How to determine the exchange rate when a currency is not exchangeable into another currency

IAS 21 The Effects of Changes in Foreign Exchange Rates requires an entity to determine an appropriate exchange rate for translating its foreign currency transactions and balances, and the results and financial position of its foreign operations, into its functional (local currency). An appropriate exchange rate is also needed if the entity wishes to present its results and financial position in a currency that is different to its local currency. This is known as the presentation currency.

What is the exchange rate?

IAS 21 defines the ‘exchange rate’ as the ratio of exchange of two currencies. Further, it defines the ‘spot exchange rate’ as the exchange rate for immediate delivery, and the ‘closing rate’ as the spot exchange rate at the end of the reporting period. IAS 21 requires the use of either the spot or closing exchange rate, depending on what is being converted.  When the relevant currencies are exchangeable, these rates are easy to obtain, but what if the currency is not exchangeable?

What if the currency is not exchangeable?

To date, IAS 21 contained no explicit guidance on what to do if currencies are not exchangeable, and this led to diversity in practice. Recent amendments to IAS 21 now address this gap:

  • Entities must assess when a currency is exchangeable into another currency and when it is not
  • Entities must estimate the spot exchange rate when a currency is not exchangeable into another currency
  • There are additional disclosure requirements when an entity estimates the spot exchange rate because a currency is not exchangeable into another currency
  • There is application guidance to help entities assess whether a currency is exchangeable into another currency and to estimate the spot exchange rate when a currency is not exchangeable, as well as Illustrative examples.

Which entities will be affected by the amendments?

Entities will be affected by the amendments if they have any of the following and there is a lack of exchangeability between the two currencies in either direction. 

Enter into foreign currency transactions Use a presentation currency other than the functional currency Translates results and financial position of foreign operation

For example, these amendments will impact entities that enter into foreign currency transactions that must be translated into the functional (local) currency and either:

  • The entity’s functional currency is not exchangeable into the foreign currency
  • The foreign currency is not exchangeable into the entity’s foreign currency.

More information

Please refer to our publication for further discussion about:

  • The meaning of ‘exchangeable’
  • Estimating the spot exchange rate when one currency is not exchangeable into another
  • Disclosure requirements
  • Effective date and transition


For more on the above, please contact your local BDO representative.

This article has been based on an article that originally appeared at BDO Australia. Read the original article here.