IFRS – IAS 21: The effects of changes in foreign exchange rates

The International Accounting Standards Committee (IASC) released International Accounting Standard 21 (IAS 21) to address the topic of foreign exchange rates.

This is especially important for international businesses as the value of things such as contracts or assets can be more volatile to the investor if the currencies they use are foreign.

The main focus of this standard is to decide which exchange rate to use, as well as how to account for changes in exchange rates. Areas of focus are fixed assets, contracts, denominated in foreign balances as well as many others. Generally, items on the balance sheet are translated at the balance sheet date, while transactions on the income statement are translated at the foreign exchange rate of the date the transaction took place.

IAS are principles based standards, rather than strict rules based standards that govern international accounting. IAS standards differ from IFRS standards in that they were introduced prior to 2001, whereas IFRS were produced after this date by the IASB, or the International Accounting Standards Board. When determining the hierarchy of these, the IAS is considered to be the building blocks in which the newer and more relevant IFRS are founded and therefore IFRS is more authoritative when these conflict.

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