In plain words
Many companies buy, sell or borrow in foreign currencies, or report in a currency different from the one they operate in. The first step is identifying the functional currency, the currency of the main economic environment. Transactions are recorded at the spot rate; monetary items are retranslated at the closing rate, with differences in profit or loss. Translating into a different presentation currency puts differences in other comprehensive income.
Why it matters
If the entity transacts, borrows, or holds balances in a currency other than its functional currency, or presents its statements in a different currency, IAS 21 governs how to determine the functional currency, translate transactions and balances, and where exchange differences are recognised.
Diagnostic questions
In which currency are most sales priced and settled? In which currency are salaries, financing and main costs paid? Do you present the statements in a currency different from the one you mainly operate in?
Recognition
Determine the functional currency first (the currency of the primary economic environment). Record foreign-currency transactions at the spot rate on the transaction date.
Measurement
At each reporting date, retranslate monetary items at the closing rate; non-monetary items measured at historical cost stay at the original rate. Exchange differences on monetary items generally go to profit or loss.
Presentation & disclosure
Disclose the amount of exchange differences recognised in profit or loss, the presentation currency, and, if it differs from the functional currency, the reason for using it.
Common mistakes
- Confusing presentation currency with functional currency
- using an average or budget rate instead of the actual spot rate
- retranslating non-monetary items carried at historical cost.
Simple example
A company operating mainly in USD (its functional currency) presents its statements in EGP. Each period it translates results and balances into EGP; the resulting translation difference is reported in other comprehensive income.
Professional judgment
Determining the functional currency can require judgement when sales, costs and financing are in different currencies.
Source basis
IAS 21 · The Effects of Changes in Foreign Exchange Rates
Paragraph references
Verified against the official standard texts used in the IFRS Expert skill.
Related issues
Educational and navigation content only. Not professional advice. Does not reproduce official IFRS/IAS text. Consult the authoritative standards and qualified professionals; professional judgment may still be required.