HKAS 21 / IAS 21 Amendments: When Your Currency Can't Be Exchanged

• Standard: HKAS 21 / IAS 21 — Effects of Changes in Foreign Exchange Rates (Lack of Exchangeability)
• Effective Date: 1 January 2025
• Early Adoption: Permitted

Imagine you’re trying to close your books, but the currency your subsidiary operates in is effectively locked behind a wall of capital controls. The old IAS 21 told you to use the “spot exchange rate”—but what if there isn’t one? What if the government publishes an official rate that nobody can actually transact at, or a parallel market exists at a wildly different price?

For years, preparers in this situation were left to improvise. The result was a patchwork of inconsistent practices across companies operating in places like Argentina, Nigeria, Ethiopia, and Sudan. Two companies with identical exposures could report very different numbers.

That ambiguity is now resolved.

The New Two-Step Framework

The amendments to HKAS 21 / IAS 21, mandatory for periods beginning on or after 1 January 2025, introduce a structured approach.

Step 1: Can you actually exchange this currency?

A currency is “exchangeable” only if an entity can obtain more than an insignificant amount of the other currency for a specified purpose at the measurement date. This isn’t a theoretical test—it must be practically achievable. Even if you can exchange a small trickle, the currency may still be “not exchangeable” if the volume is insignificant relative to what you need.

The assessment is based on ability, not intention. And it must be done separately for different purposes—settling a transaction is a different question from translating a foreign operation.

Step 2: If not, estimate the spot rate.

If the currency fails the exchangeability test, you estimate the spot rate using a hierarchy:

1. Any observable exchange rate that meets the estimation objective (e.g., the rate at which exchangeability is restored, or a rate used for a different purpose)
2. If nothing observable exists, use an estimation technique—purchasing power parity, forward rates, or cross-rates through a third currency

Rates from parallel or unofficial markets can be used as inputs, provided the result reflects what an orderly transaction between market participants would look like. A word of caution for the 2026 audit cycle: auditors are scrutinising “parallel rates” heavily to ensure they represent accessible, albeit unofficial, liquidity—not simply black market rates. The estimated rate must reflect an orderly transaction, and the documentation burden around rate selection has increased meaningfully since 2024.

The Disclosure Burden

This is where it gets real. Entities must disclose:

• The nature and financial impact of non-exchangeability
• Carrying amounts of monetary items in the affected currency
• The estimated spot rate and how it was determined
• Significant judgements made in the assessment

For foreign operations with non-exchangeable functional currencies, you also need to disclose the operation’s name, principal place of business, summarised financials, and any contractual arrangements requiring financial support.

Who Should Care?

For most Hong Kong entities dealing with Mainland China, the RMB remains exchangeable in normal circumstances, so the day-to-day impact is limited. However, for specific dividend repatriations or large-scale capital injections where “window guidance” or administrative delays occur, firms are now having to document the Step 1 assessment more formally than they did in 2024. If you have subsidiaries or investments in countries with foreign exchange controls, this is material.

Cayman SPC funds holding investments in restricted currencies (RMB, RUB, NGN) must also apply this framework and include the required disclosures in their CIMA-submitted annual financial statements.

On transition (1 January 2025), you don’t restate comparatives. The cumulative effect goes to opening retained earnings or cumulative translation differences. For entities with a 31 December year-end, the 2025 financial statements (issued in early 2026) are the first to show this cumulative effect adjustment. If you are reviewing 2026 interim reports, ensure those opening balance adjustments were properly disclosed in the prior year’s notes.

The Cayman SPC Angle

For Cayman SPC funds holding assets in a restricted currency, the disclosure burden is particularly critical. The fair value measurement under HKFRS 13 must now be explicitly reconciled with the estimated spot rate under HKAS 21 to ensure consistency in the valuation of the NAV. Auditors and administrators should be aligned on the rate used across both frameworks.

The key takeaway: document your assessment thoroughly. The standard demands evidence-based judgement, and your auditors will be looking for it.

---

This article is for informational purposes only and does not constitute professional accounting or legal advice.