Foreign currency transactions

Functional currency (IAS 21) is the currency of the primary economic environment in which the entity operates — mainly the currency that influences its selling prices and its labour, material and other costs, supported by the currencies in which it raises finance and keeps receipts. Any other currency is a foreign currency.

Initial recognition. A foreign currency transaction is recorded in the functional currency at the spot rate on the transaction date. An average rate for a week or month can be used if rates don't fluctuate significantly.

At each reporting date - Monetary items — units of currency held, and assets and liabilities to be received or paid in a fixed or determinable number of currency units (cash, receivables, payables, loans, provisions settled in cash) — are retranslated at the closing rate. - Non-monetary items measured at historical cost (inventory, property, plant and equipment, prepayments, advances received) stay at the rate on the transaction date — they're not retranslated. - Non-monetary items measured at fair value use the rate at the date fair value was measured.

Exchange differences on settling or retranslating monetary items are recognised in profit or loss in the period they arise. (When a gain or loss on a non-monetary item goes to OCI — such as a revaluation — its exchange component goes to OCI too.)

Advances. A payment or receipt in advance creates a non-monetary asset or liability. Under IFRIC 22, the transaction date for the related asset, expense or income is the date of that advance, so the part of the cost covered by the advance stays at the advance date's rate.

Lack of exchangeability. Amendments issued in August 2023 (effective for annual periods beginning on or after 1 January 2025) require an entity to assess whether a currency is exchangeable into another. When it isn't, the entity estimates the spot rate at which an orderly exchange transaction would take place between market participants under prevailing conditions, and discloses how it did so and the risks involved. US GAAP (ASC 830) treats foreign currency transactions in essentially the same way.