IAS 21 foreign currency: transactions and translation

What does IAS 21 cover?

IAS 21 applies to transactions and balances in foreign currencies, to translating the results and financial position of foreign operations into the group's presentation currency, and to presenting financial statements in a currency other than the functional currency. Derivatives and hedge accounting are covered by IFRS 9, although IAS 21 still applies to translating them. See IFRS 9 hedge accounting.

How is the functional currency determined?

The primary indicators are the currency that mainly influences sales prices, the currency of the country whose competitive forces and regulations mainly determine those prices, and the currency that mainly influences labour, material and other costs. Secondary indicators are the currencies in which financing is raised and operating receipts are kept. For a foreign operation, the group also considers how independent it is of the parent. The functional currency changes only when the underlying circumstances change, and the change is applied prospectively.

How are foreign currency transactions recorded?

At the spot rate on the transaction date; an average rate for a week or month can be used if rates do not fluctuate significantly. Where consideration is paid or received in advance, IFRIC 22 sets the transaction date as the date the prepayment or deferred income is first recognised. At each reporting date, monetary items, the rights to receive or obligations to pay a fixed or determinable number of currency units, are retranslated at the closing rate. Non-monetary items carried at cost stay at the historical rate, and those carried at fair value use the rate at the date fair value was measured. Exchange differences on monetary items go to profit or loss. See IAS 7 cash flows.

IAS 21 in practice: a supplier invoice and a US subsidiary

A company with the euro as its functional currency buys goods for USD 110,000 on credit on 1 November, when EUR 1 buys USD 1.10. At 31 December the rate is USD 1.00, and it pays on 31 January at USD 1.05.

The inventory stays at EUR 100,000, because it is non-monetary; only the payable is retranslated. The same company owns a US subsidiary with opening net assets of USD 2,000,000 and profit of USD 220,000 for the year.

Because the dollar strengthened against the euro, the subsidiary's net assets are worth more in euros, and the EUR 192,294 gain goes to other comprehensive income, not profit. See a consolidation example.

How are foreign operations translated?

• Assets and liabilities, including goodwill and fair value adjustments from the acquisition, at the closing rate.
• Income and expenses at the rates on the transaction dates, or an average rate where that is a reasonable approximation.
• All resulting differences in other comprehensive income, accumulated in a separate component of equity, with the non-controlling interest's share allocated to it.
• On disposal of the foreign operation, the cumulative difference reclassified from equity to profit or loss.

Exchange differences on a loan that forms part of the parent's net investment in a foreign operation also go to other comprehensive income in the consolidated accounts. See IFRS 3 business combinations.

What about hyperinflation and lack of exchangeability?

A foreign operation whose functional currency is hyperinflationary is first restated under IAS 29 and then translated at the closing rate. Amendments issued by the IASB in November 2025, effective from 1 January 2027, set how companies with a non-hyperinflationary functional currency translate into a hyperinflationary presentation currency: all amounts, including comparatives, at the latest closing rate. Where a currency cannot be exchanged, the 2023 amendments require an estimated spot rate; see lack of exchangeability.

How does IFRS 18 change foreign exchange presentation?

From 2027, IFRS 18 requires exchange differences to be classified in the same income statement category as the income and expenses from the items that gave rise to them, so a difference on a trade payable sits in the operating category and one on a borrowing in the financing category. See IFRS 18 foreign exchange and derivatives.

How does IAS 21 compare with ASC 830?

The concepts are close: both use a functional currency, remeasure monetary items through profit or loss and translate foreign operations through other comprehensive income into a cumulative translation adjustment. The main difference is hyperinflation: US GAAP treats an economy with cumulative inflation of about 100% or more over three years as highly inflationary and remeasures the foreign operation as if its functional currency were the reporting currency, while IFRS restates the operation's own figures for inflation under IAS 29 before translating them. See IFRS vs US GAAP key differences.

This guide is general information. It is not tax or legal advice for your situation.