Statements and analysis

IAS 21 · Foreign currency transactions

Cash and debts at the closing rate; machines and inventory at the rate they were bought at.

Draft: not yet reviewed by a teacher

Why it exists

An entity keeps its books in one currency but buys, sells and borrows in others. Without rules, one set of statements would add euros to manats, and a euro debt would be shown at a long-gone rate. The standard says which currency to keep the books in, which rate to record transactions at, and what to do with balances when the rate moves.

Key rules

The functional currency is the currency of the entity's primary economic environment. Primary indicators: the currency that influences sales prices and the currency that influences labour and material costs; secondary ones: the currency of financing and the currency in which receipts are kept.
The presentation currency is the currency the statements are presented in, and any currency may be chosen. The functional currency is not chosen, and changes only when the underlying circumstances change, prospectively.
A foreign currency transaction is first recorded at the spot rate on the transaction date; when rates barely move, an average rate for a week or a month may be used.
At the reporting date, monetary items (cash, receivables, payables, loans) are retranslated at the closing rate.
Non-monetary items at historical cost (PPE, inventory, advances paid) stay at the historical rate; those at fair value use the rate on the date the fair value was measured.
Exchange differences on monetary items, on retranslation and on settlement, go to profit or loss. When a gain or loss on a non-monetary item is recognised in OCI (a revaluation), its exchange component goes to OCI too.

Examples

A Bakı company (functional currency AZN) received a machine on 1 November 2026 for €240,000, payable on 31 January 2027. Rates: 1 November €1 = 1.90 AZN; 31 December €1 = 1.96 AZN; 31 January €1 = 1.93 AZN.

Machine and payable: 240,000 × 1.90 = 456,000
Payable at 31 December: 240,000 × 1.96 = 470,400; a 2026 exchange loss of 14,400
Machine at 31 December: 456,000 less depreciation; not retranslated
Payment: 240,000 × 1.93 = 463,200; a 2027 exchange gain of 470,400 − 463,200 = 7,200

A purchase, the payable retranslated, and the payment

How it works

One question decides it: will the item turn into a fixed amount of currency?

Yes (a supplier's payable, a loan, cash, a receivable): its value in manats moves with the rate, so it is retranslated at every reporting date and the difference goes to profit or loss.
No (a machine, inventory, an advance paid for goods): the rate was fixed on the day of purchase and there is nothing to retranslate.

Under IFRS 18 an exchange difference is classified in the same category of the statement of profit or loss as the income and expenses from the item: a trade payable's in the operating category, a bank loan's in the financing category.

Traps

Taught in the course

Why it exists

Key rules

The functional currency is the currency of the entity's primary economic environment. Primary indicators: the currency that influences sales prices and the currency that influences labour and material costs; secondary ones: the currency of financing and the currency in which receipts are kept.

The presentation currency is the currency the statements are presented in, and any currency may be chosen. The functional currency is not chosen, and changes only when the underlying circumstances change, prospectively.

A foreign currency transaction is first recorded at the spot rate on the transaction date; when rates barely move, an average rate for a week or a month may be used.

At the reporting date, monetary items (cash, receivables, payables, loans) are retranslated at the closing rate.

Non-monetary items at historical cost (PPE, inventory, advances paid) stay at the historical rate; those at fair value use the rate on the date the fair value was measured.

Exchange differences on monetary items, on retranslation and on settlement, go to profit or loss. When a gain or loss on a non-monetary item is recognised in OCI (a revaluation), its exchange component goes to OCI too.