When a Currency Cannot Be Exchanged, How Should Financial Reporting Respond?
prepared by Hafsa Research and Analysis Company
The Core Change: Filling a Long-Standing Gap
In August 2023, the International Accounting Standards Board (IASB) issued amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates to address a critical gap in the Standard. Previously, IAS 21 specified the exchange rate to use when exchangeability between two currencies is temporarily lacking, but it did not specify what an entity should do when the lack of exchangeability is not temporary .
This gap created practical divergence. Entities operating in jurisdictions with currency controls or foreign exchange shortages—such as Argentina, Zimbabwe, and Nigeria—adopted different estimation methods, reducing comparability across financial statements. The amendments, effective for annual reporting periods beginning on or after 1 January 2025 (early application permitted), introduce a clear framework for assessment, estimation, and disclosure .
The UK Endorsement Board adopted the amendments in July 2024, and the EU followed with Commission Regulation (EU) No 2024/2862 in November 2024 .
Solution 1: Determine Whether a Currency Is Exchangeable
The amendments establish a clear test. A currency is exchangeable into another currency when an entity is able to obtain the other currency:
- Within a normal administrative delay, and
- Through a market or exchange mechanism that creates enforceable rights and obligations .
The assessment is purpose-specific. An entity must consider the purpose for which it needs to obtain the other currency—whether for settling a transaction, realising a net investment, or another specified purpose. If an entity can only obtain an insignificant amount of the other currency for that purpose at the measurement date, the currency is deemed not exchangeable .
Key factors in the assessment include: the time frame for exchange, the ability to obtain the other currency, the nature of the market or exchange mechanism, and the purpose of obtaining the currency .
Action step: At each reporting date, document the specific purpose for which each material foreign currency exposure is assessed. A currency may be exchangeable for one purpose but not another—the conclusion is not uniform across all uses .
Solution 2: Estimate the Spot Exchange Rate When Exchangeability Is Lacking
When a currency is not exchangeable, the entity must estimate the spot exchange rate. The objective is explicit: determine the rate at which an orderly exchange transaction would take place at the measurement date between market participants under prevailing economic conditions .
The amendments do not prescribe a single method. Instead, they provide a flexible framework with two broad paths :
Path 1: Use an observable exchange rate without adjustment. This includes:
- A spot exchange rate for a purpose other than the one for which exchangeability is being assessed .
- The first subsequent exchange rate at which the entity can obtain the currency for the specified purpose after exchangeability is restored .
Path 2: Use another estimation technique. This may involve adjusting any observable exchange rate as necessary to meet the estimation objective. Rates from parallel or unofficial markets may be used, provided the technique meets the objective of reflecting an orderly transaction .
The IASB deliberately did not establish a hierarchy of observable rates. While a hierarchy would increase consistency, it might impose additional costs without providing more useful information. The combination of a clear objective and flexibility allows entities to choose a cost-effective approach suited to their circumstances .
Illustrative example: Entity X cannot obtain PC to realise its net investment in a foreign subsidiary. However, PC is freely obtainable for all other purposes, and a single free-floating LC:PC rate is updated several times daily. Entity X may use that observable rate because it meets the estimation objective for the purpose of realising the net investment .
Action step: Document the estimation technique selected, the rationale for choosing it, and how it satisfies the orderly transaction objective. If using a parallel market rate, assess whether that market creates enforceable rights and obligations—a key threshold in the assessment .
Solution 3: Comply with the New Disclosure Requirements
The amendments introduce enhanced disclosure requirements designed to help investors understand the effects, risks, and estimation techniques used when a currency is not exchangeable .
Entities must disclose:
- The nature and financial impacts of the currency not being exchangeable
- The spot exchange rate(s) used
- The estimation process, including the technique and inputs
- Risks to which the entity is exposed because the currency is not exchangeable
The disclosure objective is to enable users to assess how the lack of exchangeability affects, or is expected to affect, the entity’s financial performance, financial position, and cash flows .
Action step: Integrate the disclosure requirements into your period-end close checklist. Prepare a “lack of exchangeability memorandum” documenting the assessment, estimation method, and supporting evidence. For entities operating in jurisdictions with capital controls, this should be a standing agenda item with your auditors.
Solution 4: Apply the Transition Requirements Correctly
When first applying the amendments, entities are not permitted to restate comparative information. Instead:
- If the foreign currency is not exchangeable at the beginning of the annual reporting period in which the amendments are first applied, the entity translates affected assets, liabilities, and equity using the estimated spot rate at that date.
- The resulting difference is recognised as an adjustment to the opening balance of retained earnings (if between foreign and functional currency) or to the foreign currency translation reserve (if between functional and presentation currency) .
Action step: Identify whether any of your foreign currency exposures were non-exchangeable at the start of your first application period. Quantify the opening adjustment and coordinate with your audit team on the accounting treatment.
Executive Checklist: Immediate Actions
This week:
- Identify all jurisdictions in which your entity operates where currency exchangeability may be restricted
- Flag any material exposures requiring purpose-specific assessment
This month:
- Document the purpose for each material foreign currency assessment
- Select and document the estimation technique for any non-exchangeable currency
This quarter:
- Draft disclosure templates aligned with the new requirements
- Engage auditors on the estimation methodology and transition adjustments
Closing Thoughts
The IAS 21 amendments represent a significant step toward addressing real-world economic challenges. The flexibility in estimating exchange rates allows entities to reflect economic reality, but it also introduces subjectivity. The emphasis on transparency and disclosure is critical to ensuring that financial statements remain useful to investors.
For finance professionals, mastering these amendments is essential—not only for ACCA examinations but for practical application in global financial reporting.
Prepared by Hafsa Research and Analysis Company
