How is foreign currency translation handled according to IAS 21?

Foreign currency translation under IAS 21, "The Effects of Changes in Foreign Exchange Rates," mandates that foreign currency transactions must be recorded at the exchange rate on the date of the transaction. This principle ensures that the initial recognition of transactions is accurately reflected at the fair value determined by the market rate at that specific time.

By using the exchange rate on the transaction date, a company can properly measure its financial positions and performance as they relate to foreign currency transactions at the moment they occur, providing a more precise representation of the entity's financial results. This carries significant implications for both revenue recognition and cost accounting.

The other options address different aspects that do not align with standard accounting practices stipulated by IAS 21. For instance, recording transactions at an average exchange rate for the fiscal year would not accurately represent individual transaction values, leading to potential distortions in financial reporting. Similarly, stating that only monetary items are translated overlooks the requirement for entities to also consider non-monetary items, which might need to be translated based on current exchange rates. Lastly, translating all items at year-end exchange rates fails to provide an accurate initial transaction recognition and could misrepresent gains or losses from currency fluctuations.