IAS 21 - selection of exchange rates source in practice

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Violet
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IAS 21 - selection of exchange rates source in practice

Post by Violet »

Good day, everyone!
Please kindly help me to understand several things regarding IAS 21:
1) IAS 21 does not include specific rules on how an entity should select the source of exchange rates for converting foreign currency transactions to functional currency amounts. There are a lot of sources: countries' cental banks publications, exchange markets with their own info on market exchange rates, some websites ('currency converters') with aggregated information on some averages for many currency pairs, commercial banks, etc. Please share with me the rules or some logic, which are used in practice to determine that source.
From my experience, the most frequently selected rates are, of course, those published by the central bank of certain country (I believe, the main reason for that is the requirement of that country local rules, but please correct me if I'm wrong).
2) In case if an entity uses one source from its incorporation, and at some point wants to start to use another source, whether this will be a change in accounting policy (IAS 8)? I know that once it was selected, it should be used from year to year, but what if changed? How sound should be the reason for that? Shall an entity disclose the fact of changing the source in its IFRS financial statements with reasons, and maybe the estimation of effect (if practicable)?
Thank you in advance for your comments and suggestions!
JRSB
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Re: IAS 21 - selection of exchange rates source in practice

Post by JRSB »

I don't know what the standard says exactly because in practice any reasonable source would be acceptable - perhaps unless you have an unusual currency where rates vary widely between sources (roubles?)... I suppose best practice would be to use a consistent source but GBP USD EUR won't vary much between Bloomberg, ECB, BoE, Yahoo....
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Marek Muc
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Re: IAS 21 - selection of exchange rates source in practice

Post by Marek Muc »

IAS 21 does actually cover this briefly in par. 26:
When several exchange rates are available, the rate used is that at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred at the measurement date.
can you describe your case specifically?
Violet
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Re: IAS 21 - selection of exchange rates source in practice

Post by Violet »

The orginal case is the following: from inception entity (incorporated in country Z) was using exchange rates published by the central bank of Z. Recently it was decided by the management to start using exchange rates from another source - website of American forex broker, who publishes rates for a lot of currency pairs (some resources say these rates are 'averages of figures gathered from Telerate, Bridge, and Reuters rather than being closing market prices'). In general, my opinion is that entity shall keep using the rates from Z Central Bank as before (for consistency sake). However, if the entity decides to start using that forex broker's rates (hypothetically):
- will conversion at broker's rates contradict IAS 21 rules? I don't think so, because both sources seem to be close, but not exact rates, at which entity can settle its transactions/balances in reality.
- shall this decision be treated as a change in accounting policy and result in providing respective disclosure?
Hope this explains my initial questions better. Thank you!
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Marek Muc
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Re: IAS 21 - selection of exchange rates source in practice

Post by Marek Muc »

it will still be in line with IAS 21

see this paragraph on changes in accounting estimates vs. changes in accounting policies

https://ifrscommunity.com/knowledge-bas ... g-policies

There is probably no definitive answer to your question, but you can argue that this is a change in estimate. You could say that currently the data from forex broker better reflects 'rate at which the future cash flows represented by the transaction or balance could have been settled'. But anyway, is this impact even significant? What currency are we talking about?

I don't understand this one:
some resources say these rates are 'averages of figures gathered from Telerate, Bridge, and Reuters rather than being closing market prices
if this is the average of closing prices, the we can say that this is a closing market price, can't we?
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nauman
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Re: IAS 21 - selection of exchange rates source in practice

Post by nauman »

It is not a matter of compliance with IAS 21 per say as the standard doesn't say which rate to use but more a question on reasonableness of management's judgement and estimate with regards to exchange rate. This can become very tricky when it comes to some of the economies where there is a wide discrepancy between the official exchange rate and the exchange rate that is actually used in the market. Lebanon is a perfect example of this right now, where the Central bank exchange rate is 1 USD to 1,500 LBP but the parallel rate is around 8,500+ LBP to a USD.

You need to form a basis, which would reflect the economic realities behind your operations in a foreign country and align all the stakeholders. That is pretty much it.
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Marek Muc
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Re: IAS 21 - selection of exchange rates source in practice

Post by Marek Muc »

wow, so what rate do you use Nauman, the market rate I presume? where do you get it from?
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Re: IAS 21 - selection of exchange rates source in practice

Post by JRSB »

Uzbekistan had a similar issue, the solution being for all parties to agree to an official rate (which is different to what you referenced MM about what rate is actually achievable). But I think there might be government requirement to use such rate for certain transactions, eg the rate used in government deals can differ to 'open market'...
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