or amended) IFRS Standards for all or some publicly listed companies.  The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. The specific status of IFRS Standards should be checked in each individual jurisdiction . Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction .

IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency

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IAS 21 The Effects of Changes in Foreign Exchange Rates

Learn the key accounting principles to be applied to foreign currency transactions and operations, including translating financial statements into a presentation currency.

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Factsheet Series: Key principles in reporting the effects of changes in Foreign Exchange Rates

In the current economy, it is common for companies to conduct their business activities or enter into business transactions in other foreign jurisdictions or even have foreign operations. IAS 21 The Effects of Changes in Foreign Exchange Rates addresses the financial reporting requirements specifically on how to account the effects arising from foreign currency transactions and foreign operations in the financial statements of an entity. The standard also provides the procedures on how entities translate their financial results and statement of financial position prepared in functional currency into a presentation currency. The complexity revolves around the issues of determining the exchange rate(s) to be used and how to report such effects in the financial statements.

Let’s now understand the key requirements of IAS 21.

The concept of functional currency and presentation currency

When we discuss foreign exchange rates – the ratios of exchange for two currencies, it relates to transactions in foreign currencies. For the purpose of applying the standard, foreign currency is defined as a currency other than the functional currency of the entity. This is where the concept of functional currency is introduced. What is functional currency? Is it the currency that the entity use to transact with other parties in a foreign jurisdiction? How does it differ from presentation currency? Let’s see these 2 concepts:

For some entities, their functional currency is the same as the presentation currency. But this may not be the case for others. IAS 21 allows or permits the presentation currency to be any currency and this is very much driven by the local laws and regulations on the preparation and submission of the financial statements.

Next question is then, how do we determine ‘the primary economic environment’ of the entity? The primary economic environment is the economic environment where it primarily generates and expends cash. IAS 21 requires entities to consider the following factors in determining their functional currency:

• that mainly influence sales prices for goods and services – often be the currency in which sales prices for its goods and services are denominated and settled.
• of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.
• the currency that mainly influences labour, material and other costs of providing goods or services – often be the currency in which such costs are denominated and settled.

These factors are the primary factors or indicators in determining the functional currency.

IAS 21 further states that the factors below may also provide evidence of the entity’s functional currency:

• The currency in which funds from financing activities are generated.
• The currency in which receipts from operating activities are usually retained.

In determining the functional currency of a foreign operation and whether its functional currency is the same as that of the reporting entity, the additional factors below are to be considered:

• whether the activities of the foreign operation are carried out as an extension of the reporting entity rather than being carried out with a significant degree of autonomy.
• whether transactions with the reporting entity are a high or a low proportion of the foreign operation’s activities.
• whether cash flows from the activities of the foreign operation directly affect the cash flows of the reporting entity and are readily available for remittance to it.
• whether cash flows from the activities of the foreign operation are sufficient to service existing and normally expected debt obligation without funds being made available by the reporting entity

It is possible for entities to get mixed indicators and hence, the functional currency is not clear. What should an entity do in this situation? In such a situation, IAS 21 requires management to use its judgement to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. For this, the standard further states that management must give priority to the primary indicators before considering the additional 6 factors above as they are intended to provide additional supporting evidence to determine an entity’s functional currency. So, once the functional currency is determined, it is not expected to change unless there is a change in those underlying transactions, events and conditions.

Take note that if the functional currency is the currency of a hyperinflationary economy, the entity’s financial statements must be restated in accordance with IAS 29 Financial Reporting in Hyperinflationary Economies . We have covered the discussion on the procedures in 10 key takeaways on IAS 29 Financial Reporting in Hyperinflationary Economies.

What is a foreign currency translation?

Each entity is required to determine its functional currency as explain in the earlier section of this article. After determining the functional currency, entities will then need to translate foreign currency items into their functional currencies and report the effect of such translations. In addition to translating foreign currency items into its functional currency, some entities may also need to report their financial results and financial position in a presentation currency that is different from its functional currency. For instance where an entity that has USD functional currency needs to report to its parent company which uses Ringgit Malaysia (“RM”) presentation currency.

IAS 21 governs the translation requirements for financial reporting purpose in both situations. Let’s now look at the key requirements for both.

Reporting foreign currency transactions in the functional currency

A foreign currency transaction is a transaction that is denominated or requires settlement in foreign currency. On its initial recognition, IAS 21 requires such transaction to be recorded at the spot exchange rate at the date of the transaction – i.e., the date the transaction first qualifies for recognition in accordance with IFRSs. For this purpose, entities may use the average rate for a week or a month for that period for practicality, unless if the exchange rates fluctuate significantly.

After its initial recognition, entities will need to perform the following at the end of each reporting period:

• Translate foreign currency monetary items using the closing rate (spot exchange rate at the end of the reporting period);
• Those that are measured in terms of historical cost should be translated using the exchange rate at the date of the transaction.
• Those that are measured at fair value should be translated using the exchange rates at the date when the fair value was measured.

This is where the concept of monetary and non-monetary items are then introduced.

Examples of monetary items are lease liabilities, receivables, provisions that are to be settled in cash and others while examples of non-monetary items are amounts prepaid for goods and services, goodwill, inventories, intangible assets and others.

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from the translation on initial recognition during the period or in the previous financial statements shall be recognised in profit or loss in the period in which they arise. Exception however applies for a monetary item that forms part of the entity’s net investment in a foreign operation. This will be explained in the later part of this article.

Take note, however, when the transaction for a monetary item is settled in a subsequent reporting period from the period it occurred, the exchange difference recognised in profit or loss is determined by the change in exchange rates during each period. Also, any exchange component arising from a gain or loss on a non-monetary item follows where such gain or loss on the item is recognised. This means, when a gain or loss on a non-monetary item is recognised in profit or loss, any exchange components of that gain is also recognised in profit or loss. The same applies if the gain or loss is recognised in other comprehensive income.

Translation of functional currency into a presentation currency

IAS 21 stipulates the following procedures for entities to follow when translating their results and financial position in functional currency (only for currency in a non-hyperinflationary economy) to a different presentation currency:

• Assets and liabilities for each statement of financial position presented, including comparatives, are translated at the closing rate at the date of that statement of financial position;
• Income and expenses, including comparatives, are translated at exchange rates at the date of the transactions; and
• All resulting exchange differences are recognised in other comprehensive income.

For practical reason, IAS 21 also allows entities to use a rate that approximates the exchange rates at the dates of the transactions such as an average exchange rate for the period, to translate income and expense items, unless the exchange rates fluctuate significantly.

Foreign Operation

Foreign operation is an entity that is a subsidiary, associates, joint arrangement or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than those of the reporting entity. A reporting entity may have a monetary item that is receivable from or payable to a foreign operation such as long-term loans or receivables. Where the settlement of the monetary item is neither planned nor likely to occur in the foreseeable future, it is in substance, a part of the entity’s net investments in that foreign operation. Net investment in a foreign operation is the reporting entity’s interest in the net assets of that operation.

Exchange differences on a monetary item that forms part of the entity’s net investment in a foreign operation are recognised in profit or loss in the separate financial statements of the entity or the individual financial statements of the foreign operation. However, in the consolidated financial statements, the exchange differences are recognised initially in other comprehensive income and reclassified to profit or loss on disposal of the net investment.

For this, on disposal of a foreign operation, the cumulative amount of the exchange differences relating to the foreign operation accumulated in the separate component of equity (commonly labelled as foreign currency reserves in the financial statements) are reclassified to profit or loss when the gain or loss on disposal is recognised.

On the partial disposal of a subsidiary that includes a foreign operation, an entity needs to re-attribute the proportionate share of the cumulative amount of the exchange differences to the non-controlling interests in that foreign operation. In any other partial disposal of a foreign operation, an entity will need to reclassify to profit or loss only the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income.

The above summarises the key financial reporting requirements in IAS 21. We hope readers now understand the financial accounting requirements on the effects of changes in foreign currency rates.

Stay tuned for our upcoming articles by following us on social media. Meantime, enjoy other articles in  Financial Accounting  section or ask your queries by  Joining us on Community . It is free and open to join for all, now. 

Editorial Team @THEACCSENSE More by THEACCSENSE

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• Hyperinflationary presentation currency

Proposed change for companies with a non-hyperinflationary functional currency

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Global IFRS Institute  |  Financial instruments

What is the proposed change?

How would the proposed change affect the financial statements?

What’s next? Have your say by 22 November 2024

Mahesh Narayanasami

Partner KPMG US, DPP New York

There is currently no specific guidance for translating a company’s financial statements from a non-hyperinflationary functional currency into a hyperinflationary presentation currency. This scenario arises when a company presents its financial statements in a hyperinflationary currency but has:

• a non-hyperinflationary functional currency; or
• a foreign operation with a non-hyperinflationary functional currency.

To reduce diversity in practice and improve the usefulness of information for investors, the International Accounting Standards Board (IASB) proposes to amend IAS 21 The Effects of Changes in Foreign Exchange Rates to clarify that a company uses the closing rate when translating all the financial statement amounts (including comparatives) into its presentation currency in these circumstances.

The IASB proposals offer a consistent and straightforward translation method and would resolve issues for some companies with an ever-growing foreign currency translation reserve.

Mahesh Narayanasami KPMG global IFRS financial instruments leader

A company with a non-hyperinflationary functional currency but a hyperinflationary presentation currency would translate all the financial statement amounts (including comparatives) using the closing rate at the latest reporting date.

The company would also be required to disclose that it has done this and when applicable, summarise financial information about its foreign operations affected by the proposed translation method. The proposals would be applied retrospectively, and the effective date would be determined at a later stage. Earlier application would be permitted.

Under the current translation requirements, net assets or net liabilities are translated using the closing rate at the reporting date, reflecting the decline in economic value of the hyperinflationary presentation currency. In contrast, income and expenses and other components of equity are translated using historical exchange rates. The resulting exchange differences are recognised in the foreign currency translation reserve (in other comprehensive income), which could grow significantly in a hyperinflationary economic environment.

Under the proposals, a company may no longer see its foreign currency translation reserve growing more than other components of equity. This is because the company would use the same closing rate to translate all amounts, including components of equity, into its presentation currency.

The exposure draft is open for comment until 22 November 2024. We encourage stakeholders to read the proposals and provide their comments to the IASB.

Speak to your usual KPMG contact to find out more about the proposals and visit kpmg.com/ifrs to keep up to date with the latest news and discussion.

© 2024 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.

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What companies need to consider for classification of liabilities

International Director, Global IFRS Services, Ernst & Young Global Limited

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IAS 1 amendments to classification of liabilities with covenants as current or non-current are effective from 1 January 2024.

• The amendments to IAS 1 may lead to changes in the classification of certain liabilities as current or non-current. 
• The amendments clarify that the right to defer settlement of a liability must exist for at least 12 months after the reporting period.
• Companies may need to provide additional disclosures for liabilities classified as non-current and subject to covenants within 12 months of the reporting date. 

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T he classification of liabilities with covenants as current or non-current could significantly affect a company’s presentation of its financial position and, hence, the company’s financial metrics. In response, the International Accounting Standards Board issued amendments to IAS 1 Presentation to Financial Statements in 2020 and 2022, with the objective of improving the information a company provides about liabilities with covenants, in addition to addressing stakeholders’ concerns about how a company classifies liabilities with covenants as current or non-current. The amendments will become effective for annual reporting periods beginning on or after 1 January 2024 with early application permitted.

Requirements on classification of liabilities with covenants

According to the existing requirements for classifying a liability as current or non-current, a liability is current if, among others, the company does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period.

With the introduction of the two amendments to IAS 1 in 2024, for a liability to be classified as non-current, a company must have the right to defer settlement of the liability for at least twelve months after the reporting period. The right must have substance and exist at the end of the reporting period and the classification of the liability must be unaffected by the likelihood that the company will exercise that right. If a company is required to comply with covenants on or before the end of the reporting period, these covenants will affect whether such a right exists at the end of the reporting period. 

Covenants that a company is required to comply with on or before the end of the reporting period will affect whether the right to defer settlement exists at the end of the reporting period.

This is the case even if compliance with the covenant is assessed only after the reporting period. One example is a covenant based on the company’s financial position at the end of the reporting period, but the assessment for compliance is performed only after the reporting period.

A company that has a right to defer settlement at the end of the reporting period is not affected by a covenant if it is required to comply with the covenant only after the end of the reporting period.

The amendments go on to explain that a covenant does not affect whether the right to defer settlement exists at the end of the reporting period if a company is required to comply with the covenant only after the end of the reporting period. This will be the case, when, for example, a covenant is based on the company’s financial position six months after the end of the reporting period. 

Additional disclosure requirements

There are additional disclosure requirements if a company classifies liabilities arising from loan arrangements as non-current while its right to defer settlement of those liabilities is subject to its compliance with covenants within twelve months after the reporting date. In such a case, the company needs to disclose information in the notes to the financial statements so that users understand the risk that the liabilities could become repayable within twelve months after the reporting date. The disclosure requirements include providing information about the covenants, such as the nature of the covenants, when the company is required to comply with them and the carrying amount of related liabilities. Companies are also required to disclose facts and circumstances, if any, that indicate they may have difficulty complying with the covenants, such as any action the company has taken during or after the reporting period to avoid or mitigate a potential breach.

If a company expects that it may have difficulty complying with the covenants, the company must disclose this, such as any action it has taken during or after the reporting period to avoid or mitigate a potential breach.

Such facts and circumstances could also include the fact that the company would not have complied with the covenants if it were to be assessed for compliance based on its circumstances at the end of the reporting period.

Classification of liabilities when there is a breach in covenant

The existing requirements for the liability classification when there is a breach in covenant remain unchanged. When a company breaches a covenant of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand, it classifies the liability as current. Companies often negotiate with the lender not to demand payment as a consequence of the breach. To classify the liability as non-current at the end of the reporting period, such a waiver needs to be obtained by the reporting date so that the liability is not payable within twelve months from the end of the reporting period. If such a waiver is only obtained after the reporting date, but before the authorization of the financial statements, the liability is still presented as current.

Conclusion and action steps

Executives and board members will need to carefully consider the impact of the amendments on the presentation and disclosure of the company’s financial statements going forward. In light of the prevailing economic environment with high interest rates and stagnant growth, companies’ financial performance may deteriorate and, thus, they may need to renegotiate covenant terms with lenders in a timely manner to avoid potential breaches which may affect the classification of the related liabilities once these amendments become effective in 2024.

The amendments to IAS 1, effective on 1 January 2024, clarify the criteria for classifying liabilities with covenants as current or non-current. The amendments will also require companies to provide additional information to stakeholders. The changes introduced by the amendments require companies to consider the potential impact for their loan arrangements and the presentation of their financial statements.

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Johnson & johnson to acquire v-wave.

V-Wave’s Novel and Minimally Invasive Interatrial Shunt is Designed to Treat Heart Failure and Addresses Significant Treatment Gap

Device Further Strengthens Johnson & Johnson MedTech’s Position in Cardiovascular

NEW BRUNSWICK, N.J.--(BUSINESS WIRE)-- Johnson & Johnson 1 (NYSE: JNJ) today announced that it has entered into a definitive agreement to acquire V-Wave Ltd., a privately-held company focused on developing innovative treatment options for patients with heart failure. Under the terms of the agreement, Johnson & Johnson will acquire V-Wave for an upfront payment of $600 million, subject to customary adjustments, with the potential for additional regulatory and commercial milestone payments up to approximately $1.1 billion. V-Wave will join Johnson & Johnson as part of Johnson & Johnson MedTech.

The planned acquisition of V-Wave will extend Johnson & Johnson MedTech’s position as an innovation leader in addressing cardiovascular disease. It will further accelerate its shift into high-growth and high-opportunity markets and will deepen its relationships with structural interventional cardiologists and heart failure specialists.

Heart failure is a global health burden associated with impaired quality of life, frequent hospitalizations, increasing health-care costs, and high rates of premature death. 2 V-Wave’s cardiovascular implant technology specifically targets heart failure with reduced ejection fraction (HFrEF). In HFrEF, a patient’s heart muscle has insufficient ability to pump blood containing oxygen and nutrients to the body. V-Wave’s Ventura® Interatrial Shunt (IAS) is a novel implantable device designed to decrease elevated left atrial pressure seen in congestive heart failure by creating a shunt between the left and right atrium, thereby reducing cardiovascular events and heart failure hospitalizations. More specifically, the device:

• Is placed in the heart through a minimally invasive catheter-based procedure and has the potential to fill a significant treatment gap between guideline directed medical therapies (GDMT) as a first line therapy and highly invasive cardiac replacement therapies, including left ventricular assist devices (LVADs) and heart transplantation.
• Received FDA Breakthrough Device Designation in 2019 and CE mark in 2020 and has the potential to be the first device of its kind to market.
• Addresses an unmet need for approximately 800,000 patients who experience HFrEF in the U.S every year, representing a market opportunity for significant sustainable growth and meaningful impact. 3

Tim Schmid, Executive Vice President and Worldwide Chairman of Johnson & Johnson MedTech, said, “We are excited to welcome V-Wave to Johnson & Johnson MedTech and to take another meaningful step toward transforming the standard of care for cardiovascular disease. We recognize the importance of identifying more diverse and effective treatments for heart failure, and our recent track record demonstrates our focus on accelerating our impact on the most urgent and pressing unmet needs. We know V-Wave well, with our relationship dating back to our original investment in the company in 2016, and we have a deep understanding of the technology and science, as well as the company’s commitment to patients. We look forward to working with the V-Wave team at this pivotal stage of its evolution to bring the Ventura® Interatrial Shunt technology to patients.”

“At V-Wave, we are dedicated to achieving our vision to help patients around the world – and we know Johnson & Johnson MedTech shares this mission,” said Dr. Neal Eigler, Chief Executive Officer of V-Wave. “We are confident that Johnson & Johnson MedTech is well-positioned to ensure V-Wave’s breakthrough ideas and technology reach patients in need as quickly and effectively as possible. I couldn’t be prouder of the V-Wave team, and the commitment it has taken to achieve this milestone. We look forward to continuing to build a world where cardiovascular disease is prevented, treated, and cured.”

Transaction Details, Path to Completion, and Financial Impact

Under the terms of the agreement, Johnson & Johnson will acquire V-Wave for an upfront payment of $600 million, subject to customary adjustments, with the potential for additional regulatory and commercial milestone payments up to approximately $1.1 billion. The transaction is expected to close before the end of 2024, subject to the receipt of applicable regulatory approvals and other customary closing conditions.

In accordance with U.S. GAAP, the transaction will be accounted for as an asset acquisition, resulting in a non-tax deductible in-process research and development charge of approximately $600 million in the period the transaction closes. Johnson & Johnson expects the transaction to dilute adjusted earnings per share (EPS) by approximately $0.24 in 2024 and approximately $0.06 in 2025. Johnson & Johnson will provide an update to its full-year financial outlook when it reports third quarter 2024 results on October 15, 2024.

Following the completion of the transaction, V-Wave will be part of Johnson & Johnson MedTech, and financials will be reported within Johnson & Johnson MedTech’s Cardiovascular portfolio. Michael Bodner, Group President, Heart Recovery & Intravascular Lithotripsy, will assume responsibility for the V-Wave team upon close.

About Johnson & Johnson

At Johnson & Johnson, we believe health is everything. Our strength in healthcare innovation empowers us to build a world where complex diseases are prevented, treated, and cured, where treatments are smarter and less invasive, and solutions are personal. Through our expertise in Innovative Medicine and MedTech, we are uniquely positioned to innovate across the full spectrum of healthcare solutions today to deliver the breakthroughs of tomorrow, and profoundly impact health for humanity. Learn more at https://www.jnj.com/ .

About V-Wave

V-Wave is a privately held medical device company that was established in 2009 and is focused on developing innovative treatment options for people living with heart failure and cardiovascular disease. The company was built on a foundation of science, engineering, and medicine and has decades of experience in these fields. The company has offices in Israel and the U.S. For more information, please visit www.vwavemedical.com or V-Wave on LinkedIn.

Cautionary Statement Regarding Forward-Looking Statements

This press release contains forward-looking statements regarding the acquisition of V-Wave. The reader is cautioned not to rely on these forward-looking statements. These statements are based on current expectations of future events. If underlying assumptions prove inaccurate or known or unknown risks or uncertainties materialize, actual results could vary materially from the expectations and projections of Johnson & Johnson. Risks and uncertainties include, but are not limited to: the potential that the expected benefits and opportunities of the acquisition may not be realized or may take longer to realize than expected; challenges inherent in product research and development, including uncertainty of clinical success and obtaining regulatory approvals; uncertainty of commercial success for new products; manufacturing difficulties and delays; product efficacy or safety concerns resulting in product recalls or regulatory action; economic conditions, including currency exchange and interest rate fluctuations; the risks associated with global operations; competition, including technological advances, new products and patents attained by competitors; challenges to patents; changes to applicable laws and regulations, including tax laws and global health care reforms; adverse litigation or government action; changes in behavior and spending patterns or financial distress of purchasers of health care services and products; and trends toward health care cost containment. In addition, there will be risks and uncertainties related to the ability of the Johnson & Johnson family of companies to successfully integrate the products and employees/operations and clinical work of V-Wave, as well as the ability to ensure continued performance or market growth of V-Wave’s products. A further list and descriptions of these risks, uncertainties and other factors can be found in Johnson & Johnson’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, including in the sections captioned “Cautionary Note Regarding Forward-Looking Statements” and “Item 1A. Risk Factors,” and in Johnson & Johnson’s subsequent Quarterly Reports on Form 10-Q, and other filings by Johnson & Johnson with the SEC. Copies of these filings are available online at www.sec.gov , at www.jnj.com or on request from Johnson & Johnson. Johnson & Johnson does not undertake to update any forward-looking statement as a result of new information or future events or developments, except as required by law.

Non-GAAP Financial Measures

This press release includes Adjusted EPS, which represents a non-GAAP financial measure. The Company believes that providing this non-GAAP financial measure enhances the Company’s and investors’ understanding of our financial performance. Non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP. The Company’s definitions of its non-GAAP financial measures may not be comparable to similarly titled measures reported by other companies. The most directly comparable GAAP measure to Adjusted EPS is earnings per share, or EPS. The Company is not providing a reconciliation of Adjusted EPS to EPS, however, because Johnson & Johnson does not provide GAAP financial measures on a forward-looking basis as the Company is unable to predict with reasonable certainty the ultimate outcome of adjusted items, such as legal proceedings, unusual gains and losses, acquisition-related expenses, and purchase accounting fair value adjustments without unreasonable effort. These items are uncertain, depend on various factors, and could be material to Johnson & Johnson's results computed in accordance with GAAP.

1 Legal entity, Biosense Webster (Israel) Ltd.

2 Khan, M.S., Shahid, I., Bennis, A. et al. Global epidemiology of heart failure. Nat Rev Cardiol (2024). https://doi.org/10.1038/s41569-024-01046-6

3 Market size derived from internal market analysis and analyst estimates

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Illustrative Examples

These examples accompany, but are not part of, IAS 21. The text of the Basis for Conclusions on IAS 21 is contained in Part C of this edition. They illustrate aspects of IAS 21 but are not intended to provide interpretative guidance.

Introduction

Exchangeability

illustrate how an entity assesses whether a currency is exchangeable (Step I as set out in , and ). illustrate how an entity estimates the spot exchange rate when a currency is not exchangeable (Step II as set out in and ). In all five examples: (a) Entity X’s functional and presentation currency is PC. Entity X prepares consolidated financial statements. (b) Entity X has a subsidiary, Entity Y, that is a foreign operation. Entity Y’s functional currency is LC, the currency of the jurisdiction in which Entity Y operates. The relevant authority administers the exchangeability of LC for other currencies. Step I: Assessing whether a currency is exchangeable ( paragraphs 8 , 8A⁠–⁠8B and A2⁠–⁠A10 ) Example 1—time frame. , Entity X considers LC to be exchangeable into PC if Entity X is able to obtain PC within N days of requesting it. Example 2—Markets or exchange mechanisms Example 3—purpose of obtaining the other currency, step ii: estimating the spot exchange rate when a currency is not exchangeable ( paragraphs 19a and a11⁠–⁠a16 ), example 4—using an observable exchange rate for another purpose ( paragraphs a11⁠–⁠a14 ), fact pattern, estimating the spot exchange rate. . , Entity X considers whether it might use the observable LC:PC exchange rate for the purpose of realising a net investment in an entity. To do so, it assesses whether that observable exchange rate meets the objective in and considers: (a) —only one observable exchange rate exists between LC and PC. (b) Entity X is able to obtain PC for any transaction other than a transaction that would result in the realisation of its net investment in Entity Y. (c) the observable exchange rate is free-floating. (d) the observable exchange rate is updated several times a day. . Therefore, Entity X may use that observable exchange rate as the estimated spot exchange rate when it translates the results and financial position of Entity Y. Example 5—Using the first subsequent exchange rate ( paragraphs A11⁠–⁠A12 and A15⁠–⁠A16 ) ]. The relevant authority in Entity Y’s jurisdiction prevents entities from obtaining PC for the purpose of realising a net investment in an entity operating in that jurisdiction. However, from 30 April 20X2, the authority allows entities to obtain PC for that purpose. and , Entity X considers whether it might use the first exchange rate at which it is able to obtain the other currency after exchangeability of the currency is restored (first subsequent exchange rate) [Refer: ]. To do so, it assesses whether that first subsequent exchange rate meets the objective in and considers: (a) —exchangeability is restored four months after the measurement date. (b) —the jurisdiction in which Entity Y operates is subject to hyperinflation. for the purpose of realising Entity X’s net investment in Entity Y. However, Entity X could adjust that rate, as necessary, to estimate a rate that meets the objective in paragraph 19A for realising its net investment in Entity Y. 265 IMAGES How to make a change in functional currency IAS 21 The Effects of Changes in Foreign Exchange Rates PPT IAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES PPT PPT COMMENTS IAS 21 IAS 21 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 ... PDF The Reporting Currency—Measurement and Presentation of ... International Accounting Standard 21 The Effects of Changes in Foreign Exchange Rates (IAS 21) is set out in paragraphs 1-62 and the Appendix. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 21 should be read in the context of its objective and the Basis for Conclusions ... International Accounting Standard 21The Effects of Changes in ... has a presentation currency that is not the currency of a hyperinflationary economy as defined in IAS 29; b. ... Description of presentation currency Disclosure: Text: IAS 1.51 d Disclosure: 110000, 842000: Description of reason why presentation currency is different from functional currency Disclosure: IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 21 permits an entity to present its financial statements in any currency (or currencies). The principal issues are which exchange rate (s) to use and how to report the effects of changes in exchange rates in the financial statements. An entity's functional currency is the currency of the primary economic environment in which the entity ... Changes in Foreign Exchange Rates (IAS 21) When an entity within a group uses a different presentation currency from that of the consolidated financial statements, translations are performed using the following procedures as per IAS 21.39: Assets, including goodwill and fair value adjustments (IAS 21.47), and liabilities, are translated at the closing rate at the reporting date. IAS 21 the effects of changes in foreign exchange rates The previous version of IAS 21 used a concept of reporting currency. In revising IAS 21 in 2004, the IASB's main aim was to provide additional guidance on the translation method and determining the functional and presentation currencies. The functional currency should be determined by looking at several factors. PDF Technical Summary IAS 21 The Effects of Changes in Foreign Exchange Rates. An entity may carry on foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. In addition, an entity may present its financial statements in a foreign currency. The objective of this Standard is to prescribe how to include foreign ... Deloitte e-learning This Deloitte e-learning module provides training in the background, scope and principles under IAS 21 'The Effects of Changes in Foreign Exchange Rates', and the application of this Standard. The module also incorporates IFRIC 22 Foreign Currency Transactions and Advance Consideration issued in December 2016. Topics covered include determining functional currency, the presentation currency ... IAS 21 The Effects of Changes in Foreign Exchange Rates Library and Information Service. Expert help with research and access to trustworthy, professional sources. +44 (0)20 7920 8620. [email protected]. IAS 21 prescribes how to include foreign currency transactions and foreign operations in the financial statements of an entity, and how to translate financial statements into a presentation currency. IAS 21 The Effects of Changes in Foreign Exchange Rates Functional vs. Presentation Currency. IAS 21 defines both functional and presentation currency and it's crucial to understand the difference: Functional currency is the currency of the primary economic environment in which the entity operates. It is the own entity's currency and all other currencies are "foreign currencies". IAS 21 Presentation Currency IAS 21 Presentation currency. Use of a presentation currency other than the functional currency. Translation to the presentation currency. 38 An entity may present its financial statements in any currency (or currencies). If the presentation currency differs from the entity's functional currency, it translates its results and financial ... The Effects of Changes in Foreign Exchange Rates IAS 21 The Effects of Changes in Foreign Exchange Rates provides guidance to determine the functional currency of an entity under International Financial Reporting Standards (IFRS). The standard also prescribes how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements from the entity's functional ... PDF IAS 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES riods commencing on or after 1 January 2005.OBJECTIVEThe objective of IAS 21 is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to tran. into a presentation currency.SCOPEIAS 21 applies in: accounting for transactions and balances in foreign currencies except for ... IAS 21 Overview. 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 ... IAS 21 The Effects of Changes in Foreign Exchange Rates IAS 21 The Effects of Changes in Foreign Exchange Rates 2h 30m Learn the key accounting principles to be applied to foreign currency transactions and operations, including translating financial statements into a presentation currency. PDF IAS 21 The Effects of Changes in Foreign Exchange Rates into a presentation currency. IAS 21 does not. apply to: • hedge accounting for foreign currency items, including the hedging of a net investment in a foreign operation. • presentation in an entity's statement of cash flows arising from transactions in a foreign currency, or to translation of cash flows of a foreign operation. Key principles in reporting the effects of changes in ... For some entities, their functional currency is the same as the presentation currency. But this may not be the case for others. IAS 21 allows or permits the presentation currency to be any currency and this is very much driven by the local laws and regulations on the preparation and submission of the financial statements. IAS 1 the presentation currency (as defined by IAS 21 The Effects of Changes in Foreign Exchange Rates) the level of rounding used (e.g. thousands, millions). Reporting period. There is a presumption that financial statements will be prepared at least annually. If the annual reporting period changes and financial statements are prepared for a ... Hyperinflationary presentation currency A company with a non-hyperinflationary functional currency but a hyperinflationary presentation currency would translate all the financial statement amounts (including comparatives) using the closing rate at the latest reporting date. The company would also be required to disclose that it has done this and when applicable, summarise financial ... PDF International Accounting Standard 21 The Effects of Changes in ... Presentation currency is the currency in which the financial statements are presented. Spot exchange rate is the exchange rate for immediate delivery. ... are restated in accordance with IAS 29 Financial Reporting in Hyperinflationary Economies. An entity cannot avoid restatement in accordance with IAS 29 by, for example, adopting as its ... PDF Economies Financial Reporting in Hyperinflationary IAS 29 presenting comparative amounts in a different presentation currency, paragraphs 42(b) and 43 of IAS 21 . The Effects of Changes in Foreign Exchange Rates. apply. The gain or loss on the net monetary position shall be included in profit or loss and separately disclosed. The restatement of financial statements in accordance with this Standard IAS 1 amendments are effective from 1 January 2024 T he classification of liabilities with covenants as current or non-current could significantly affect a company's presentation of its financial position and, hence, the company's financial metrics. In response, the International Accounting Standards Board issued amendments to IAS 1 Presentation to Financial Statements in 2020 and 2022, with the objective of improving the information a ... Johnson & Johnson to Acquire V-Wave V-Wave's Novel and Minimally Invasive Interatrial Shunt is Designed to Treat Heart Failure and Addresses Significant Treatment Gap Device Further Strengthens Johnson Johnson MedTech's Position in Cardiovascular Johnson Johnson 1 (NYSE: JNJ) today announced that it has entered into a definitive agreement to acquire V-Wave Ltd., a privately-held company focused on developing innovative ... Illustrative Examples These examples accompany, but are not part of, IAS 21. The text of the Basis for Conclusions on IAS 21 is contained in Part C of this edition. They illustrate aspects of IAS 21 but are not intended to provide interpretative guidance. ... Entity X's functional and presentation currency is PC. Entity X prepares consolidated financial statements. Financial reporting: IASB proposes amendments to IFRS 19 IAS 21 — The Effects of Changes in Foreign Exchange Rates; IFRS 7 — Financial Instruments: Disclosures; ... IASB proposes amendments to IAS 21 on translations to a hyperinflationary presentation currency 26 Jul 2024. iGAAP in Focus — Financial reporting: IASB issues amendments to IFRS Accounting Standards as part of its annual ... assignment essay homework paper phd report resume review speech thesis