The International Accounting Standards Board (IASB) has responded to the challenging economic conditions in certain regions by issuing a significant amendment to IAS 21 (The Effects of Changes in Foreign Exchange Rates). The new requirements provide clear guidance for situations in which an entity needs to translate transactions or financial statements involving a foreign currency that cannot be exchanged for another currency at a normal market exchange rate over an extended period.
Key changes and new requirements
- Definition of exchangeability: The amended standard clearly defines when a currency is considered exchangeable. The key criterion is whether the currency is available in sufficient amounts for a specific purpose and can be obtained with reasonable administrative effort.
- Estimating the spot exchange rate: If a currency is not exchangeable, an entity may no longer use the official exchange rate, which is often administratively controlled. Instead, it must estimate the spot exchange rate. The estimate should faithfully reflect the economic conditions and represent the rate at which an orderly exchange transaction between market participants would occur at the measurement date.
- Enhanced disclosures: Entities are required to provide detailed disclosures in the notes regarding the nature and effects of the lack of exchangeability, the process used to estimate the exchange rate, and the related financial risks.
Practical implications
The amendment primarily affects multinational groups with subsidiaries operating in countries subject to strict foreign exchange controls, hyperinflation, or economic sanctions (such as Argentina, Venezuela, and Lebanon). The new requirements are intended to ensure that financial statements provide a more faithful representation of the financial position and performance of entities operating in these challenging environments.
Effective date
The IAS 21 amendment is effective for annual reporting periods beginning on or after 1 January 2025. As this date has already passed, the requirements are now fully effective and must be applied in financial statements currently being prepared. Earlier application was also permitted.
