The IASB has issued Lack of Exchangeability (Amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates).
The amending standard adds requirements to IAS 21 for an entity to determine whether a currency is exchangeable into another currency and if it is not exchangeable, the exchange rate that must be used.
IAS 21 specified the exchange rate to use when exchangeability between two currencies was temporarily lacking, which was the first subsequent rate at which an exchange could be made.
However, IFRS was silent when a lack of exchangeability was not temporary.
This amendment was introduced to address the issue of how to determine foreign exchange rates, where foreign operations have been unable to access foreign currencies using any legal exchange mechanism for an extended period. This is relatively rare in practice but may have a significant impact in countries such as Venezuela where the normal foreign exchange market has ceased to function.
The following two-step approach has now been included.
Step 1: Assess whether the currency is exchangeable
If a company is able to obtain not more than an insignificant amount of the other currency at the measurement for the specified purpose, the currency is not exchangeable into the other currency for that purpose. If not exchangeable, step 2 should be followed.
Step 2: Estimate spot exchange rate when a currency is not exchangeable
The objective in estimating the spot exchange rate is to reflect the rate at which an orderly exchange transaction would take place at the measurement date between market participants under prevailing economic conditions.
A company can use an observable exchange rate without adjustment – if that rate meets the estimation objective; or another estimation technique where any observable exchange rate is used and adjusted as necessary to meet the estimation objective. Examples of when this might be the case include:
- Where there is a spot rate available for another purpose. For example, a company may be allowed to obtain foreign currency to import goods but may be prohibited from making distributions to its parent entity
- Where there may be multiple different available rates for different purposes (for example, when certain activities are subject to a penalty or incentive that results in a different exchange rate)
These amendments are effective for annual reporting periods beginning on or after 1 January 2025, but earlier application is permitted.