International Accounting Standard (IAS) 21, The Effects of Changes in Foreign Exchange Rates, generally requires the use of a spot exchange rate when an entity reports foreign currency transactions or a foreign operation’s results and financial position in its financial statements. However, IAS 21 does not discuss how an entity determines the exchange rate to use when the foreign operation’s functional currency is not exchangeable into the presentation currency. To address this situation, the International Accounting Standards Board recently issued an Exposure Draft, Lack of Exchangeability: Proposed amendments to IAS 21.
If finalized, the proposed amendments would require an entity to determine whether a currency is exchangeable into another currency, and provides factors to consider in that regard. The Exposure Draft also provides guidance for estimating a spot exchange rate when a currency is not exchangeable into another currency. When an entity estimates a spot exchange rate because exchangeability between two currencies is lacking, the proposed amendments would require the entity to disclose information that enables financial statement users to understand how a lack of exchangeability between two currencies affects, or is expected to affect, its financial performance, financial position and cash flows.
The Exposure Draft is available for comment until September 1, 2021.