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Mastering Foreign Currency Accounting: A Pedagogical Case Based on IAS 21
Ana Isabel Lopes
ISCTE-IUL Instituto Universitário De Lisboa, Portugal
Volume 19: 2024, pp. 285-292; ABSTRACT
This educational exercise offers a comprehensive application aimed at improving understanding of the implications of
fluctuations in foreign currency rates. Grounded in International Accounting Standard (IAS) 21 - The Effects of Changes
in Foreign Exchange Rates, the case employs a structured two-step approach: firstly, elucidating the reporting of
foreign currency transactions within the functional currency, and secondly, illustrating the conversion of financial
statements into a presentation currency distinct from the functional currency. This scenario mirrors real-world business
scenarios, containing both isolated and combined forms of currency exposure, thereby equipping students with practical
accounting skills in navigating the complexities of international finance. With the British pound (GBP) employed as the
functional currency, students engage in transactions denominated in US dollars (USD), culminating in the preparation of
financial statements at year-end in Euros (EUR) and the functional currency. Emphasising the importance of professional
judgment and critical thinking, the case challenges students to analyse nuanced situations where definitive answers are
not always evident. Furthermore, it fosters an indepth understanding of the impact of exchange differences recognised in
comprehensive income, particularly those manifesting directly in profit or loss accounts or within various components of
shareholders’ equity. Designed for postgraduate and executive master's programmes, as well as intermediate and advanced
undergraduate courses, this case offers a dynamic learning opportunity that transcends traditional classroom boundaries,
empowering students to navigate the intricate landscape of foreign currency accounting with confidence and expertise.
Keywords: currency translation; foreign exchange rate; foreign exchange transactions; instructional exercise; functional currency; presentation currency; translation of financial statements.
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