An Executive Guide to IFRS: Content, Costs and Benefits to Business

Foreign exchange differences

Leaving aside the question of translating the financial statements of subsidiaries that use a different currency (discussed in Chapter 3), we need to look at foreign exchange differences arising on transactions, and for simplicity we will also deal with differences on outstanding assets and liabilities denominated in a foreign currency.

IAS 21 The Effects of Changes in Foreign Exchange Rates says that an item denominated in a foreign currency will be recognized at the point where IFRS would require recognition, and will be measured by conversion at the spot rate to the company’s operating currency (‘functional currency’ – the one in which it primarily transacts). If the transaction is for cash, that is the end of the matter; however, if the transaction is on credit, subsequent settlement of the outstanding receivable or payable will likely give rise to a foreign exchange gain or loss. This is recognized as a foreign exchange item in the profit and loss account and does not impact the measurement of the original transaction.

As originally written, IAS 21 also dealt with hedges of individual transactions, but this was removed subsequently and the standard now refers entities to IAS 39 Financial Instrument: Recognition and Measurement. Broadly the hedging instrument is measured at fair value at each reporting date, with gains and losses on the hedging instrument taken to Other Comprehensive Income (OCI). When the hedged item matures, the net gain or loss ...