Objective of IAS 21
The objective of IAS 21 is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency. [IAS 21.1] The principal issues are which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements. [IAS 21.2] (IASPlus, Deloitte)

Key definitions [IAS 21.8]
-Functional currency: the currency of the primary economic environment in which the entity operates. (The term 'functional currency' was used in the 2003 revision of IAS 21 in place of 'measurement currency' but with essentially the same meaning.)
-Presentation currency: the currency in which financial statements are presented.
Exchange difference: the difference resulting from translating a given number of units of one currency into another currency at different exchange rates.
-Foreign operation: a subsidiary, associate, joint venture, or branch whose activities are based in a country or currency other than that of the reporting entity. (IASPlus, Deloitte)

An entity considers the following factors in determining its functional currency:
(a) The currency:
(i) that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and
(ii) of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services.
(b) the currency that mainly influences labor, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled).

Reporting foreign currency transactions in the functional currency
Foreign currency is a currency other than the functional currency of the entity. Spot exchange rate is the exchange rate for immediate delivery. Exchange difference is the difference resulting from translating a given number of units of one currency into another currency at different exchange rates. Net investment in a foreign operation is the amount of the reporting entity’s interest in the net assets of that operation. (“IAS 21

A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.
At the end of each reporting period:
(a) Foreign currency monetary items shall be translated using the closing rate;
(b) Non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction; and
(c) Non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was measured. (“IAS 21)

As regards a monetary item that forms part of an entity's investment in a foreign operation, the accounting treatment in consolidated financial statements should not be dependent on the currency of the monetary item. [IAS 21.33] Also, the accounting should not depend on which entity within the group conducts a transaction with the foreign operation. [IAS 21.15A] If a gain or loss on a non-monetary item is recognized in other comprehensive income (for example, a property revaluation under IAS 16), any foreign exchange component of that gain or loss is also recognized in other comprehensive income. [IAS 21.30]

Translation from the functional currency to the presentation currency

The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy are translated into a different presentation currency using the following procedures: [IAS 21.39]

- Assets and liabilities for each balance sheet presented (including comparatives) are translated at the closing rate at the date of that balance sheet. This would include any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation are treated as part of the assets and liabilities of the foreign operation [IAS 21.47];
- Income and expenses for each income statement (including comparatives) are translated at exchange rates at the dates of the transactions; and
- All resulting exchange differences are recognized in other comprehensive income.
Special rules apply for translating the results and financial position of an entity whose functional currency is the currency of a hyperinflationary economy into a different presentation currency. [IAS 21.42-43]

SCOPE – As stated in paragraph 3 of IAS 21, the Standard shall be applied:
(a) In accounting for transactions and balances in foreign currencies, except for those derivative transactions and balances that are within the scope of IAS 39, Financial Instruments: Recognition and Measurement and IFRS 9, Financial Instruments;
(b) In translating the results and financial position of foreign operations that are included in the financial statements of the entity by consolidation, proportionate consolidation or the equity method; and
(c) In translating an entity’s results and financial position into a presentation currency.

Further, paragraph 4 of IAS 21 states that IFRS 9 and IAS 39 apply to many foreign currency derivatives and, accordingly, these are excluded from the scope of this Standard. In addition, this Standard applies when an entity translates amounts relating to derivatives from its functional currency to its presentation currency. This Standard does not apply to hedge accounting for foreign currency items, including the hedging of a net investment in a foreign operation. IAS 39 applies to hedge accounting. This Standard applies to the presentation of an entity’s financial statements in a foreign currency and sets out requirements for the resulting financial statements to be described as complying with IFRSs. For translations of financial information into a foreign currency that do not meet these requirements, this Standard specifies information to be disclosed. This Standard does not apply to the presentation in a statement of cash flows of the cash flows arising from transactions in a foreign currency, or to the translation of cash flows of a foreign operation, which are within the scope of IAS 7, Statement of Cash Flows.

IAS 21was originally issued in 1983 and was revised and reissued in 1993 as part of the IASC’s Comparability Project. The original IAS No. 21 was issued shortly after SFAS No. 52 in the United States. It is therefore not surprising that it adopts the same basic approach to foreign currency translation as SFAS No. 52.

IAS NO. 21 requires the uses of the temporal method of translation for foreign operations that are integral to the operations of the reporting enterprise. Translation gains or losses are included in the income statement. Under IAS No. 21, the current rate method of translation is required for a foreign entity. Translation gains and losses are transferred to reserves and reported in shareholder’s equity.

Both require foreign currency transactions of an entity to be remeasured into its functional currency with amounts resulting from changes in exchange rates being reported in income. Once a subsidiary’s financial statements are remeasured into its functional currency, both standards require translation into its parent’s functional currency with assets and liabilities being translated at the period-end rate, and income statement amounts generally at the average rate, with the exchange differences reported in equity. Both standards also permit the hedging of that net investment with exchange differences from the hedging instrument offsetting the translation amounts reported in equity. The cumulative translation amounts reported in equity are reflected in income when there is a sale, or complete liquidation or abandonment of the foreign operation. There are many difference existed between IAS 21 and SFAS No. 52. In translation/functional currency of foreign operations in a hyperinflationary economy, in U.S. GAAP, local functional currency financial statements are remeasured as if the functional currency was the reporting currency with resulting exchange differences recognized in income. In IAS 21, the functional currency must be maintained. However, local functional currency financial statement amounts not already measured at the current rate at the end of the reporting period (current and prior period) are indexed using a general price index (i.e., restated in terms of the measuring unit current at the balance sheet date with the resultant effects recognized in income), and are then translated to the reporting currency at the current rate.

In determining the functional currency, IAS 21 includes primary and secondary factors to consider in determining the functional currency. U.S GAAP does not have a hierarchy of factors to consider in determining the functional currency. It has detailed guidance on the determination (IFRSs and US GAAP- A Pocket Comparison)

In remeasuring foreign currency balances into the functional currency available-for-sale debt securities, IAS 21 required that foreign currency gains or losses on AFS debt securities are reported in current earnings. In U.S. GAAP, foreign currency gains or losses on AFS debt securities are reported in other comprehensive income.( IFRSs and US GAAP- A Pocket Comparison)

In change in functional currency, IAS21 requires prospectively from the date of the change. Bases in non-monetary assets and liabilities are the translated amounts at current exchange rates at the date of the change. In U.S GAAP, accounting treatment and bases in non-monetary assets and liabilities depend on whether the functional currency is changing from a foreign currency to the reporting currency (prospective treatment, similar to IFRSs) or vice versa (retrospective). (IFRSs and US GAAP- A Pocket Comparison) (US GAAP versus IFRS-The Basis)

Regarding to treatment of translation difference in equity when a partial return of a foreign investment is made to the parent, in U.S GAAP, translation difference in equity is recognized in income only upon sale (full or partial), or complete liquidation or abandonment of the foreign subsidiary. No recognition is made when there’s a partial return of investment to the parent. In IAS 21, a return of investment (for example, dividend) is treated as a partial disposal of the foreign investment and a proportionate share of the translation difference of recognized in income.( US GAAP versus IFRS-The Basis)

Convergence
IAS No.21 permits alternative treatment in two situations. The first situation relates to exchange losses on a liability for the recent acquisition of an asset purchased in a foreign currency. Similar to SFAS No. 52, the benchmark treatment under IAS No. 21 requires that the exchange losses be charged to expense. However, the alternative treatment under IAS No. 21 allows exchange loose to be added to the cost of the asset when the related liability cannot be settled and there is no practical means of hedging. (“SUMMARY OF THE FASB'S IASC/ US GAAP.")

Another area where IAS 21 permits alternative treatment is in translating goodwill and fair value adjustment to assets and liabilities that arise from purchase accounting for the acquisition of a foreign entity for which the local currency is the functional currency. When the local currency is the functional currency, SFAS No. 52 requires use of the current exchange rate to translate all balance sheet items, including goodwill and fair value adjustment. IAS No. 21 allows the use of either the current exchange rate or the historical exchange rate. There could be significant differences in the results of current rate translation relative to historical rate translation of goodwill, fair value adjustments of balance sheet items, and related depreciation, amortization and other expense. (Saudagaran)
So far, there is no convergence activities are underway or planned for foreign currency matters.

Reference 1. "IASPlus."IAS 21. Web. 30 Nov. 2015. http://www.iasplus.com/en/standards/ias/ias21 2. "IAS 21: The Effects of Changes in Foreign Exchange Rates." International Accounting Standards. IAS (2004): 1065-93. ProQuest. Web. 2 Dec. 2015. 3. "IAS 21 the Effects of Changes in Foreign Exchange Rates."2012, Technical Summary. IFRS. Web. 30 Nov. 2015 4. "IFRSs and US GAAP- A Pocket Comparison." An IAS Plus Guide. Deloitte, 1 July 2008. Web. 30 Nov. 2015. http://www.iasplus.com/en/binary/dttpubs/0809ifrsusgaap.pdf 5. "US GAAP versus IFRS-The Basis." Ernst&Young, 1 Nov. 2012. Web. 30 Nov. 2015. http://www.ey.com/Publication/vwLUAssets/IFRSBasics_BB2435_November2012/$FILE/IFRSBasics_BB2435_November2012.pdf 6. "SUMMARY OF THE FASB'S IASC/ US GAAP." Department of Treasury. Web. 30 Nov. 2015. <https://www.treasury.gov/resource-center/international/standards-codes/Documents/code6.pdf>. 7. Saudagaran, Shahrokh M., and L. Murphy Smith. "Accounting for Currency Exchange Rate Changes." International Accounting: A User Perspective. Fourth ed. Chicago: Wolters Kulwer CCH, 2013. 3-105. Print