Lack of exchangeability: the 2023 IAS 21 amendments

When is a currency not exchangeable?

The test looks at the company's ability to obtain the other currency, not its intention, and is made for a specified purpose: for translating a foreign operation's results, for example, the purpose is the parent's ability to obtain its return through dividends or the realisation of its net investment. A currency can be exchangeable for some purposes and not others. A company that can obtain only an insignificant amount of the other currency for the purpose concerned treats the currency as not exchangeable for it.

How is the spot rate estimated?

The objective is the rate at which an orderly exchange transaction would take place at the measurement date between market participants under the prevailing economic conditions. A company may use an observable rate without adjustment if it meets that objective, for example a rate in another market or exchange mechanism, even one that does not create enforceable rights, or the first rate at which exchange becomes possible after the restriction ends. Otherwise it uses another technique, such as adjusting an observable rate for inflation differences. It considers whether several rates exist, their purposes, how often they are updated and whether they reflect the prevailing conditions. See IFRS 13 fair value measurement for the similar idea of an orderly transaction.

Lack of exchangeability in practice: a subsidiary under currency controls

A group with a US dollar presentation currency owns a subsidiary whose net assets are LC 500 million. The central bank's official rate is LC 100 to the dollar, but for months it has allocated dollars only in tiny amounts, so the parent cannot repatriate dividends. A parallel market trades at LC 250, and the group concludes that this rate, without adjustment, best reflects an orderly transaction under the prevailing conditions.

Using the estimated rate reduces the translated net assets by USD 3.0 million, with the difference in the translation reserve. The group discloses that the currency is not exchangeable into dollars for remitting dividends, the rate it used and why, the subsidiary's summarised financial information, and the risk that the restrictions continue. See IAS 21 foreign currency.

What must be disclosed?

• The currency and a description of the restrictions that make it not exchangeable.
• The transactions affected and the carrying amounts of the affected assets and liabilities.
• The spot rate or rates used, whether they are observable or estimated, and the estimation process.
• Qualitative information about the risks the company is exposed to, and, for foreign operations, summarised financial information.

How were the amendments applied on transition?

Companies did not restate comparatives. Where a currency was not exchangeable at the start of the first year of application, they translated the affected items at the estimated spot rate at that date, adjusting opening retained earnings or, for a foreign operation, the translation reserve. See IAS 8 accounting policies, estimates and errors.

How does US GAAP deal with this?

ASC 830 has no equivalent framework; US GAAP generally uses the rate at which a transaction could have been settled at the measurement date, and the SEC staff has given views on specific situations with multiple or restricted rates in the past. Groups reporting under both frameworks should document how their rate meets each. See IFRS vs US GAAP key differences.

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