Exchange rates – Lack of exchangeability

Assessing exchangeability

Under IAS 21, a currency is exchangeable into another currency when a company is able to exchange it for the other currency at the measurement date and for a specified purpose. A lack of exchangeability might arise when a government imposes controls on capital imports and exports, or when it provides an official exchange rate but limits the volume of foreign currency transactions that can be undertaken at that rate. Consequently, market participants are unable to buy and sell currency to meet their needs at the official exchange rate and turn to unofficial parallel markets.

During times of economic uncertainty, it is important for a company to reassess at each reporting date whether a currency is exchangeable into another currency at that date and for a specified purpose. Whether a currency is exchangeable could depend on the purpose for obtaining the other currency.

In assessing exchangeability, a company assumes that its purpose in obtaining the other currency is to realise or settle:

• individual foreign currency transactions, assets or liabilities, when it reports foreign currency transactions in its functional currency;
• its net assets or net liabilities, when it uses a presentation currency other than its functional currency; or
• its net investment in the foreign operation, when it translates the results and financial position of a foreign operation into the presentation currency. [IAS 21.8–8A, A7]
  

Estimating the spot exchange rate when a currency is not exchangeable

If a currency is not exchangeable, then a company needs to estimate a spot exchange rate. The objective 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.

When estimating a spot exchange rate, the company can use:

• an observable exchange rate without adjustment; or
• another estimation technique.

The technique could include using rates from exchange transactions in markets or exchange mechanisms that do not create enforceable rights and obligations, with adjustments as necessary to meet the objective described above. [IAS 21.19A, A11, A17]

Examples of an observable exchange rate include:

• a spot exchange rate for a purpose other than that for which the company assesses exchangeability; and
• the first exchange rate at which the company is able to obtain the other currency for the specified purpose after exchangeability of the currency is restored. If the company chooses to use this as an observable rate, then it would also need to consider the time elapsed between the measurement date and the date at which exchangeability is restored, as well as inflation rates.
  

Disclosures

When a company estimates a spot exchange rate, it discloses information that enables users of its financial statements to understand how the currency not being exchangeable into the other currency affects, or is expected to affect, its financial performance, financial position and cash flows. These disclosures might include:

• the nature and financial impacts of the currency not being exchangeable;
• the spot exchange rate used;
• the estimation process; and
• risks it is exposed to because the currency is not exchangeable.

Actions for management

During periods of economic uncertainty:

• assess whether currencies that need to be translated for financial reporting purposes are exchangeable into another currency at the reporting date and for a specified purpose;
• estimate a spot exchange rate when a currency is not exchangeable; and
• disclose information that enables users to understand the impact of using an estimated exchange rate on the financial statements.