IAS 21 - The Effects of Changes in Foreign Exchange Rates: A Review of Concepts and Related Issues

Abstract

As interaction of companies across borders increases, accounting for foreign exchange transactions as well as translation of financial statements has become an important topic. An entity is exposed to foreign exchange gains or losses through investments or balances in a foreign currency or ownership in a foreign operation. In order to assess these risks and the related impact, foreign currency transactions and balances should be accounted accurately. IAS 21 aims to set the framework for inclusion of foreign currency transactions and foreign operations in the financial statements of an entity and translation of financial statements into a presentation currency. Foreign exchange transactions and translations inevitably affect an entity’s net income and/or other comprehensive income. Despite IAS 21 setting the framework for accounting for these effects, management still may use some judgement in practice. When analyzing financial statements, users of information should be aware of the underlying methods used for accounting for exchange rate differences since results of analysis of financial statements is largely dependent on these methods.