Regulatory updates

As per the provisions of International Accounting Standard (IAS) 21, The Effects of Changes in Foreign Exchange Rates, a company uses a spot exchange rate when translating a foreign currency transaction.

However, in certain cases it may be possible that one currency cannot be exchanged into another currency. Consequently, market participants are unable to buy and sell currency to meet their needs at the official exchange rate and instead resort to unofficial, parallel markets. In this regard, in August 2023, the International Accounting Standards Board (IASB) issued certain amendments to IAS 21. These include:

• Assessing exchangeability: IASB has stated that a currency is exchangeable into another currency, when a company is able to exchange that currency for the other currency at the measurement date and for a specified purpose. However, when a currency is not exchangeable, a company should estimate a spot rate.

• Estimating spot rate: The amendments contain no specific requirements for estimating a spot rate. Thus, when estimating a spot rate, a company can use:

• An observable exchange rate without adjustment, if that rate meets the estimation objective – i.e., it reflects that, at which rate an orderly exchange transaction would take place at the measurement date between market participants under the prevailing economic conditions, or
• Another estimation technique, including using rates from exchange transactions in markets or exchange mechanisms that do not create enforceable rights and obligations. However, the technique used should meet the estimation objective.

• Estimating spot rate: Under the amendments, companies would need to provide certain new disclosures to help users assess the impact of using an estimated exchange rate on the financial statements. These disclosures include:

• Nature and financial impacts of the currency not being exchangeable
• Spot exchange rate used
• The estimation process, and
• Risks to the company because the currency is not exchangeable.

Effective date: The amendments would apply for annual reporting periods beginning on or after 1 January 2025. Earlier application is permitted.

To access the text of the amendments, please click here