An entity may carry on foreign activities in two ways transactions and translation. In addition, it may present its financial statements in a foreign currency. IAS 21 prescribes how transactions and foreign operations should be accounted, and how to translate financial statements into a presentation currency.
The principal issues are which exchange rates to use and how to report the effects of those changes in exchange rates.
The standard should be applied to:
accounting for transactions and balances in foreign currencies;
translating foreign operations in preparation for consolidation; and
translating an entity's results into a different presentation currency.
The standard does not deal with hedge accounting (see IAS 39). It does not cover cash flows arising from transactions in a foreign currency, nor with the translation of cash flows of a foreign operation (see IAS 7).
Functional currency: currency of the primary economic environment in which the entity operates.
The following factors should be considered:
the currency in which sales prices are denominated and settled;
the country whose competitive forces and regulations mainly determine the sales prices of its goods/services;
the currency in which labour and other costs are denominated and settled;
the currency in which funds from financing activities are generated; and
the currency in which receipts from operating activities are usually retained.
When the entity is a foreign operation, the following additional factors are considered:
whether the...
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