IPSAS 4
Active
The Effects of Changes in Foreign Exchange Rates
Prescribes how to include foreign currency transactions and foreign operations in an entity's financial statements, and how to translate financial statements into a presentation currency. Covers determining functional currency, recognizing exchange differences, translating foreign operations, and disposal effects, including the advance-consideration Appendix.
Active Standard
IPSAS 4 The Effects of Changes in Foreign Exchange Rates is the current, active standard issued by the IPSASB. It is effective for annual financial statements covering periods beginning on/after 1 January 2010 (earlier application encouraged). It superseded IPSAS 4 (2006). The current Standard comprises paras. 1–73, including Appendix A.
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Objective, Scope & Definitions (paras. 1–10)
Objective & scope
Prescribes how to include foreign currency transactions and foreign operations in an entity's financial statements, and how to translate financial statements into a presentation currency. Principal issues: (a) which exchange rate(s) to use, and (b) how to report the effects of rate changes.
Accounting for transactions/balances in foreign currencies (excl. IPSAS 41-scope derivatives) Translating foreign operations included by consolidation or the equity method Translating an entity's own performance/position into a presentation currency
Hedge accounting for foreign currency items (incl. net investment hedges) – governed by IPSAS 41 Cash flow statement presentation of foreign currency cash flows – governed by IPSAS 2
Key definitions (para. 10)
Functional currency
The currency of the primary economic environment in which the entity operates.
Presentation currency
The currency in which the financial statements are presented.
Foreign currency
A currency other than the entity's functional currency.
Closing rate
The spot exchange rate at the reporting date.
Foreign operation
A controlled entity, associate, joint arrangement, or branch based/conducted in a country or currency other than the reporting entity's.
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Determining Functional Currency (paras. 11–16)
Primary indicators (para. 11) – considered FIRST
Currency that mainly influences revenue – taxes, grants, transfers, fines, and sale prices of goods/services Currency of the country whose competitive forces/regulations mainly determine sale prices Currency that mainly influences labor, material, and other costs
SECONDARY INDICATORS (PARA. 12) – SUPPORTING EVIDENCE ONLY
Currency in which financing funds are generated Currency in which operating receipts are usually retained
Additional factors for a foreign operation (para. 13) & judgment
Extension of the reporting entity vs significant AUTONOMY (e.g. an overseas defense base paid in the parent's currency vs an independently operating trade board) Proportion of transactions WITH the reporting entity Whether cash flows directly affect, and are readily remittable to, the reporting entity Whether cash flows suffice to service debt without funding from the reporting entity
Once determined, functional currency is changed ONLY if the underlying transactions/events/conditions change (para. 15) – and an entity cannot dodge IPSAS 10 hyperinflation restatement by simply adopting a different functional currency (para. 16).
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Monetary Items & Net Investment in a Foreign Operation (paras. 17–19)
Monetary vs non-monetary
MONETARY – a right to receive / obligation to deliver a fixed or determinable number of currency units
Social policy obligations & employee benefits payable in cash; provisions settled in cash; lease liabilities; cash dividends recognized as a liability
NON-MONETARY – no such fixed right/obligigation
Prepayments for goods/services; transfer right assets; goodwill; intangible assets; inventories; PP&E; right-of-use assets; provisions settled by delivering a non-monetary asset
Net investment in a foreign operation
A monetary item receivable from/payable to a foreign operation, for which settlement is NEITHER PLANNED NOR LIKELY in the foreseeable future, is in substance part of the entity's net investment – e.g. long-term receivables/loans (NOT trade receivables/payables).
Any controlled entity within the economic entity can hold such an item – e.g. Controlled Entity A's loan to foreign Controlled Entity B is part of A's net investment in B if settlement isn't planned/likely, even if A is itself a foreign operation.
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Reporting Foreign Currency Transactions in the Functional Currency (paras. 20–30)
Initial recognition (paras. 23–26)
Foreign currency amount × spot rate at the DATE OF THE TRANSACTION
The transaction date is when it first qualifies for recognition under IPSAS. A rate approximating the actual rate (e.g. a weekly/monthly average) is acceptable for practical reasons – UNLESS exchange rates fluctuate significantly.
A foreign currency transaction includes buying/selling goods or services, borrowing/lending, and acquiring/disposing of assets or incurring/settling liabilities denominated in a foreign currency (para. 23).
Subsequent reporting dates (para. 27)
Item typeRate used
Monetary itemsCLOSING rate
Non-monetary, historical costRate at the DATE OF THE TRANSACTION
Non-monetary, fair value / current operational valueRate when that value was MEASURED
Lower-of-two-amounts comparisons (e.g. inventory at lower of cost and NRV; impaired non-cash-generating assets) translate EACH side at its own applicable rate – this can flip whether an impairment is recognized in the functional vs. foreign currency (para. 29).
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Recognition of Exchange Differences (paras. 31–39)
General rule – surplus or deficit
Exchange differences arising (a) on SETTLEMENT of monetary items, or (b) on TRANSLATING monetary items at rates different from initial/previous recognition, are recognized in surplus or deficit in the period they arise – except the net-investment carve-out (para. 37, right).
Where a gain/loss on a NON-monetary item goes directly to net assets/equity, its exchange component follows it there too (para. 35) Where a gain/loss on a non-monetary item goes to surplus/deficit, its exchange component follows it there too
Net investment carve-out (para. 37)
Exchange differences on a monetary item forming part of the net investment in a foreign operation:
SEPARATE financial statements of the reporting entity, or the foreign operation's own statements → surplus or deficit CONSOLIDATED statements including both → initially a SEPARATE component of net assets/equity, reclassified to surplus/deficit only on DISPOSAL (see §8)
IPSAS 45 revaluation gains/losses on an asset measured in a foreign currency are translated at the rate when the value was determined (para. 27(c)) – producing an exchange difference that is ALSO recognized directly in net assets/equity (para. 36).
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Change in Functional Currency (paras. 40–42)
Prospective treatment only
When the functional currency changes, the entity applies the NEW functional currency's translation procedures PROSPECTIVELY from the date of the change – never retrospectively.
All items are translated into the new functional currency at the exchange rate AT THE DATE OF THE CHANGE Resulting translated amounts for non-monetary items become their new "historical cost" Exchange differences on a foreign operation, previously classified in net assets/equity, are NOT recognized in surplus/deficit until the operation is disposed of
A functional currency change might follow, e.g., a shift in the currency mainly influencing sale prices or the provision of goods/services (para. 41).
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Use of a Presentation Currency Other than the Functional Currency (paras. 43–49)
Non-hyperinflationary functional currency (para. 44)
ItemRate
Assets & liabilities (each SOFP, incl. comparatives)CLOSING rate at that SOFP's date
Revenue & expenses (each SOFPerformance, incl. comparatives)Rates AT THE DATES OF THE TRANSACTIONS (average rate acceptable, unless rates fluctuate significantly)
All resulting exchange differences → a SEPARATE component of net assets/equity (para. 44(c)). They arise from (a) translating revenue/expenses vs assets/liabilities at different rate bases, and (b) translating opening net assets/equity at a closing rate that differs from the prior closing rate (para. 47). They are NOT recognized in surplus/deficit because rate changes have little direct effect on present/future operating cash flows.
Hyperinflationary functional currency (paras. 48–49)
ALL amounts (assets, liabilities, net assets/equity, revenue, expenses, incl. comparatives) translated at the CLOSING rate of the most recent SOFP EXCEPTION: when translating into a NON-hyperinflationary presentation currency, comparatives are the amounts originally presented as CURRENT-year figures in the prior year's statements – not re-adjusted for later price-level or rate changes
The entity first restates its own statements under IPSAS 10 before applying this translation method. If the economy stops being hyperinflationary, the price-level-restated amounts at the date restatement ceased become the "historical costs" for translation going forward.
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Translation & Disposal of a Foreign Operation (paras. 50–58)
Consolidation mechanics (paras. 51–56)
Normal consolidation procedures apply (IPSAS 35) – but an intra-economic-entity monetary asset/liability CANNOT simply be eliminated without showing currency-fluctuation results (para. 52) Goodwill and fair value adjustments on acquiring a foreign operation are treated as ITS assets/liabilities – expressed in ITS functional currency, translated at the closing rate (para. 56) Different reporting dates: assets/liabilities translated at the foreign operation's OWN reporting-date rate, with adjustments for significant rate changes up to the group's reporting date (IPSAS 35)
Disposal or partial disposal (paras. 57–58)
On DISPOSAL, the cumulative exchange differences accumulated in the separate net assets/equity component for that foreign operation are RECLASSIFIED to surplus or deficit when the gain/loss on disposal is recognized.
Partial disposal WITH loss of control → treated as a full disposal for this purpose, even if a non-controlling interest is retained Partial disposal WITHOUT loss of control → only the PROPORTIONATE share of cumulative exchange differences is reattributed to non-controlling interests (or transferred to accumulated surplus/deficit)
A write-down from the foreign operation's own losses or an impairment does NOT count as a partial disposal – no deferred FX gain/loss is recognized at that point (para. 58).
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Tax Effects & Disclosure (paras. 59–66)
Required disclosures (paras. 61–63)
Amount of exchange differences recognized in surplus/deficit (excl. those on FV-through-surplus/deficit financial instruments under IPSAS 41) Net exchange differences in a separate net assets/equity component, with a reconciliation of the opening/closing amount When presentation currency ≠ functional currency: that fact, the functional currency, and WHY a different presentation currency is used Any change in functional currency (reporting entity or a significant foreign operation), and why
Non-compliant currency displays (paras. 64–66)
An entity may only describe statements as IPSAS-compliant, when presented in a non-functional currency, if ALL requirements (incl. the translation methods in paras. 44 and 48) are met. Otherwise (e.g. converting only selected items, or translating everything at the most recent closing rate) it must:
Clearly identify the information as SUPPLEMENTARY, distinct from IPSAS-compliant information Disclose the currency the supplementary information is displayed in Disclose the functional currency and the translation method used
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Appendix A – Foreign Currency Transactions & Advance Consideration (paras. A1–A9)
The problem this Appendix solves
When an entity pays/receives foreign-currency consideration IN ADVANCE, it recognizes a non-monetary asset or liability BEFORE the related asset, expense, or revenue. This Appendix clarifies which date's exchange rate governs the later recognition of that related item.
Date of the transaction (for rate purposes) = date the entity initially recognizes the non-monetary asset/liability from the advance consideration
This Appendix is an INTEGRAL part of IPSAS 4. Applies (in scope, para. A4) only where a non-monetary asset/liability from advance consideration is recognized before the related item.
Scope exclusions (paras. A5–A6)
Where the related item is measured at fair value or current operational value on initial recognition Where it's measured at the FV of consideration paid/received at a date OTHER than the non-monetary item's initial recognition date (e.g. goodwill under IPSAS 40) Income taxes Insurance/reinsurance contracts issued or held
If there are MULTIPLE advance payments/receipts, the entity determines a separate transaction date for EACH one (para. A9).
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Worked Examples – Advance Consideration (Illustrative Examples IE1–IE19)
Example 1 – single advance payment for PP&E
FC1,000 paid 1 Apr 20X1; machine delivered 15 Apr 20X1
Entity A recognizes a non-monetary asset (prepayment) translating FC1,000 at the spot rate on 1 Apr 20X1.
On delivery (15 Apr), Entity A derecognizes the prepayment and recognizes the machine's cost using the exchange rate from 1 Apr 20X1 – the date of the non-monetary asset's initial recognition, NOT the delivery date.
Example 4 – multiple receipts, multiple points in time (journal entries)
FC200 received 31 Jan 20X4 (rate 1:1.5); goods 1 (FC450) delivered 1 Mar (rate 1:1.7); goods 2 (FC550) delivered + FC800 received 1 Jun (rate 1:1.9)
Step 1 – receive advance: Dr Cash (FC200) LC300 / Cr Contract liability (FC200) LC300. Step 2 – deliver good 1: Dr Contract liability LC300, Dr Receivable (FC250) LC425 / Cr Revenue (FC450) LC725.
The FC250 receivable is MONETARY, so it's remeasured at each date. By 1 Jun it's worth LC475 → Dr Receivable LC50 / Cr FX gain LC50. On 1 Jun: deliver good 2, recognize FC550 revenue at that day's rate, and settle the FC250 receivable against the FC800 received: Dr Cash (FC800) LC1,520 / Cr Receivable (FC250) LC475 / Cr Revenue (FC550) LC1,045.
Illustrates the core rule: the ADVANCE portion locks in its rate at the advance-recognition date; revenue recognized LATER (without an advance) uses the rate on ITS OWN recognition date; and any resulting RECEIVABLE remains monetary and keeps remeasuring until settled.
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Effective Date & Amendment Timeline (paras. 71–73)
Amendment history at a glance
Base Standard: periods beginning on/after 1 January 2010 (earlier application encouraged). Supersedes IPSAS 4 (2006) (para. 73, "Withdrawal").
EffectiveChange
2015 (with IPSAS 35/37)Paras. 3(b), 10, 13, 21, 22, 38, 47, 50, 51, 53, 55, 57, 58; new 57A–57D
1 Jan 2017Paras. 67–70, 72 – IPSAS 33, First-time Adoption
1 Jan 2018Paras. 6, 7 deleted; para. 13 amended – The Applicability of IPSAS (Apr 2016)
1 Jan 2019New paras. 70A, 70B, Appendix A (A1–A9) – Improvements to IPSAS, 2018
1 Jan 2023Paras. 3, 4, 5, 31, 61 – IPSAS 41, Financial Instruments
1 Jan 2025Para. 17 (IPSAS 43, Leases); paras. 28, 36 (IPSAS 45); paras. 27, A5 (IPSAS 46)
1 Jan 2026Para. 11 (IPSAS 47, Revenue); para. 17 (IPSAS 48, Transfer Expenses)
Para. 72: when an entity adopts accrual-basis IPSAS after the effective date (per IPSAS 33), this Standard applies from the date of adoption.
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Relationship to IAS/IFRS – Comparison with IAS 21
Comparison – IPSAS 4 vs IAS 21
IPSAS 4 is drawn primarily from IAS 21 (revised 2003, amended 2005), The Effects of Changes in Foreign Exchange Rates.
TopicIPSAS 4IAS 21
Terminology"Revenue," "economic entity," "statement of financial performance," "net assets/equity""Income," "group," "statement of comprehensive income," "equity"
This is the sole documented terminology difference – IPSAS 4 otherwise closely tracks IAS 21's substantive requirements, reflecting the IPSASB's convergence policy where no public-sector-specific reason for departure exists.
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Statement / Process Mapping
Which rate applies? – decision map
- Initial recognition of a foreign currency transaction → spot rate at the TRANSACTION date (§4)
- Monetary item at a later reporting date → CLOSING rate (§4)
- Non-monetary item, historical cost basis → rate at the ORIGINAL transaction date, unchanged (§4)
- Non-monetary item, fair value / current operational value basis → rate when that value was MEASURED (§4)
- Advance consideration recognized as a non-monetary asset/liability → rate at the date THAT item was first recognized, carried into the later related asset/expense/revenue (§10–11)
- Translating a whole foreign operation into a presentation currency → assets/liabilities at CLOSING rate; revenue/expenses at TRANSACTION-DATE (or average) rates (§7)
Concept-to-statement mapping table
IPSAS 4 conceptStatement(s)Notes
Exchange differences on monetary items (general)SOFPerfRecognized in surplus/deficit as they arise
Exchange differences on net investment in a foreign operationNA/EDeferred until disposal, then reclassified to SOFPerf
Translating a foreign operation to presentation currencySOFP NA/EAssets/liabilities at closing rate; resulting differences to NA/E
Disposal of a foreign operationNA/E SOFPerfCumulative differences reclassified on disposal
Revaluation of a foreign-currency-measured assetNA/EFX component follows the revaluation gain/loss (IPSAS 45)
Functional/presentation currency disclosuresNotesRequired whenever presentation ≠ functional currency
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Related Standards – Cross-Reference Map
How IPSAS 4 connects across the IPSAS body of literature
StandardNature of the connection
IPSAS 1Presentation currency identification requirement on the face of the financial statements (§1)
IPSAS 2Cash flow statement translation of foreign currency cash flows – out of IPSAS 4's own scope, cross-referenced (§1, §7)
IPSAS 10Hyperinflationary economy restatement, applied BEFORE IPSAS 4 translation (§7)
IPSAS 35 / 36Consolidation and equity-method mechanics for foreign operations (§8)
IPSAS 40Goodwill measurement exception to the advance-consideration Appendix (§10)
IPSAS 41Hedge accounting for foreign currency items and most foreign-currency derivatives – out of IPSAS 4's scope (§1, §5)
IPSAS 45Revaluation gains/losses on foreign-currency-measured PP&E, translated at the valuation-date rate (§5)
IPSAS 47Revenue recognition timing interacts with the advance-consideration transaction-date rule (§10–11)
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Quick-Reference Glossary
Exchange difference
The difference from translating a given number of units of one currency into another at different exchange rates.
Spot exchange rate
The exchange rate for immediate delivery.
Monetary items
Units of currency held, and assets/liabilities to be received or paid, in a fixed or determinable number of currency units.
Net investment in a foreign operation
The reporting entity's interest in the net assets/equity of that operation.
Foreign operation
A controlled entity, associate, joint arrangement, or branch based/conducted in a different country or currency from the reporting entity.
Economic entity
A controlling entity and its controlled entities, for financial reporting purposes.
Financial statement key
SOFP Statement of financial position
SOFPerf Statement of financial performance
NA/E Net assets/equity (statement of changes)