On 15 August 2023, the International Accounting Standards Board (IASB) published 'Lack of Exchangeability (Amendments to IAS 21)' that contains guidance to specify when a currency is exchangeable and how to determine the exchange rate when it is not. The amendments are effective for annual reporting periods beginning on or after 1 January 2025.
The IFRS Interpretations Committee received a submission about the determination of the exchange rate when there is a long-term lack of exchangeability. The IFRS Interpretations Committee considered different approaches to address the matter and concluded that the best way forward was to recommend that the IASB publishes narrow-scope amendments to IAS 21.
The amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates
Definition of ‘exchangeable’
The amendments state that a currency is exchangeable when an entity is able to exchange that currency for another currency through market or exchange mechanisms that create enforceable rights and obligations without undue delay at the measurement date and for a specified purpose.
A currency is not exchangeable into another currency if an entity can only obtain an insignificant amount of the other currency.
Estimating the spot exchange rate when a currency is not exchangeable
If a currency is not exchangeable at the measurement date, the entity is required to estimate the spot exchange rate as the rate that would have applied to an orderly exchange transaction between market participants at the measurement date under prevailing economic conditions.
Disclosure requirements when an entity estimates the spot exchange rate
If a currency is not exchangeable, the entity is required to disclose information that enables users of its financial statements to understand how the currency not being exchangeable into the other currency affects, or is expected to affect, the entity ‘s financial performance, financial position and cash flows.
Accompanying documents and consequential amendments
The pronouncement also includes a new appendix with application guidance on exchangeability and a new illustrative example.
In addition, the IASB made consequential amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards to align with and refer to the revised IAS 21.
Effective date and transition
An entity is required to apply the amendments for annual reporting periods beginning on or after 1 January 2025. Earlier application is permitted.
An entity does not apply the amendments retrospectively. Instead, an entity recognises any effect of initially applying the amendments as an adjustment to the opening balance of retained earnings when the entity reports foreign currency transactions. If an entity uses a presentation currency other than its functional currency, it recognises the cumulative amount of translation differences in equity.