The IAS 21 Currency Mastery: How Smart FX Accounting Protects International Profits
A multinational thought they were hedging currency risk perfectly. Then year-end came, and their foreign subsidiary’s “hedged” profits created an $18 million forex loss. The hedge worked economically—but IAS 21 doesn’t care about economics.
The Functional Currency Fiasco
First question IAS 21 asks: What’s your functional currency? Get this wrong, everything else falls apart.
The indicators battle:
- Sales currency? (Often misleading)
- Cost currency? (Getting warmer)
- Financing currency? (Important)
- Management autonomy? (Critical)
Disaster story: A Mexican subsidiary sells in USD, reports to US parent in USD, keeps books in USD. Functional currency? USD, right? Wrong! Costs were in pesos, local management made decisions, financing was peso-based. Functional currency: pesos. Three years of wrong accounting, massive restatement.
The Translation vs. Transaction Trap
Here’s what breaks brains: The same foreign currency can create different accounting depending on context:
- Transaction in foreign currency? → P&L impact
- Translation of foreign operation? → Other comprehensive income
The hedging heartbreak: US parent hedges Mexican subsidiary’s peso earnings. Economically perfect—peso falls, hedge gains. Accounting result:
- Subsidiary translation loss: Through OCI
- Hedge gain: Through P&L
- Net income volatility the hedge was supposed to prevent!
The Rate Selection Disaster
Which exchange rate? Sounds simple until you have:
- Official rate: 50
- Parallel rate: 75
- Rate you actually get: 72
IAS 21 says use the rate at which you could settle. But what if you can’t settle freely?
Venezuela nightmare: Company used official rate of 6.3 bolivars/dollar. Reality: Nobody could exchange at that rate. Parallel market: 170. When finally forced to reality, assets dropped 96% overnight.
The Monetary vs. Non-Monetary Maze
Golden rule: Monetary items = retranslate every period. Non-monetary = stick with historical rate. Simple? Look closer:
- Prepaid rent: Non-monetary
- Refundable deposits: Monetary
- Inventory: Non-monetary
- Inventory write-down to NRV: Monetary!
The classification chaos: A company treated all prepaids as non-monetary. Including $10 million in prepaid services refundable in cash. Euro strengthened 20%. Missing forex gain: $2 million.
Your Takeaway as an Accountant
Document functional currency analysis annually—facts change. Create a monetary/non-monetary asset register. Track exchange rates daily, not monthly. When hedging, understand the accounting mismatch before celebrating the economic match.
Most importantly: In forex accounting, your intuition is usually wrong. What makes business sense rarely makes accounting sense.
Master multicurrency complexity with ACCOUNTANT MINDSET—where we translate confusion into clarity.
