IAS 21 — Lack of exchangeability

Date recorded:


In May, June and September 2018, the Committee discussed the difficulties in applying IAS 21 when a currency suffers from an extreme long-term lack of exchangeability and that foreign operation has not been able to access foreign currencies using the available legal exchange mechanisms, such as with the Venezuelan Bolivar. The Committee agreed to publish a tentative agenda decision after June 2018 meeting. Since the Committee observed that IAS 21 does not include relevant explicit requirements, the Committee members agreed with the narrow-scope standard-setting due to the urgency of the matter.

Based on the discussions and feedback from the Committee members, the narrow-scope standard-setting approach shall cover a broader scope applicable not only a particular circumstance and not reconsider the fundamental principles in IAS 21. The scope includes (i) providing clarity on the definitions of "exchangeability" and "lack of exchangeability" (Agenda Paper 14A); (ii) developing requirements in developing the exchange rate in the circumstances which exchangeability is lacking (Agenda Paper 14B); and (iii) setting out disclosure requirements (Agenda Paper 14C).

Staff analysis—Agenda Paper 14A

Given the lack of guidance in IAS 21, the staff analyse exchangeability is lacking when an entity would be unable to exchange a currency for another currency at a specified date. The staff analyse the following considerations in identifying when an entity is able to obtain foreign currency and when not:

  • a) Timeframe within which an entity is able to settle a foreign currency transaction—having considered the definition of 'spot rate', the staff analyse that the entity shall, in order to assess exchangeability, consider whether it could obtain immediate delivery of other currency. The staff acknowledge the completion of an exchange transaction may not always occur instantaneously in practical scenarios and therefore include consideration of normal administrative delay in addition to immediate delivery of other currency. The staff recommend no application guidance to be provided and the assessment would depend on facts and circumstances.
  • b) No intention to exchange a currency—the staff consider lack of exchangeability is caused by laws, regulations or other events outside the control of the entity and therefore view that the assessment of the entity's intention is not relevant.
  • c) Means of accessing foreign currency—the staff consider the importance of enforceability of rights and obligations of the exchange mechanisms and view that in assessing exchangeability, an entity shall consider only markets or exchange mechanisms that it can legally access.
  • d) Purpose of obtaining foreign currency—The staff acknowledge there are situations that different exchange rates apply for differing uses of foreign currency, for example a rate for settling foreign currency payments and a different rate for dividend remittance abroad. The staff recommend that in assessing exchangeability an entity would assume the purpose of obtaining foreign currency is (a) to settle individual foreign currency transactions, or assets or liabilities related to those transactions, when it reports foreign currency transactions in the functional currency or (b) to realise the entity’s net assets when it uses a presentation currency other than the functional currency. The assessment of exchangeability shall be performed separately for (a) and (b) above, and the staff consider that such analysis has not violated the 'several exchange rate' principles set out in IAS 21:26.
  • e) Amounts of foreign currency exchanged—the staff analyse the effects of different extent of foreign currency that the entity is able to obtain and recommend exchangeability is lacking when an entity is unable to obtain more than an insignificant amount of foreign currency. The staff consider this amendment could cover more circumstances and not overly restrictive.


The Chair acknowledged that there are too many market practices. The Committee members expressed many of their personal views on the subject matter. A Committee member is concerned about enforceability (legally permissible to access the market). Other Committee members shared similar views that such guidance will create practical problems because something may be permitted but not explicitly stated in the law for some of the jurisdictions or legal systems. Therefore she suggested to remove the term 'legally' and just keep 'permissible and enforceable'. The staff considered the focus should be on what is creating the enforceable rights and obligations, which is a more objective assessment.

A Committee member asked about magnitude of 'significant amount' and the staff responded that it is a matter of judgement. Another Committee member suggested not to put an amount in illustrating what is 'more than an insignificant amount' because that may imply a threshold while such determination is a very judgmental and very facts specific area.

The Committee members recognised that the staff acknowledged the challenge of existence of multiple rates. The practical problem of which could be 'unit of account'. The Chair agreed that 'unit of account' does matter.

Another Committee member expressed her view on blended rate. There is a practical problem because the system is hard to manage if different exchange rates are used for different transactions.

No decisions were made in the meeting.

Staff analysis—Agenda Paper 14B

In respect of determining the exchange rate, certain Committee members said the first subsequent rate (as set out in IAS 21:26) at which exchanges could be made may not always reflect the conditions existing at the reporting date. The staff acknowledge that and therefore develop a framework with the core principle that an entity should use a spot rate that reflects conditions existing at the reporting date. The staff has prepared a flowchart in illustrating on how to determine the exchange rate when the currency is subject to a lack of exchangeability—the observable exchange rate is used as spot rate at the reporting date if there is an observable rate at the reporting date that meets the definition of spot rate and approximates the spot rate at the reporting date. If not, then the entity would consider if the exchangeability has been restored when the financial statements are authorised for issue. If the first subsequent exchange rate after the restoration of exchangeability approximate the spot rate at the reporting date, that rate shall be used, otherwise, the entity would estimate the spot rate at the reporting period.

As a next step, the staff analyse the requirements in estimating the spot rate. The staff acknowledge the complexity of the estimation process involved in such an exercise and observe the practice of using an observable rate which is not a spot rate or a spot rate at a date other than the reporting date as a starting point. The staff agree that it involves a high level of judgement and so an entity shall assess carefully its own facts and circumstances by considering indicators when assessing whether an observable rate would approximate the spot rate. The staff recommend the amendment neither specifies the method of estimation nor prescribes a particular estimation technique. At the same time, disclosure requirements are introduced in order to maintain the faithfulness of the representation of that estimation.


Most Committee members agreed with the analysis and proposal in the staff paper. A Committee member also reminded the staff to be careful of what is the objective of estimating the rate. The staff analysed that it should be an estimated rate to get as close as possible the exact rate. However the Committee member said it should be the best rate that approximate the economic situation at a given point in time, for example at the end of the reporting period.

Another Committee member pointed out the practical challenge of using the first subsequent exchange rate after the restoration of exchangeability as an approximate of the spot rate at the reporting date. The exchange rate may be restored after the end of the reporting period but right before the earning release date and that will create a problem in a practical preparer perspective. The Committee members considered it is a non-adjusting event because the exchange rate restoration is happened after the year end. The staff suggested to change this to the first exchange rate at which the transaction could be made.

Some Committee members expressed their appreciation for the flowchart in the staff paper which is very clear and useful and serves as a good summary of the staff paper.

Another Committee member said the staff paper should state that the estimated rate is not the spot rate. Spot rate is the rate that the entity can immediately get when converting the currency while an estimated rate is not.

No decisions were made in the meeting.

Staff analysis—Agenda Paper 14C

In respect of the disclosure requirements, the staff recommend the Board develop:

  • a) A high-level disclosure objective which captures how a lack of exchangeability affects an entity's financial statements at the reporting date. The overall disclosure objective is recommended to be: "an entity shall disclose information that enables users of financial statements to understand how a currency’s lack of exchangeability affects, or is expected to affect, an entity’s financial performance, position and cash flows"; and
  • b) Specific disclosure requirements, including the spot rate used, nature of the spot rate, the estimation process including inputs (qualitative information), uncertainties (quantitative information) as well as a sensitivity analysis.


The Committee members generally agreed with the staff analysis. Some Committee members had concerns about the disclosure requirements of sensitivity analysis. One Committee member said the sensitivity should be based on reasonably possible other choices of (instead of reasonably possible change in) the estimated rate because it is important to highlight the different measurement basis (i.e. other possible choices from the measurement perspective or other potential basis).

Another Committee member expressed his concern on the usefulness of the disclosure of sensitivity analysis. He considered there is already a lot qualitative and quantitative information disclosed. He also opined that estimating the rate is already a very complex process that involves so many parameters and questioned whether providing additional estimates provides useful information. The preparation of the disclosure of sensitivity analysis will increase costs but not provide useful information to the investors. The Chair replied that there is a need to do investors outreach in order to understand what are the interests of investors.

A Committee member highlighted that disclosure of the underlying assumptions is very important for the users of the financial statements to understand the modelling or mechanics of arriving the specific rate used. Greater granularity about mechanics might be more important than some of the overall sensitivity analysis.

No decisions were made in the meeting.

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