IFRS 21

Definition

IFRS 21 is the International Financial Reporting Standard that outlines the accounting treatment for foreign currency transactions and the translation of foreign currency financial statements. This standard addresses how to account for changes in exchange rates and the impact these fluctuations have on financial reporting, ensuring that entities recognize foreign currency transactions appropriately, remeasure balances, and adjust their financial statements accurately to reflect currency translations.

5 Must Know Facts For Your Next Test

1. Under IFRS 21, foreign currency transactions must be recorded at the exchange rate prevailing at the date of the transaction.
2. Entities are required to remeasure monetary items at each reporting date using the closing exchange rate, leading to potential gains or losses due to fluctuations.
3. Translation adjustments arise when converting financial statements of foreign operations and must be recognized in other comprehensive income until disposal.
4. The standard emphasizes that an entity's functional currency must be identified as it impacts how foreign currency transactions are reported.
5. IFRS 21 requires disclosures related to foreign currency risks and how they are managed, providing transparency to users of financial statements.

Review Questions

• How does IFRS 21 guide the recognition and measurement of foreign currency transactions?
  • IFRS 21 requires that foreign currency transactions be recognized at the exchange rate in effect on the date of the transaction. For monetary items, entities must remeasure these balances at each reporting date using the closing exchange rate, which may result in recognizing exchange gains or losses in profit or loss. This guidance ensures that financial statements accurately reflect the impact of fluctuating currencies on an entity's financial position.
• Discuss how translation adjustments are handled under IFRS 21 and their impact on financial statements.
  • Under IFRS 21, translation adjustments occur when converting the financial statements of foreign subsidiaries into the parent company's reporting currency. These adjustments are recognized in other comprehensive income until there is a disposal of the foreign operation. This treatment helps reflect changes in exchange rates while preserving the integrity of profit or loss calculations by deferring these impacts until a sale occurs.
• Evaluate the importance of identifying an entity's functional currency under IFRS 21 and its implications for financial reporting.
  • Identifying an entity's functional currency is crucial under IFRS 21 because it determines how transactions are recorded and reported. The functional currency reflects the primary economic environment in which an entity operates, influencing how exchange rate fluctuations affect its financial statements. A proper identification ensures that all foreign currency transactions are accounted for consistently and provides clarity on financial performance and risk exposure related to currency fluctuations.

Related terms

Exchange Rate: The price of one currency in terms of another, which determines how much of one currency is needed to purchase a unit of another currency.

Functional Currency: The currency of the primary economic environment in which an entity operates, used for recording transactions and preparing financial statements.

Currency Translation: The process of converting financial statements from one currency to another, particularly when consolidating the accounts of foreign subsidiaries into the parent company's financial statements.