Under AASB 121 The Effects of Changes in Foreign Exchange Rates, an entity uses the spot exchange rate for translation. However, there was previously no guidance on which exchange rate to use if exchangeability between two currencies was lacking.
To address this, AASB 121 was amended to clarify when a currency is considered to lack exchangeability and how an entity should estimate a spot rate in such cases.
With these amendments, entities are now required to provide new disclosures to help users assess the financial impact of a lack of exchangeability on the entity's financial performance, position, and cash flows.
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Lack of exchangeability: Financial reporting considerations
Guidance on lack of exchangeability and its impact on financial reporting
FAQs
A currency is considered exchangeable when an entity can exchange that currency into another currency at the measurement date and for a specific purpose. This evaluation is ongoing and depends on the circumstances of each entity.
Factors to consider when assessing whether a currency lacks exchangeability include:
- time frame within which the entity could obtain the other currency
- purpose of obtaining the other currency
- ability to obtain the other currency
- amount of the other currency that can be obtained
- whether markets or exchange mechanisms that create enforceable rights and obligations exist.
An entity estimates the spot exchange rate at the measurement date when a currency is not exchangeable into the other currency.
When an entity estimates a spot exchange rate due to lack of exchangeability, it discloses additional information to enable users of its financial statements to understand how the entity’s financial performance, position and cash flows are affected, or are expected to be affected, by the lack of exchangeability.
When estimating a spot exchange rate, an entity’s objective is to reflect the rate at which an orderly exchange transaction would occur between market participants at the measurement date, given the prevailing economic conditions. There is no specific method required for this estimation. As such, an entity may use either:
- an observable exchange rate without adjustment or
- apply another suitable estimation technique.
The amendments apply for annual reporting periods beginning on or after 1 January 2025.
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