presentation currency explained

What’s a functional and presentation currency under IAS 21?

When preparing financial statement a company must determine its functional and presentation currencies.

The functional currency is the currency of the primary economic environment where the entity operates, in most cases this will be the local currency (e.g. Euro in Ireland, GBP in UK)

When determining the functional currency, an entity should consider the following factors:

Primary factors

The currency than mainly influences sales prices for goods and services
The currency of the country whose competitive forces and regulations mainly determine the sales price of goods and services
The currency that mainly influences labour, material and other costs of providing goods and services.

Secondary factors

The currency from which issuing debt and equity is generated
The currency in which receipts from operating activities are usually retained

What’s a presentation currency?

The presentation currency is the currency in which the entity presents its financial statements and this may be different from the functional currency, (e.g. If the entity in question is a foreign owned subsidiary. It may have to present its financial statements in the currency of the parent company, even though that is different from their normal trading currency).

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Presentation Currency, Functional Currency, and Local Currency

A multinational corporation is a firm that has business operations located in at least one country besides its home country. It may engage in transactions that are denominated in foreign currency or invest in foreign subsidiaries that keep their financial records in a foreign currency. This exposes the firm to foreign currency effects. There are three different forms of currencies, as demonstrated below:

Assume that we have a sizable US-based organization, XYZ, i.e., the parent company with three subsidiaries in India, Kenya, and Mexico. At the financial year-end, the Indian company prepares its financial statements in Indian Rupees (INR), the Kenyan company in Kenyan Shillings (KES), and the Mexican company in Mexican Pesos (MXN).

The subsidiaries use their local currency to prepare their financial statements, whereas the parent company uses USD to prepare its consolidated financial statements. USD, in this case, is called the presentation currency . If the Kenyan subsidiary carries out all its transactions in KES , then we say that KES is the functional currency . Assume that XYZ entirely controls the Mexican subsidiary. This means that it makes all operation decisions for the subsidiary, and consequently, all transactions are in USD. In this instance, USD is the functional currency for the Mexican subsidiary.

To summarize the above explanations, we have:

1. Presentation (Reporting) Currency

Presentation currency refers to the currency that the parent company uses to prepare its financial statements. Mostly, a company’s reporting currency is the currency of the country where the company is located.

2. Functional Currency

It is the currency of the primary economic environment in which an entity operates. A company’s management determines its functional currency. It is the currency in which an entity generates and expends cash. The functional currency can be the local currency or some other currency.

3. Local Currency

The national currency of the country in which a foreign firm operates is called the local currency. Typically, the local currency is the entity’s functional currency. For accounting purposes, any currency other than the entity’s functional currency is a foreign currency for that entity.

Question The most accurate definition of the local currency is: A. Any currency other than the parent currency. B. The currency used by the parent company to prepare its financial statements. C. The currency of the country in which a company operates. Solution The correct answer is C . The local currency is the national currency of the country in which a foreign firm operates. A is incorrect . For accounting purposes, any currency other than the entity’s functional currency is a foreign currency for that entity. B is incorrect . The presentation currency is the currency that the parent company uses to prepare its financial statements.

Reading 13: Multinational Operations

LOS 13 (a) Compare and contrast presentation in (reporting) currency, functional currency, and local currency.

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Accounting Policy

Functional and Presentation Currency

International Accounting Standard 21 (IAS 21) defines functional currency as “the currency of the primary economic environment in which the entity operates”. Functional currency is the currency that mainly influences the company's transactions and cash flows, it is the currency of the country where the entity primarily generates and expends cash. It is the currency that is most appropriate for measuring the entity's financial performance and position.

The same Standard defines presentation currency as “the currency in which the financial statements are presented”. It can be different from the functional currency. It is the currency in which the financial statements are intended to be used by the primary users. The presentation currency is chosen by the management and is typically the currency that is most relevant to the primary users of the financial statements.

IAS 21 states that an entity shall present its financial statements, including the income statement and the statement of financial position , in the presentation currency chosen by the management, and that an entity shall translate its financial statements into the presentation currency in a manner consistent with the requirements of IAS 21.

The functional currency is determined by considering a number of relevant factors. This currency should be the currency in which an entity normally generates and expends cash. The functional currency should be the currency in which an entity's transactions are normally denominated. All transactions that are not denominated in the functional currency are treated as foreign transactions. The following five factors should be considered in determining the functional currency. The currency is the functional currency:

That mainly affects the prices at which the goods or services are sold.
Of the country whose regulations, market conditions and competitive forces mainly affect the pricing policy of the entity.
That influences the costs and expenses of the entity.
In which the funds are usually generated.
In which receipts from operating activities are retained.

The first three factors are considered to be the most significant factors in determining the functional currency.

An entity's functional currency reflects the transactions, events and conditions under which the entity operates and conducts its business. Once the functional currency has been determined, it does not change. A functional currency should be changed only when there is a change in the nature of the underlying transactions, events and conditions.

If there is a change in the functional currency, it should be applied from the date of the change. The change should be accounted for prospectively rather than retrospectively. The change in functional currency should be linked to a change in the underlying conditions and transactions. For example, a change in the primary market may result in a change in the currency that affects selling prices.

An entity may present its financial statements in any currency. Usually, they are presented in the functional currency; therefore, the functional currency is usually the same as the presentation currency. When the presentation currency is different from the functional currency, the financial statements should be translated into the presentation currency.

Choice of Presentation Currency for Transnational Companies

For international corporations with branches in multiple countries, the choice of presentation currency can be a complex decision. According to International Accounting Standard 21 (IAS 21), the presentation currency should be the currency that is most appropriate for the primary users of the financial statements.

In the case of an international corporation with branches in multiple countries, the management will typically choose the currency that is most relevant to the primary users of the financial statements. This could be the currency of the country where the company is headquartered, the currency of the country where the majority of the company's revenue is generated, or the currency of the country where the company is listed on a stock exchange.

It is important to note that the choice of presentation currency can have a significant impact on the financial statements, as it affects the translation of the functional currency into the presentation currency. Therefore, it is important for the management to consider the impact of the choice of presentation currency on the financial statements and to clearly communicate the reasons for the choice in the notes to the financial statements.

In addition, it is important for the management to consider the needs of different groups of users, such as investors, creditors, and regulators, when choosing the presentation currency, as each group may have different needs and preferences.

In any case, it is important to be transparent and disclose the reasons for choosing the presentation currency in the notes to the financial statements.

Exchange R ates U sed for T ranslation

According to International Accounting Standard 21 (IAS 21), the presentation currency value should be used on the date of the statement of financial position ( balance sheet ) in which the financial statements are presented. This means that all assets, liabilities, and equity should be translated into the presentation currency using the exchange rate at the date of the statement of financial position.

For example, if a company's functional currency is the U.S. dollar and its presentation currency is the Euro, the company's assets, liabilities, and equity will be translated into Euros at the exchange rate on the date of the statement of financial position.

It is important to note that the exchange rate used for translation should be the rate at the date of the statement of financial position, not the average exchange rate for the period, as this would not reflect the real value of the assets and liabilities at the date of the statement.

The income statement should be translated using the exchange rate on the transaction date, not on the statement date, as it would be more accurate, a consistent with the concept of matching revenues and expenses, and also it will be easier to compare results between different periods.

Additionally, it is important to disclose the exchange rates used for translation in the notes to the financial statements, along with the impact of the translation on the financial statements.

Currencies Besides Functional and Presentation Currency

Besides functional and presentation currency, there are other types of currencies that may be relevant for financial reporting:

Reporting currency : This is the currency in which an entity's financial statements are prepared and presented for internal management use. It may be different from the functional and presentation currency.

Foreign currency : This is a currency other than the functional currency of an entity. It is used when an entity enters into transactions or has assets or liabilities denominated in a currency other than its functional currency.

Base currency : This is the currency that is used as a reference or benchmark for financial reporting. It is typically the currency of the country where the entity is headquartered or the currency of the country where the majority of the entity's operations are conducted.

Hyperinflationary currency : This is a currency that is experiencing very high inflation, which can make financial reporting difficult. According to IAS 29, Financial Reporting in Hyperinflationary Economies, entities operating in a hyperinflationary economy are required to present their financial statements in a currency that is not hyperinflationary.

Consolidated currency : This is the currency that is used to present the financial statements of a group of entities that are consolidated together. It is usually the currency of the parent company or the currency that is most relevant to the primary users of the consolidated financial statements.

IAS 21 The Effects of Changes in Foreign Exchange Rates
Exchange Difference
International Financial Reporting Standards (IFRS)

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Effects of Changes in Foreign Exchange Rates (IAS 21)

Last updated: 13 September 2023

Entities may engage in transactions denominated in foreign currencies. These transactions must be translated into the currency that the company uses to present its financial statements. In addition, a parent company may conduct foreign operations through subsidiaries, associates or joint arrangements. In such cases, the financial statements of these investees need to be translated to the currency used in the consolidated financial statements. Furthermore, an entity may opt to present its financial statements in a currency different from the one used in its economic environment. All these considerations are addressed by IAS 21. Let’s delve deeper.

Translating foreign currency transactions

Initial recognition.

Initially, a foreign currency transaction is recognised at the spot exchange rate (i.e., the rate for immediate delivery) between the functional currency and the foreign currency at the date of the transaction (IAS 21.21). A foreign currency transaction is a transaction denominated or requiring settlement in a foreign currency, including transactions arising when an entity (IAS 21.20):

Buys or sells goods or services priced in a foreign currency,
Borrows or lends funds with amounts payable or receivable denominated in a foreign currency, or
Otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency.

The transaction date is when the transaction first qualifies for recognition under applicable IFRS standard (IAS 21.22).

IAS 21 permits the use of simplifications in determining the foreign exchange rate, such as using an average rate, as long as exchange rates don’t fluctuate significantly (IAS 21.22). In practice, entities often use the average of monthly rates, as central banks publish these for most currencies.

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Translation at reporting dates

At the end of each reporting period (IAS 21.23):

Foreign currency monetary items are translated using the closing rate (i.e., the spot exchange rate at the end of the reporting period).
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. They are not re-translated using the closing rate.
Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

Specific procedures for translating foreign operations are discussed below.

Monetary and non-monetary items

Monetary items are defined as units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency (IAS 21.8). Common examples of monetary items include trade receivables and payables or loans. Other examples are given in paragraph IAS 21.16.

Non-monetary items lack the right to receive (or the obligation to deliver) a fixed or determinable number of units of currency. Examples of non-monetary items include advance consideration paid or received, goodwill, items of PP&E, intangible assets and inventories (IAS 21.16).

Investments in equity instruments are also non-monetary items (IFRS 9.B5.7.3), but they are measured at fair value and therefore their carrying amount is effectively impacted by foreign exchange movements.

Recognition of exchange differences

As a general rule, exchange differences arising from the settlement or translation of a monetary asset are recognised in P/L (IAS 21.28).

When non-monetary assets are measured at fair value (or revalued amount) in a foreign currency, exchange differences are treated similarly to gains or losses on remeasurement. That is, they can be recognised in other comprehensive income under circumstances specified by other IFRS standards (IAS 21.30-31).

Example: Recognition of exchange differences

Suppose Entity A buys an item of PP&E on 1 January 20X1. Entity A’s functional and presentation currency is the Euro (EUR), but the invoice for the PP&E is for 1,000 US dollars (USD). The EUR/USD exchange rate on 1 January 20X1 is 1.1 (i.e., 1 EUR = 1.1 USD). The invoice is paid on 1 May 20X1 when the EUR/USD rate is 1.2. All calculations used in this example are available for download in an Excel file .

Entity A would make the following entries in EUR:

As shown, the PP&E item is carried at historical cost and is not subsequently retranslated to reflect exchange rate movements between initial recognition and invoice payment.

Use of multiple exchange rates

When several exchange rates are available, the rate used is the one at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred at the measurement date (IAS 21.26).

Lack of exchangeability

In 2023, the IASB issued amendments to IAS 21 that will require companies to provide more information in their financial statements when a currency cannot be exchanged into another currency, an issue that wasn’t previously covered. The amendments are effective for annual reporting periods beginning from 1 January 2025, with early application permitted. Read more in Deloitte’s publication .

Advance Consideration (IFRIC 22)

IFRIC Interpretation 22 ‘Foreign Currency Transactions and Advance Consideration’ stipulates that the transaction date for determining the exchange rate used for initial recognition of the related asset, expense, or income is the date an entity first recognises the non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration (IFRIC 22.8-9).

Exchange differences on borrowings

According to paragraph IAS 23.6(e), borrowing costs may include exchange differences resulting from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

Exchange differences on deferred tax

Exchange differences on deferred foreign tax liabilities or assets may be classified as deferred tax expense or income if that presentation is considered to be the most useful to financial statement users (IAS 12.78).

Change in functional currency

A change in functional currency can only occur if there are changes to the underlying transactions, events, and conditions that the functional currency reflects. Any change in functional currency is accounted for prospectively (IAS 21.35-37).

Translating a foreign operation

When an entity within a group uses a different presentation currency from that of the consolidated financial statements, translations are performed using the following procedures as per IAS 21.39:

Assets, including goodwill and fair value adjustments (IAS 21.47), and liabilities, are translated at the closing rate at the reporting date. This includes comparatives translated using historical rates.
Income and expenses are translated at exchange rates applicable at the transaction dates. This also includes comparatives translated using historical rates.
All resulting exchange differences are recognised in other comprehensive income (OCI).

IAS 21.40 allows for simplifications in determining the foreign exchange rate, for example, using an average rate, assuming exchange rates do not significantly fluctuate. In practice, an average rate for each month is most commonly used.

Cumulative translation adjustment (CTA)

Exchange differences referred to in IAS 21.39(c) are commonly identified as either ‘Cumulative Translation Adjustment’ (CTA) or ‘Foreign Currency Translation Reserve’ (FCTR). The two primary sources for CTA, as per IAS 21.41, include:

Translating income and expenses at the transaction date exchange rates, while assets and liabilities are translated at the closing rate.
Translating opening assets and liabilities at a closing rate that differs from the opening rate.

CTA is recognised in OCI, presented as a distinct item within equity, and not recycled to P/L until the foreign operation is disposed of. CTA is further divided between controlling and non-controlling interests (IAS 21.41). It is also recognised in OCI for investments accounted for using the equity method (IAS 21.44).

Example: Illustrative translation of a foreign operation

Consider Group A with the Euro as its presentation currency. Entity X, one of Group A’s subsidiaries, uses the US Dollar as its presentation currency. The following EUR/USD exchange rates apply:

Opening rate at 1 January 20X1: 1.1
Average rate in 20X1: 1.2
Closing rate at 31 December 20X1: 1.3

All calculations and tables presented in this example can be downloaded in an Excel file .

Entity X is consolidated to Group A consolidated financial statements as follows:

Entity X stand-alone data

Statement of financial position in USD:

P/L in USD:

Consolidation of Group A

Consolidated statement of financial position in EUR at 1 January 20X1:

Consolidated statement of financial position in EUR at 31 December 20X1:

Consolidated P/L for 20X1 in EUR:

Intragroup balances

Exchange differences on intragroup balances.

Although intragroup balances are eliminated during consolidation, any exchange differences arising from those balances are not. This is because the group is effectively exposed to foreign exchange gains and losses, even on intragroup transactions, including dividend receivables and payables (IAS 21.45).

Goodwill considerations

Goodwill, as previously stated, is considered an asset of a foreign operation and is retranslated at each reporting date. For multinational group acquisitions, goodwill should be allocated to each functional currency level of the acquired foreign operation (IAS 21.BC32).

Net investment in a foreign operation

A net investment in a foreign operation represents the reporting entity’s interest in the net assets of that operation (IAS 21.8). Monetary items receivable from, or payable to, a foreign operation, where settlement is neither planned nor likely to occur in the foreseeable future, are treated as part of the entity’s net investment in that operation (IAS 21.15-15A). Exchange differences arising from such monetary items are recognised in P/L in separate financial statements, but in OCI (as part of CTA) in consolidated financial statements (IAS 21.32-33).

Disposal or partial disposal of a foreign operation

Upon disposing of a foreign operation, the cumulative amount of exchange differences relating to that operation, recognised in OCI and accumulated in the separate component of equity (i.e. CTA), is reclassified from equity to P/L (as a reclassification adjustment ) when the gain or loss on disposal is recognised (IAS 21.48). Furthermore, paragraph IAS 21.48A outlines accounting procedures for partial disposals.

Translation from the currency of a hyperinflationary economy

IAS 21.42-43 provides specific provisions for translating from the currency of a hyperinflationary economy.

Functional and foreign currencies

Defining functional and foreign currencies.

The functional currency is defined as the currency of the primary economic environment in which an entity operates, i.e. primarily generates and spends cash. IAS 21.9-10 details the factors that should be considered in determining an entity’s functional currency.

The foreign currency, as defined by IAS 21.8, is any currency that is different from the entity’s functional currency.

Functional currency of a foreign operation

Identifying the functional currency can be particularly complex when a reporting entity is a foreign operation of another entity and fundamentally an extension of its operations. For instance, a ‘financial’ subsidiary (i.e., a subsidiary primarily holding financial assets or issuing debt) whose core financial assets and liabilities are denominated in the parent’s functional currency may have the same functional currency as the parent, regardless of its operational country. IAS 21.11 outlines additional factors to be considered when determining the functional currency of a foreign operation. If these indicators are mixed, priority is given to the primary indicators described in IAS 21.9.

Use of a presentation currency other than the functional currency

The rules regarding the translation of a foreign operation are equally applicable to the use of a presentation currency that is different from the functional currency.

Presentation in financial statements

IAS 21 does not specify in which part of the income statement foreign exchange differences should be presented. Therefore, entities must develop an accounting policy. The most common approach is to report exchange differences in the same section of the income statement where the original income or expense was (or will be) recognised for the item that subsequently led to exchange differences. For example, exchange differences on trade receivables are presented within operating profit, while exchange differences on debt are presented within finance costs. This method aligns with the one proposed by the IASB in their primary financial statements project .

Cash flows in foreign currency

IAS 21 does not cover the statement of cash flows as it falls under the scope of IAS 7. This includes the presentation of cash flows resulting from transactions in a foreign currency and the translation of cash flows from a foreign operation (IAS 21.7).

The disclosure requirements are provided in IAS 21.51-57.

The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. Use at your own risk. Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). You can access full versions of IFRS Standards at shop.ifrs.org. IFRScommunity.com is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org.

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IAS 21 The Effects of Changes in Foreign Exchange Rates

These days people use about 180 currencies world wide!

The truth is that we, people, don’t want to stay isolated. We love to sell, buy, import, export, trade together and do many other things, all in foreign currencies!

When you look at the business world, you’ll see that business go global in two ways: they either have individual transactions in foreign currencies, or when they grow bigger, they often set up foreign operations (separate business abroad).

Moreover, the exchange rates change every minute. So how to bring a bit of organization into this currency mix-up? That’s why there is the standard IAS 21 The Effects of Changes in Foreign Exchange Rates.

What is the objective of IAS 21?

The objective of IAS 21 The Effects of Changes in Foreign Exchange Rates is to prescribe:

How to include foreign currency transactions and foreign operations in the financial statements of an entity; and
How to translate financial statements into a presentation currency .

In other words, IAS 21 answers 2 basic questions:

What exchange rates shall we use?
How to report gains or losses from foreign exchange rates in the financial statements?

Functional vs. Presentation Currency

IAS 21 defines both functional and presentation currency and it’s crucial to understand the difference:

Functional currency is the currency of the primary economic environment in which the entity operates. It is the own entity’s currency and all other currencies are “foreign currencies”.

Presentation currency is the currency in which the financial statements are presented.

In most cases, functional and presentation currencies are the same.

Also, while an entity has only 1 functional currency, it can have 1 or more presentation currencies, if an entity decides to present its financial statements in more currencies.

You also need to realize that an entity can actually choose its presentation currency , but it CANNOT choose its functional currency. The functional currency needs to be determined by assessing several factors.

How to determine functional currency

The most important factor in determining the functional currency is the entity’s primary economic environment in which it operates. In most cases, it will be the country where an entity operates, but this is not necessarily true.

The primary economic environment is normally the one in which the entity primarily generates and expends the cash . The following factors can be considered:

What currency does mainly influence sales prices for goods and services?
In what currency are the labor, material and other costs denominated and settled?
In what currency are funds from financing activities generated (loans, issued equity instruments)?
And other factors, too.

Sometimes, sales prices, labor and material costs and other items might be denominated in various currencies and therefore, the functional currency is not obvious.

In this case, management must use its judgment to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions.

How to report transactions in Functional Currency

Initial recognition.

Initially , all foreign currency transactions shall be translated to functional currency by applying the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.

The date of transaction is the date when the conditions for the initial recognition of an asset or liability are met in line with IFRS.

Subsequent reporting

Subsequently, at the end of each reporting period , you should translate:

All monetary items in foreign currency using the closing rate ;
All non-monetary items measured in terms of historical cost using the exchange rate at the date of transaction ( historical rate );
All non-monetary items measured at fair value using the exchange rate at the date when the fair value was measured.

How to report foreign exchange differences

All exchange rate differences shall be recognized in profit or loss , with the following exceptions:

Exchange rate gains or losses on non-monetary items are recognized consistently with the recognition of gains or losses on an item itself.For example, when an item is revalued with the changes recognized in other comprehensive income, then also exchange rate component of that gain or loss is recognized in OCI, too.
In the separate entity’s or foreign operation’s financial statements: in profit or loss ;
In the consolidated financial statements: initially in other comprehensive income and subsequently, on disposal of net investment in the foreign operation, they shall be reclassified to profit or loss .

Change in functional currency

When there is a change in a functional currency, then the entity applies the translation procedures related to the new functional currency prospectively from the date of the change.

How to translate financial statements into a Presentation Currency

When an entity presents its financial in the presentation currency different from its functional currency, then the rules depend on whether the entity operates in a non-hyperinflationary economy or not.

Non-hyperinflationary economy

When an entity’s functional currency is NOT the currency of a hyperinflationary economy, then an entity should translate:

All assets and liabilities for each statement of financial position presented (including comparatives) using the closing rate at the date of that statement of financial position. Here, this rule applies for goodwill and fair value adjustments , too.
All income and expenses and other comprehensive income items (including comparatives) using the exchange rates at the date of transactions. Standard IAS 21 permits using some period average rates for the practical reasons, but if the exchange rates fluctuate a lot during the reporting period, then the use of averages is not appropriate.

All resulting exchange differences shall be recognized in other comprehensive income as a separate component of equity.

However, when an entity disposes the foreign operation, then the cumulative amount of exchange differences relating to that foreign operation shall be reclassified from equity to profit or loss when the gain or loss on disposal is recognized.

Hyperinflationary economy

When an entity’s functional currency IS the currency of a hyperinflationary economy, then the approach slightly changes:

The entity’s current year’s financial statements are restated first, as required by IAS 29 Financial Reporting in Hyperinflationary Economies. Comparative figures are used the same as current year’s figures in the financial statements from previous reporting period.
Only then, the same procedures as described above are applied.

IAS 21 prescribes the number of disclosures, too. Please watch the following video with the summary of IAS 21 here:

Have you ever been unsure what foreign exchange rate to use? Please comment below this video and don’t forget to share it with your friends by clicking HERE. Thank you!

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235 Comments

Thank you dear Silvia for I’m inspired a lot from your lecture.

Inventory & Foreign Exchange Rate. What happened if inventory which was purchased with foreign currency is required to be recorded based on NRV, do we need to record changes in the exchange rates at closing date?

Hi Silvia, thanks for the always helpful articles and videos. I read/watched both this article and the article about translating entities to a presentation currency. If one applies these rules to companies within the same group (eg holding company makes prepayments to a subsidiary who then sells a service back to the holding company where holding company and subsidiary have different functional currencies) does it make sense that one would then end up with an intercompany imbalances between the prepaid asset and prepaid liability and so to “balance” the intercompany elimination entry one would take the imbalance to the FCTR/CTR?

Hi Silvia I am currently doing a research study on this Standard may you kindly assist.

Hi explain how realized and unrealized exchange gain or loss come up.if I have a foreign bank account balance and at the reporting date I translate the closing rate to functional currency will the difference be realized or unrealized

Realized. By the way – IFRS do not know the term “unrealized” FX differences. Once you are required to revalue at some reporting date, these differences are realized because you need to recognize them in your financial statements (through profit or loss).

Good job Silvia. Please how do I reference this your good work

Hi. Thank you for the great article. Question tho – Are there exceptions to the rule which says that exchange difference arising from the conversion of functional to presentation currency should be recorded in OCI?

Hi, In a hyperinflation environment, what will be the appropriate rate to value inventory that were imported . the rate at the date of the LC or the rate at the day of settlement?

Hello Sylvia. How to treat currency exchange effect when the upper edge of currency is frozen per contract? For example i have liability in foreign currency, but no more then 3. How to treat effect when exchange rate becomes 3.2? Could you provide some reference from standards? Also i think that it has to be ifrs 9 issue Thanks in advance

Thank you Silvia for your illustration, I have a question regarding functional currency , if we have a entity that has a functional currency in US Dollar but chose to present financial statements in EUR for stock market, in this case does it need to translate the financial statements using the rules that are applied when translating from foreign operations to presentation currency ? Thanks in advance

Hi Silvia. Thank you for your article. I would like to seek guidance on the settlement of foreign currency translation reserve. I encounter a problem where the company functional currency has cleared to zero balance, but there are still some balances in the forex translation reserve. What are the possible reasons causing the remaining balances in the reserve and how to deal with it? I look forward for your reply, thank you.

Hi Silvia, Thank you for your article. I have one specific question: I have been told like this “Under IAS -21 each company shall prepare separate financial statement on the basis of functional currency and parent shall follow presentation currency in Consolidated FS”

My Query is : I have one Company only. I don’t want to touch Consolidation Part. My Company is in Oman and our functional currency is OMR. But management intends to present the FS in USD as well for the shake of potential investors who prefer to read USD. Or, say for any other purpose. Can we apply IAS 21 Translation of FS from OMR to USD in Case of Standalone FS ?

Hi, How is the industry practice to convert the (1) Stated Capital (2) Retained Earnings Opening Balance ? in the absence of specific guideline in the standard. Would you be able to help me with that ?

I mean when the Financials are converted to another presentation currency ?

Hi Randika, please read this . S.

Dear Silvia,

First of all thank you for all of your articles. I love to read them.

I am writing my thesis and my teacher said that when there was any decrease in equity (like dividend, capital decrease) I should not have translated these transactions with historical rate (the exchange rate at the date of transaction) because the equity should have been decreased like inventory with FIFO or average cost. It is logical, but I have not found any example for that . Do you have maybe an article where it is clearly explained?

Thank you in advance!

Hi Eva, well, there is no guidance on translating the equity items and there are multiple ways of doing it. So perhaps your teacher should explain why she/he thinks that historical cost is the best option. Please try looking here, too. I explained more about translating equity items.

Dear Silvia, Thank you very much for your explanation in the video, it was very helpful, I have a query that I was hoping you could help me, is there a way to calculate the CTD other than by difference or is there a method where we can test if the CTD is determined correctly?

I look forward reading your opinion and response. Thanks in advance!

Hi Silvia, I have a question on this topic. What happens if an entity located in Kenya, with EUR functional currency and KES presentation currency, has bank balances as of the reporting date in the bank accounts in KES? I mean, does the company have to recognize the fx differences to convert first the KES to EUR and then again to translate the EUR to KES because KES is the presentation currency? it would look weird… is it necessary to do it? is it stated anywhere in the IFRS? Thanks in advance. Regards.

Hi, Would a derivative (OTC Forward) be a non-monetary items measured at fair value and therefore use a daily FX rate until it is settled? Would this result in a discrepancy between BS and P&L reporting value? Thanks.

Dear Silvia, Please let me clarify the following situation below: (using fictitious company’s name and numbers including exchange rate for a simple explanation purpose)

I prepare an annual budget of ABC company. It has H/O estimated sales JPY 1000 for Jan, JPY 2000 for Feb, JPY 3000 for March in profit and loss (PL). At the same time, I recognise JPY 1000 for Jan, JPY 3000 (1000+2000) for Feb, and JPY 6000 (1000+2000+3000) as account receivable in Balance Sheet (BS) . As ABC company’s functional & presentational currency is EUR so I translate into EUR. Using average rate let’s say 1EUR=100 YEN, ABC company’s budget sales in PL shows EUR 10 for Jan, EUR 20 for Feb and EUR 30 March. At the same time, using same late average rate as accounting team suggested, (not closing period rate), ABC company’s budget account receivable in BS shows EUR 10 for Jan, EUR 30 for Feb and EUR 60 for March. But I wonder if we use a basic knowledge, when translating items in BS such as account receivable, then we should use closing rate let’s say 1 EUR =110 JPY so it will be EUR 9 for Jan In BS and so on. If I use closing rate then sale figure and account receivable in the same month shows different figures and this is an inconsistency.(sale EUR 10 in PL and Account receivable EUR 9 in BS for Jan)

Could you please give me your advice which rate to use in PL and BS in this case? Thank you for your time in advance.

Hi Silvia, How is profit repatriation from a foreign branch / operation accounted for in the financial statements?

Hi Silvia, I would like to get some clarification on this : –

“For income and expenses and other comprehensive income items (including comparatives) using the exchange rates at the date of transactions.’

i) Let say Company A have a few sales transaction in foreign currency. So during year end closing, Company A would only have recalculate the receivable part ( monetary asset) using the latest foreign exchange rate. For sales revenue that was recognized early in the year using spot exchange rate, no action needed ?

ii) How should the forex gain / loss on receivables be recognized during year end close ? Seems not proper to recognized it directly to P&L as it is still unrealized forex gain / loss ?

CPD technical article

01 March 2009

IAS 21 the effects of changes in foreign exchange rates

Multiple-choice questions

Graham Holt

Graham holt explains the importance of exchange rates when it comes to accounting for any transactions carried out in foreign currencies, this article was first published in the march 2009 edition of accounting and business magazine., studying this technical article and answering the related questions can count towards your verifiable cpd if you are following the unit route to cpd and the content is relevant to your learning and development needs. one hour of learning equates to one unit of cpd. we'd suggest that you use this as a guide when allocating yourself cpd units..

The purpose of IAS 21 is to set out how to account for transactions in foreign currencies and foreign operations.

The standard shows how to translate financial statements into a presentation currency, which is the currency in which the financial statements are presented. This contrasts with the functional currency, which is the currency of the primary economic environment in which the entity operates.

Key issues are the exchange rates, which should be used, and where the effects of changes in exchange rates are recorded in the financial statements.

Functional currency is a concept that was introduced into IAS 21, The Effects of Changes in Foreign Exchange Rates , when it was revised in 2003. The previous version of IAS 21 used a concept of reporting currency. In revising IAS 21 in 2004, the IASB’s main aim was to provide additional guidance on the translation method and determining the functional and presentation currencies.

The functional currency should be determined by looking at several factors. This currency should be the one in which the entity normally generates and spends cash, and that in which transactions are normally denominated. All transactions in currencies other than the functional currency are treated as transactions in foreign currencies.

The entity’s functional currency reflects the transactions, events and conditions under which the entity conducts its business. Once decided on, the functional currency does not change unless there is a change in the underlying nature of the transactions and relevant conditions and events. Foreign currency transactions should initially be recorded at the spot rate of exchange at the date of the transaction. An approximate rate can be used. Subsequently, at each balance sheet date, foreign currency monetary amounts should be reported using the closing rate. Non-monetary items measured at historical cost should be reported using the exchange rate at the date of the transaction. Non-monetary items carried at fair value, however, should be reported at the rate that existed when the fair values were determined.

Exchange differences arising on monetary items are reported in profit or loss in the period, with one exception. The exception is that exchange differences arising on monetary items that form part of the reporting entity’s net investment in a foreign operation are recognised in the group financial statements, within a separate component of equity. They are recognised in profit or loss on disposal of the net investment. If a gain or loss on a non-monetary item is recognised in equity (for example, property, plant and equipment revalued under IAS 16), any foreign exchange gain or loss element is also recognised in equity.

Presentation currency and functional currency

An entity can present its financial statements in any currency. If the presentation currency differs from the functional currency, the financial statements are retranslated into the presentation currency. If the financial statements of the entity are not in the functional currency of a hyperinflationary economy, then they are translated into the presentation currency as follows:

Assets and liabilities (including any goodwill arising on the acquisition and any fair value adjustment) are translated at the closing spot rate at the date of that balance sheet
Income statements are translated at the spot rate at the date of the transactions (average rates are allowed if there is no great fluctuation in the exchange rates)
All exchange differences are recognised in a separate component of equity.

At the entity level, management should determine the functional currency of the entity based on the requirements of IAS 21.

An entity does not have a choice of functional currency. All currencies, other than the functional one, are treated as foreign currencies. An entity’s management may choose a different currency from its functional one – the presentation currency – in which to present financial statements.

At the group level, various entities within a multinational group will often have different functional currencies. The functional currency is identified at entity level for each group entity. Each group entity translates its results and financial position into the presentation currency of the reporting entity.

Normal consolidation procedures are followed for the preparation of the consolidated financial statements, once all the consolidated entities have prepared their financial information in the appropriate presentation currency.

Translation of a foreign operation

When preparing group accounts, the financial statements of a foreign subsidiary should be translated into the presentation currency as set out above. Any goodwill and fair value adjustments are treated as assets and liabilities of the foreign entity, and therefore retranslated at each balance sheet date at the closing spot rate.

Exchange differences on intra-group items are recognised in profit or loss, unless they are a result of the retranslation of an entity’s net investment in a foreign operation when it is classified as equity.

Dividends paid in a foreign currency by a subsidiary to its parent firm may lead to exchange differences in the parent’s financial statements. They will not be eliminated on consolidation, but recognised in profit or loss. When a foreign operation is disposed of, the cumulative amount of the exchange differences in equity relating to that foreign operation is recognised in profit or loss when the gain or loss on disposal is recognised.

The notion of a group functional currency does not exist under IFRS; functional currency is purely an individual entity or business operation-based concept. This has resulted in IAS 21 becoming one of the more complex standards for firms converting to IFRS.

In addition, many multinational groups have found the process time-consuming and challenging, particularly when considering non-trading group entities where the standard’s emphasis on external factors suggests that the functional currency of corporate subsidiaries might well be that of the parent, regardless of their country of incorporation or the currency in which their transactions are denominated.

Entities applying IFRS need to remember that the assessment of functional currency is a key step when considering any change in the group structure or when implementing any new hedging or tax strategies. Furthermore, should the activities of the entity within the group change for any reason, the determination of the functional currency of that entity should be reconsidered to identify the changes required. Management must take care to document the approach followed in the determination of functional currency for each entity within the group, using a consistent methodology across all cases, particularly when an exercise of judgment is required.

Case study 1

An entity, with the dollar as its functional currency, purchases plant from a foreign entity for €18m on 31 May 2008 when the exchange rate was €2 to $1. The entity also sells goods to a foreign customer for €10.5m on 30 September 2008, when the exchange rate was €1.75 to $1. At the entity’s year end of 31 December 2008, both amounts are still outstanding and have not been paid. The closing exchange rate was €1.5 to $1. The accounting for the items for the period ending 31 December 2008 would be as follows:

The entity records the plant and liability at $9m at 31 May 2008. At the year-end, the amount has not been paid. Thus using the closing rate of exchange, the amount payable would be retranslated at $12m, which would give an exchange loss of $3m in profit or loss. The asset remains at $9m before depreciation.

The entity will record a sale and trade receivable of $6m. At the year-end, the trade receivable would be stated at $7m, which would give an exchange gain of $1m that would be reported in profit or loss. IAS 21 does not specify where exchange gains and losses should be shown in the statement of comprehensive income.

Case study 2

An entity has a 100%-owned foreign subsidiary, which has a carrying value at a cost of $25m. It sells the subsidiary on 31 December 2008 for €45m. As at 31 December 2008, the credit balance on the exchange reserve, which relates to this subsidiary, was $6m. The functional currency of the entity is the dollar and the exchange rate on 31 December 2008 is $1 to €1.5. The net asset value of the subsidiary at the date of disposal was $28m.

The subsidiary is sold for $45m divided by 1.5 million, therefore $30m. In the parent entity’s accounts a gain of $5m will be shown. In the group financial statements, the cumulative exchange gain in reserves will be transferred to profit or loss, together with the gain on disposal. The gain on disposal is $30m minus $28m, therefore $2m, which is the difference between the sale proceeds and the net asset value of the subsidiary. To this is added the exchange reserve balance of $6m to give a total gain of $8m, which will be included in the group statement of comprehensive income.

Graham Holt is an ACCA examiner and principal lecturer in accounting and finance at Manchester Metropolitan University Business School

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Annual Reporting

Knowledge base for IFRS Reporting

IAS 21 Presentation currency

Ias 21 the effects of changes in foreign exchange rates, use of a presentation currency other than the functional currency, translation to the presentation currency.

38 An entity may present its financial statements in any currency (or currencies). If the presentation currency differs from the entity’s functional currency , it translates its results and financial position into the presentation currency . For example, when a group contains individual entities with different functional currencies, the results and financial position of each entity are expressed in a common currency so that consolidated financial statements may be presented.

39 The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

assets and liabilities for each statement of financial position presented (ie including comparatives) shall be translated at the closing rate at the date of that statement of financial position;
income and expenses for each statement presenting profit or loss and other comprehensive income (ie including comparatives) shall be translated at exchange rates at the dates of the transactions; and
all resulting exchange differences shall be recognised in other comprehensive income .

40 For practical reasons, a rate that approximates the exchange rates at the dates of the transactions, for example an average rate for the period, is often used to translate income and expense items. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate.

41 The exchange differences referred to in paragraph 39(c) result from:

translating income and expenses at the exchange rates at the dates of the transactions and assets and liabilities at the closing rate .
translating the opening net assets at a closing rate that differs from the previous closing rate .

When the exchange differences relate to a foreign operation that is consolidated but not wholly-owned, accumulated exchange differences arising from translation and attributable to non-controlling interests are allocated to, and recognised as part of, non-controlling interests in the consolidated statement of financial position.

42 The results and financial position of an entity whose functional currency is the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

all amounts (ie assets, liabilities, equity items, income and expenses , including comparatives) shall be translated at the closing rate at the date of the most recent statement of financial position, except that
when amounts are translated into the currency of a non-hyperinflationary economy, comparative amounts shall be those that were presented as current year amounts in the relevant prior year financial statements (ie not adjusted for subsequent changes in the price level or subsequent changes in exchange rates).

43 When an entity’s functional currency is the currency of a hyperinflationary economy, the entity shall restate its financial statements in accordance with IAS 29 before applying the translation method set out in paragraph 42, except for comparative amounts that are translated into a currency of a non-hyperinflationary economy (see paragraph 42(b)).

When the economy ceases to be hyperinflationary and the entity no longer restates its financial statements in accordance with IAS 29, it shall use as the historical costs for translation into the presentation currency the amounts restated to the price level at the date the entity ceased restating its financial statements.

Translation of a foreign operation

44 Paragraphs 45–47, in addition to paragraphs 38–43, apply when the results and financial position of a foreign operation are translated into a presentation currency so that the foreign operation can be included in the financial statements of the reporting entity by consolidation or the equity method .

45 The incorporation of the results and financial position of a foreign operation with those of the reporting entity follows normal consolidation procedures, such as the elimination of intragroup balances and intragroup transactions of a subsidiary (see IFRS 10 Consolidated Financial Statements ).

However, an intragroup monetary asset (or liability ), whether short-term or long-term, cannot be eliminated against the corresponding intragroup liability (or asset) without showing the results of currency fluctuations in the consolidated financial statements . This is because the monetary item represents a commitment to convert one currency into another and exposes the reporting entity to a gain or loss through currency fluctuations.

Accordingly, in the consolidated financial statements of the reporting entity , such an exchange difference is recognised in profit or loss or, if it arises from the circumstances described in paragraph 32, it is recognised in other comprehensive income and accumulated in a separate component of equity until the disposal of the foreign operation .

46 When the financial statements of a foreign operation are as of a date different from that of the reporting entity , the foreign operation often prepares additional statements as of the same date as the reporting entity ’s financial statements.

When this is not done, IFRS 10 allows the use of a different date provided that the difference is no greater than three months and adjustments are made for the effects of any significant transactions or other events that occur between the different dates.

In such a case, the assets and liabilities of the foreign operation are translated at the exchange rate at the end of the reporting period of the foreign operation .

Adjustments are made for significant changes in exchange rates up to the end of the reporting period of the reporting entity in accordance with IFRS 10. The same approach is used in applying the equity method to associates and joint ventures in accordance with IAS 28 (as amended in 2011).

47 Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation . Thus they shall be expressed in the functional currency of the foreign operation and shall be translated at the closing rate in accordance with paragraphs 39 and 42.

Disposal or partial disposal of a foreign operation

48 On the disposal of a foreign operation , the cumulative amount of the exchange differences relating to that foreign operation , recognised in other comprehensive income and accumulated in the separate component of equity , shall be reclassified from equity to profit or loss (as a reclassification adjustment) when the gain or loss on disposal is recognised (see IAS 1 Presentation of Financial Statements (as revised in 2007)).

48A In addition to the disposal of an entity’s entire interest in a foreign operation , the following partial disposals are accounted for as disposals:

when the partial disposal involves the loss of control of a subsidiary that includes a foreign operation , regardless of whether the entity retains a non-controlling interest in its former subsidiary after the partial disposal; and
when the retained interest after the partial disposal of an interest in a joint arrangement or a partial disposal of an interest in an associate that includes a foreign operation is a financial asset that includes a foreign operation .

48B On disposal of a subsidiary that includes a foreign operation , the cumulative amount of the exchange differences relating to that foreign operation that have been attributed to the non-controlling interests shall be derecognised, but shall not be reclassified to profit or loss .

48C On the partial disposal of a subsidiary that includes a foreign operation , the entity shall re- attribute the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income to the non-controlling interests in that foreign operation .

In any other partial disposal of a foreign operation the entity shall reclassify to profit or loss only the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income .

48D A partial disposal of an entity’s interest in a foreign operation is any reduction in an entity’s ownership interest in a foreign operation , except those reductions in paragraph 48A that are accounted for as disposals.

49 An entity may dispose or partially dispose of its interest in a foreign operation through sale, liquidation, repayment of share capital or abandonment of all, or part of, that entity. A write-down of the carrying amount of a foreign operation , either because of its own losses or because of an impairment recognised by the investor, does not constitute a partial disposal. Accordingly, no part of the foreign exchange gain or loss recognised in other comprehensive income is reclassified to profit or loss at the time of a write-down.

Excerpts from IFRS Standards come from the Official Journal of the European Union (© European Union, https://eur-lex.europa.eu). Individual jurisdictions around the world may require or permit the use of (locally authorised and/or amended) IFRS Standards for all or some publicly listed companies. The information provided on this website is for general information and educational purposes only and should not be used as a substitute for professional advice. The specific status of IFRS Standards should be checked in each individual jurisdiction . Use at your own risk. Annualreporting is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. For official information concerning IFRS Standards, visit IFRS.org or the local representative in your jurisdiction .

IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency IAS 21 Presentation currency

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IPSAS 4: The Effects of Changes in Foreign Exchange Rates

There are two ways for public sector entities to enter into business relations at an international level. Such business relations can either take the form of foreign currency transactions with a foreign business partner or business or administrative operations performed abroad. In addition, public sector entities may present their financial statements in a foreign currency. The objective of this standard is to prescribe how public sector entities should account for foreign currency transactions and foreign operations in their financial statements and how to translate financial statements into a presentation currency. In particular it addresses general issues such as the exchange rates to be used and how the financial effects of changes in exchange rates should be accounted for in the financial statements.

The IFRS on which the IPSAS is based

IAS 21, The Effects of Changes in Foreign Exchange Rates

Principal definitions

Functional currency is the currency of the primary economic environment in which the entity operates. The primary economic environment of an entity is normally the one in which it primarily generates and expends cash.

Presentation currency is the currency in which the financial statements are presented.

Public sector entities preparing financial statements under the accrual basis of accounting are required to apply IPSAS 4:

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AP®︎/College Macroeconomics

Course: ap®︎/college macroeconomics > unit 6, currency exchange introduction.

Supply and demand curves in foreign exchange
Lesson summary: the foreign exchange market
The foreign exchange market

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Video transcript

Use of a presentation currency other than the functional currency (AASB121_08-15_COMPmar20_07-21)

Use of a presentation currency other than the functional currency, translation to the presentation currency.

An entity may present its financial statements in any currency (or currencies). If the presentation currency differs from the entity’s functional currency, it translates its results and financial position into the presentation currency. For example, when a group contains individual entities with different functional currencies, the results and financial position of each entity are expressed in a common currency so that consolidated financial statements may be presented.

The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

(a) assets and liabilities for each statement of financial position presented (ie including comparatives) shall be translated at the closing rate at the date of that statement of financial position;

(b) income and expenses for each statement presenting profit or loss and other comprehensive income (ie including comparatives) shall be translated at exchange rates at the dates of the transactions; and

For practical reasons, a rate that approximates the exchange rates at the dates of the transactions, for example an average rate for the period, is often used to translate income and expense items. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate.

The exchange differences referred to in paragraph 39(c) result from:

(a) translating income and expenses at the exchange rates at the dates of the transactions and assets and liabilities at the closing rate.

(b) translating the opening net assets at a closing rate that differs from the previous closing rate.

These exchange differences are not recognised in profit or loss because the changes in exchange rates have little or no direct effect on the present and future cash flows from operations. The cumulative amount of the exchange differences is presented in a separate component of equity until disposal of the foreign operation. When the exchange differences relate to a foreign operation that is consolidated but not wholly-owned, accumulated exchange differences arising from translation and attributable to non-controlling interests are allocated to, and recognised as part of, non-controlling interests in the consolidated statement of financial position.

The results and financial position of an entity whose functional currency is the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

(a) all amounts (ie assets, liabilities, equity items, income and expenses, including comparatives) shall be translated at the closing rate at the date of the most recent statement of financial position, except that

(b) when amounts are translated into the currency of a non-hyperinflationary economy, comparative amounts shall be those that were presented as current year amounts in the relevant prior year financial statements (ie not adjusted for subsequent changes in the price level or subsequent changes in exchange rates).

When an entity’s functional currency is the currency of a hyperinflationary economy, the entity shall restate its financial statements in accordance with AASB 129 before applying the translation method set out in paragraph 42 , except for comparative amounts that are translated into a currency of a non-hyperinflationary economy (see paragraph 42(b) ). When the economy ceases to be hyperinflationary and the entity no longer restates its financial statements in accordance with AASB 129 , it shall use as the historical costs for translation into the presentation currency the amounts restated to the price level at the date the entity ceased restating its financial statements.

Translation of a foreign operation

Paragraphs 45–47 , in addition to paragraphs 38–43 , apply when the results and financial position of a foreign operation are translated into a presentation currency so that the foreign operation can be included in the financial statements of the reporting entity by consolidation or the equity method.

The incorporation of the results and financial position of a foreign operation with those of the reporting entity follows normal consolidation procedures, such as the elimination of intragroup balances and intragroup transactions of a subsidiary (see AASB 10 Consolidated Financial Statements ). However, an intragroup monetary asset (or liability), whether short-term or long-term, cannot be eliminated against the corresponding intragroup liability (or asset) without showing the results of currency fluctuations in the consolidated financial statements. This is because the monetary item represents a commitment to convert one currency into another and exposes the reporting entity to a gain or loss through currency fluctuations. Accordingly, in the consolidated financial statements of the reporting entity, such an exchange difference is recognised in profit or loss or, if it arises from the circumstances described in paragraph 32 , it is recognised in other comprehensive income and accumulated in a separate component of equity until the disposal of the foreign operation.

When the financial statements of a foreign operation are as of a date different from that of the reporting entity, the foreign operation often prepares additional statements as of the same date as the reporting entity’s financial statements. When this is not done, AASB 10 allows the use of a different date provided that the difference is no greater than three months and adjustments are made for the effects of any significant transactions or other events that occur between the different dates. In such a case, the assets and liabilities of the foreign operation are translated at the exchange rate at the end of the reporting period of the foreign operation. Adjustments are made for significant changes in exchange rates up to the end of the reporting period of the reporting entity in accordance with AASB 10 . The same approach is used in applying the equity method to associates and joint ventures in accordance with AASB 128 .

Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation. Thus they shall be expressed in the functional currency of the foreign operation and shall be translated at the closing rate in accordance with paragraphs 39 and 42 .

Disposal or partial disposal of a foreign operation

On the disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation, recognised in other comprehensive income and accumulated in the separate component of equity, shall be reclassified from equity to profit or loss (as a reclassification adjustment) when the gain or loss on disposal is recognised (see AASB 101 Presentation of Financial Statements ).

In addition to the disposal of an entity’s entire interest in a foreign operation, the following partial disposals are accounted for as disposals:

(a) when the partial disposal involves the loss of control of a subsidiary that includes a foreign operation, regardless of whether the entity retains a non-controlling interest in its former subsidiary after the partial disposal; and

(b) when the retained interest after the partial disposal of an interest in a joint arrangement or a partial disposal of an interest in an associate that includes a foreign operation is a financial asset that includes a foreign operation.

On disposal of a subsidiary that includes a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation that have been attributed to the non-controlling interests shall be derecognised, but shall not be reclassified to profit or loss.

On the partial disposal of a subsidiary that includes a foreign operation, the entity shall re-attribute the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income to the non-controlling interests in that foreign operation. In any other partial disposal of a foreign operation the entity shall reclassify to profit or loss only the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income.

A partial disposal of an entity’s interest in a foreign operation is any reduction in an entity’s ownership interest in a foreign operation, except those reductions in paragraph 48A that are accounted for as disposals.

An entity may dispose or partially dispose of its interest in a foreign operation through sale, liquidation, repayment of share capital or abandonment of all, or part of, that entity. A write-down of the carrying amount of a foreign operation, either because of its own losses or because of an impairment recognised by the investor, does not constitute a partial disposal. Accordingly, no part of the foreign exchange gain or loss recognised in other comprehensive income is reclassified to profit or loss at the time of a write-down.

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What Is a Digital Currency?

Understanding digital currencies.

Characteristics
Disadvantages

The Bottom Line

Cryptocurrency
Strategy & Education

Digital Currency Types, Characteristics, Pros & Cons, Future Uses

Amilcar has 10 years of FinTech, blockchain, and crypto startup experience and advises financial institutions, governments, regulators, and startups.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

Investopedia / Paige McLaughlin

Digital currency is a form of currency that is available only in digital or electronic form. It is also called digital money, electronic money, electronic currency, or cybercash.

Key Takeaways

Digital currencies are currencies that are only accessible with computers or mobile phones because they only exist in electronic form.
Typical digital currencies do not require intermediaries and are often the cheapest method for trading currencies.
All cryptocurrencies are digital currencies, but not all digital currencies are cryptocurrencies.
Some of the advantages of digital currencies are that they enable seamless transfer of value and can make transaction costs cheaper.
Some of the disadvantages of digital currencies are that they can volatile to trade and are susceptible to hacks.

Digital currencies do not have physical attributes and are available only in digital form. Transactions involving digital currencies are made using computers or electronic wallets connected to the internet or designated networks. In contrast, physical currencies, such as banknotes and minted coins, are tangible, meaning they have definite physical attributes and characteristics. Transactions involving such currencies are made possible only when their holders have physical possession of these currencies.

Digital currencies have utility similar to physical currencies. They can be used to purchase goods and pay for services. They can also find restricted use among certain online communities, such as gaming sites, gambling portals, or social networks.

Digital currencies also enable instant transactions that can be seamlessly executed across borders. For instance, it is possible for a person located in the United States to make payments in digital currency to a counterparty residing in Singapore, provided they are both connected to the same network.

Characteristics of Digital Currencies

As mentioned earlier, digital currencies only exist in digital form. They do not have a physical equivalent. Digital currencies can be centralized or decentralized. Fiat currency , which exists in physical form, is a centralized system of production and distribution by a central bank and government agencies. Prominent cryptocurrencies , such as Bitcoin and Ethereum , are examples of decentralized digital currency systems.

Digital currencies can transfer value. Using digital currencies requires a mental shift in the existing framework for currencies, where they are associated with sale and purchase transactions for goods and services.

Digital currencies, however, extend the concept. For example, a gaming network token can extend the life of a player or provide them with extra superpowers. This is not a purchase or sale transaction but, instead, represents a transfer of value.

Types of Digital Currencies

Digital currency is an overarching term that can be used to describe different types of currencies that exist in the electronic realm. Broadly, there are three different types of currencies:

Cryptocurrencies

Cryptocurrencies are digital currencies that use cryptography to secure and verify transactions in a network. Cryptography is also used to manage and control the creation of such currencies. Bitcoin and Ethereum are examples of cryptocurrencies. Depending on the jurisdiction, cryptocurrencies may or may not be regulated.

Cryptocurrencies are considered virtual currencies because they are unregulated and exist only in digital form.

Virtual Currencies

Virtual currencies are unregulated digital currencies controlled by developers or a founding organization consisting of various stakeholders involved in the process. Virtual currencies can also be algorithmically controlled by a defined network protocol. An example of a virtual currency is a gaming network token whose economics is defined and controlled by developers.

Central Bank Digital Currencies

Central bank digital currencies (CBDCs) are regulated digital currencies issued by the central bank of a country. A CBDC can be a supplement or a replacement to traditional fiat currency . Unlike fiat currency, which exists in both physical and digital form, a CBDC exists purely in digital form. England, Sweden, and Uruguay are a few of the nations that are considering plans to launch a digital version of their native fiat currencies.

The use of CBDCs has been suggested as a means of enhancing the speed and security of centralized payment systems, lowering the costs and dangers of handling cash, and promoting greater financial inclusion for people and companies without access to conventional banking services. They may also make cross-border payments easier and lessen the need for foreign exchange .

The introduction of a U.S. CBDC presents a number of difficulties. For instance, for Congress to authorized the issuance of a CBDC, there must be robust privacy and security infrastructures put in place. The government must also weight the possible impacts on monetary policy and the operational management of the switch from conventional money to a CBDC.

Advantages of Digital Currencies

The advantages of digital currencies are as follows:

Fast Transfer and Transaction Times

Because digital currencies generally exist within the same network and accomplish transfers without intermediaries, the amount of time required for transfers involving digital currencies is extremely fast.

As payments in digital currencies are made directly between the transacting parties without the need for any intermediaries, the transactions are usually instantaneous and low-cost. This fares better compared to traditional payment methods that involve banks or clearinghouses . Digital-currency-based electronic transactions also bring in the necessary record keeping and transparency in dealings.

No Physical Manufacturing Required

Many requirements for physical currencies, such as the establishment of physical manufacturing facilities, are absent for digital currencies. Such currencies are also immune to physical defects or soiling that are present in physical currency.

Monetary and Fiscal Policy Implementation

Under the current currency regime, the Fed works through a series of intermediaries—banks and financial institutions—to circulate money into an economy. CBDCs can help circumvent this mechanism and enable a government agency to disburse payments directly to citizens. They also simplify the production and distribution methods by obviating the need for physical manufacturing and transportation of currency notes from one location to another.

Cheaper Transaction Costs

Digital currencies enable direct interactions within a network. For example, a customer can pay a shopkeeper directly as long as they are situated in the same network. Even costs involving digital currency transactions between different networks are relatively cheaper as compared to those with physical or fiat currencies. By cutting out middlemen that seek economic rent from processing the transaction, digital currencies can make the overall cost of a transaction cheaper.

Decentralized

Digital currencies may be decentralized. This means they are not controlled by any government or financial institution. Digital currencies that are decentralized make them more resistant to government interference, censorship, and manipulation. Decentralization means true control over the digital currency is spread over a broader range of owners or users.

Due to the fact that transactions with digital currencies are not linked to personal data, users are given a high level of privacy and anonymity. They are therefore very helpful for those who want to protect the confidentiality of their financial dealings.

Accessible Around the World

Anyone with an internet connection can utilize digital currencies from anywhere in the globe. These services are therefore particularly helpful for people who do not have access to conventional banking institutions. In addition, many of these banking services only need access to an internet connection; for geographical areas that are not as developed with a strong financial infrastructure, digital currencies may be a stronger option.

Disadvantages of Digital Currencies

The disadvantages of digital currencies are as follows:

Storage and Infrastructure Issues

While they do not require physical wallets, digital currencies have their own set of requirements for storage and processing. For example, an Internet connection is necessary as are smartphones and services related to their provisioning. Online wallets with robust security are also necessary to store digital currencies.

Hacking Potential

Their digital provenance makes digital currencies susceptible to hacking. Hackers can steal digital currencies from online wallets or change the protocol for digital currencies, making them unusable. As the numerous cases of hacks in cryptocurrencies have proved, securing digital systems and currencies is a work-in-progress.

Volatile Value

Digital currencies used for trading can have wild price swings. For example, the decentralized nature of cryptocurrencies has resulted in a profusion of thinly capitalized digital currencies whose prices are prone to sudden changes based on investor whims.

Other digital currencies have followed a similar price trajectory during their initial days. For example, Linden dollars used in the online game Second Life had a similarly volatile price trajectory in its early days.

Limited Acceptance

Digital currencies are still not commonly used as a means of payment by retailers and other enterprises. Because of this, using them for routine transactions may be challenging. Though digital currencies have gained gained in popularity, there are still limited functionalities in everyday transactions in many places.

Irreversibility

On a digital currency network, transactions are irreversible. This means that once a transaction has been completed, it cannot be undone. In circumstances where a mistake or fraud has taken place, this may be a disadvantage.

This is also a tremendous disadvantage for those new to the digital currency space, as there is a substantial learning curve. Because there is no central oversight area for many digital currencies, new users can't simply go to their local branch to receive help for many digital currencies.

Pros and Cons of Digital Currencies

Faster transaction times.

Do not require physical manufacturing.

Lower transaction costs.

Make it easier to implement monetary and fiscal policy.

Offers greater privacy than other forms of currency.

Can be difficult to store and use.

Can be hacked.

Can have volatile prices that result in lost value.

May not allow for irrevocability of transactions.

Still has limited acceptability.

Central Bank Digital Currencies Around the World

Some major central banks around the world have begun looking issuing their own digital currencies. Some of the larger, more notable examples include the countries below.

China: Since 2020, the People's Bank of China (PBOC) has been testing the digital yuan , also known as e-CNY, in a number of Chinese localities. Millions of Chinese citizens currently utilize the digital yuan, which is intended to be used for retail transactions.
Sweden: Also since 2020, Sweden's Riksbank has been testing the e-krona digital currency. The e-krona is being created to complement Sweden's diminishing use of currency and to give the general public access to a safe and effective payment system.
EU: A digital euro that may be issued by the European Central Bank (ECB) and used for retail transactions within the Eurozone is being investigated.
England: The Bank of England is looking into the prospect of launching the "Britcoin" cryptocurrency . The UK's payment system would be backed by a digital currency, which could also reduce the nation's dependence on cash.
Canada: The Bank of Canada has been conducting research and consultations on the idea of creating a CBDC.

Future of Digital Currencies

Cryptocurrencies like bitcoin have exploded in value, but they are largely used for speculation or to buy other speculative assets. Although there have been some signs of merchant adoption in countries like El Salvador, the high volatility and complexity of these currencies make them impractical for most daily applications.

Many companies have tried to reduce volatility by introducing stablecoins , whose value is fixed to the price of fiat currency. This is usually done by depositing an equivalent amount of fiat, which can be used to redeem the tokens. However, stablecoin issuers such as Tether have used these deposits on more speculative investments, raising concerns that they are vulnerable to a market crash.

Another possible application is in central bank digital currencies , which could be issued by a country's bank or monetary authority. These would be used and stored in online wallets, similar to cryptocurrencies, but allowing the central bank to issue and freeze tokens at will. Several countries, such as China, have proposed digital versions of their currencies.

Can You Invest in Central Bank Digital Currencies?

CBDCs are unlikely to be useful for speculative investments since they will likely be pegged to the value of an underlying currency. However, it will still be possible to invest in those currencies through the forex markets .

How Do You Buy China's Digital Yuan?

The digital yuan, or e-CNY, is only available to Chinese citizens living in 23 major cities. Users can buy digital yuan by downloading an app and connecting it to their bank accounts.

How Do You Make a Digital Currency?

Most digital currencies are created by issuing them on Ethereum or another blockchain capable of running smart contracts . The issuer must first decide how many tokens to issue, and any special rules that limit transactions or ownership. Once these choices are coded into the smart contract, the issuer pays a small amount of cryptocurrency to pay for the computational cost of issuing the tokens.

Digital currencies are assets that are only used for electronic transactions. They do not have any physical form, although they can be exchanged for regular money or other assets. Although the most popular digital currencies are cryptocurrencies like bitcoin, many national governments are considering issuing their own centralized digital currencies.

State University of New York, Oswego. " The Basics about Cryptocurrency ."

European Central Bank. " Virtual Currency Schemes ." Page 5.

Bank of England. " Central Bank Digital Currency: Opportunities, Challenges and Design ."

European Central Bank. " Virtual Currency Schemes – a Further Analysis ." Page 6.

Sveriges Riksbank. " E-krona ."

European Central Bank. " Digital Euro ."

Bank of England. " The Digital Pound ."

Bank of Canada. " Central Bank Digital Currency ."

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IAS 21
IAS 21 outlines how to account for foreign currency transactions and operations in financial statements, and also how to translate financial statements into a presentation currency. An entity is required to determine a functional currency (for each of its operations if necessary) based on the primary economic environment in which it operates and generally records foreign currency transactions ...
PDF The Reporting Currency—Measurement and Presentation of ...
International Accounting Standard 21 The Effects of Changes in Foreign Exchange Rates (IAS 21) is set out in paragraphs 1-62 and Appendices A-B. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 21 should be read in the context of its objective and the Basis for ...
What's a functional and presentation currency under IAS 21?
The presentation currency is the currency in which the entity presents its financial statements and this may be different from the functional currency, (e.g. If the entity in question is a foreign owned subsidiary. It may have to present its financial statements in the currency of the parent company, even though that is different from their ...
Presentation Currency, Functional Currency, and Local Currency
Presentation currency refers to the currency that the parent company uses to prepare its financial statements. Mostly, a company's reporting currency is the currency of the country where the company is located. ... Every concept is very well explained by Nilay Arun. kudos to you man! Badr Moubile. 2021-02-13. Very helpfull! Agustin Olcese ...
Functional and Presentation Currency
Functional currency is the currency that mainly influences the company's transactions and cash flows, it is the currency of the country where the entity primarily generates and expends cash. It is the currency that is most appropriate for measuring the entity's financial performance and position. The same Standard defines presentation currency ...
International Accounting Standard 21The Effects of Changes in ...
An entity may present its financial statements in any currency (or currencies). If the presentation currency differs from the entity's functional currency, it translates its results and financial position into the presentation currency. For example, when a group contains individual entities with different functional currencies, the results ...
PDF Technical Summary
IAS 21 The Effects of Changes in Foreign Exchange Rates. An entity may carry on foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. In addition, an entity may present its financial statements in a foreign currency. The objective of this Standard is to prescribe how to include foreign ...
PDF The Effects of Changes in Foreign Exchange Rates
The effect of a change in the functional currency is accounted for prospectively. Therefore, an entity translates all items into the new functional currency using the exchange rate at the date of change. The resulting translated amounts for non-monetary items are treated as their historical cost. Exchange differences arising from the ...
Changes in Foreign Exchange Rates (IAS 21)
The foreign currency, as defined by IAS 21.8, is any currency that is different from the entity's functional currency. Functional currency of a foreign operation. Identifying the functional currency can be particularly complex when a reporting entity is a foreign operation of another entity and fundamentally an extension of its operations.
IAS 21 The Effects of Changes in Foreign Exchange Rates
Functional vs. Presentation Currency. IAS 21 defines both functional and presentation currency and it's crucial to understand the difference: Functional currency is the currency of the primary economic environment in which the entity operates. It is the own entity's currency and all other currencies are "foreign currencies".
IAS 21 the effects of changes in foreign exchange rates
Functional currency is a concept that was introduced into IAS 21, The Effects of Changes in Foreign Exchange Rates, when it was revised in 2003. The previous version of IAS 21 used a concept of reporting currency. In revising IAS 21 in 2004, the IASB's main aim was to provide additional guidance on the translation method and determining the ...
IFRS
IAS 21 permits an entity to present its financial statements in any currency (or currencies). The principal issues are which exchange rate (s) to use and how to report the effects of changes in exchange rates in the financial statements. An entity's functional currency is the currency of the primary economic environment in which the entity ...
IAS 1
the presentation currency (as defined by IAS 21 The Effects of Changes in Foreign Exchange Rates) the level of rounding used (e.g. thousands, millions). Reporting period. There is a presumption that financial statements will be prepared at least annually. If the annual reporting period changes and financial statements are prepared for a ...
IAS 21 Presentation Currency
IAS 21 Presentation currency. Use of a presentation currency other than the functional currency. Translation to the presentation currency. 38 An entity may present its financial statements in any currency (or currencies). If the presentation currency differs from the entity's functional currency, it translates its results and financial ...
7.1.3. Presentation currency
7.1.3. Presentation currency. Publication date: 13 Dec 2021 (updated 05 Feb 2023) gx Applying IFRS for the real estate industry - 2023 edition. An entity can choose to present its financial statements in any currency. There is no requirement in the standard for an entity to present its financial statements in its functional currency. Where the ...
Currency Translation: Accounting Methods, Risks, and Examples
Currency translation is the process of converting a foreign entity's functional currency financial statements to the reporting entity's financial statements. FASB Accounting Standards Codification ...
IPSAS Explained: A Summary of International Public Sector Accounting
Presentation currency is the currency in which the financial statements are presented. ... Get IPSAS Explained: A Summary of International Public Sector Accounting Standards, 2nd Edition now with the O'Reilly learning platform. O'Reilly members experience books, live events, courses curated by job role, ...
PDF Foreign Exchange Restrictions
presentation currency. Some stakeholders explained that: (a) the matter has become particularly extreme for Venezuelan foreign operations, whose functional currency is VEF. In particular: (i) entities have been unable for several years to exchange VEF to repatriate dividends or make investment-related payments2.
Currency exchange introduction (video)
So let's say right now, if I were to just go on some website-- and this is not the actual exchange rate right now, but let's say right now the quoted exchange rate is 10 yuan per U.S. dollar. 10 yuan is equal to $1. And every time I say dollar in this video, I'm referring to the U.S. dollar.
Use of a presentation currency other than the functional currency
If the presentation currency differs from the entity's functional currency, it translates its results and financial position into the presentation currency. For example, when a group contains individual entities with different functional currencies, the results and financial position of each entity are expressed in a common currency so that ...
What is cryptocurrency? A beginner's guide to digital currency
Cryptocurrency (also known as crypto) is a digital currency designed to work as a medium of exchange. It uses cryptography to secure and verify transactions, as well as to control the creation of ...
Digital Currency Types, Characteristics, Pros & Cons, Future Uses
Cryptocurrencies. Cryptocurrencies are digital currencies that use cryptography to secure and verify transactions in a network. Cryptography is also used to manage and control the creation of such ...

What’s a functional and presentation currency under IAS 21?

When determining the functional currency, an entity should consider the following factors:

What’s a presentation currency?

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Presentation Currency, Functional Currency, and Local Currency

1. Presentation (Reporting) Currency

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Direct Capitalization and Discounted C ...

Discount Rate Estimation Elements

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Functional and Presentation Currency

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Effects of Changes in Foreign Exchange Rates (IAS 21)

Translating foreign currency transactions

Translation at reporting dates

Monetary and non-monetary items

Recognition of exchange differences

Use of multiple exchange rates

Lack of exchangeability

Advance Consideration (IFRIC 22)

Exchange differences on borrowings

Exchange differences on deferred tax

Change in functional currency

Translating a foreign operation

Cumulative translation adjustment (CTA)

Intragroup balances

Goodwill considerations

Net investment in a foreign operation

Disposal or partial disposal of a foreign operation

Translation from the currency of a hyperinflationary economy

Functional and foreign currencies

Functional currency of a foreign operation

Use of a presentation currency other than the functional currency

Presentation in financial statements

Cash flows in foreign currency

IAS 21 The Effects of Changes in Foreign Exchange Rates

What is the objective of IAS 21?

Functional vs. Presentation Currency

How to determine functional currency

How to report transactions in Functional Currency

Subsequent reporting

How to report foreign exchange differences

Change in functional currency

How to translate financial statements into a Presentation Currency

Non-hyperinflationary economy

Hyperinflationary economy

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Use of a presentation currency other than the functional currency (AASB121_08-15_COMPmar20_07-21)