Ind AS 21, The Effects of Changes in Foreign Exchange Rates
Ind AS 21, The Effects of Changes in Foreign Exchange Rates: An entity may carry on foreign activities in two ways. Indian Accounting Standard 21.
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Ind AS 21, The Effects of Changes in Foreign Exchange Rates: An entity may carry on foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. In addition, an entity may present its financial statements in a foreign currency. The objective of Ind AS 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. 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.This Standard does not apply to hedge accounting for foreign currency items, including the hedging of a net investment in a foreign operation. Ind AS 109 applies to hedge accounting. 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 (Ind AS 7, Statement of Cash Flows). This Standard does not also apply to long-term foreign currency monetary items for which an entity has opted for the exemption given in paragraph D13AA of Appendix D to Ind AS 101. Such an entity may continue to apply the accounting policy so opted for such long-term foreign currency monetary items.If the functional currency is the currency of a hyperinflationary economy, the entity’s financial statements are restated in accordance with Ind AS 29, Financial Reporting in Hyperinflationary Economies.Net investment in a foreign operation is the amount of the reporting entity’s interest in the net assets of that operation. 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:Furthermore, when a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange component of that gain or loss shall be recognised in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss shall be recognised in profit or loss. When there is a change in an entity’s functional currency, the entity shall apply the translation procedures applicable to the new functional currency prospectively from the date of the change.An entity may present its financial statements in any currency (or currencies). For this purpose, an entity could be a stand-alone entity, a parent preparing consolidated financial statements or a parent, an investor or a venturer preparing separate financial statements in accordance with Ind AS 27, Separate Financial Statements. If the presentation currency differs from the entity’s functional currency, it translates its results and financial position into the presentation currency. For example, when a group contains individual entities with different functional currencies, the results and financial position of each entity are expressed in a common currency so that consolidated financial statements may be presented. The results and financial position of an entity whose functional currency is not the currency of a hyper inflationary economy shall be translated into a different presentation currency using the following procedures: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 shall be treated as assets and liabilities of the foreign operation. Foreign operation is an entity that is a subsidiary, associate, joint arrangement or branch of a reporting entity. On the disposal of a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation, recognised in other comprehensive income and accumulated in the separate component of equity, shall be reclassified from equity to profit or loss (as a reclassification adjustment) when the gain or loss on disposal is recognised (Ind AS 1, Presentation of Financial Statements).On the partial disposal of a subsidiary that includes a foreign operation, the entity shall re-attribute the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income to the non-controlling interests in that foreign operation. In any other partial disposal of a foreign operation the entity shall reclassify to profit or loss only the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income.
List of other IndAS
Functional currencyFunctional currency is the currency of the primary economic environment in which the entity operates. The primary economic environment in which an entity operates is normally the one in which it primarily generates and An entity considers the following factors in determining its functional currency:
- the currency:
- 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
- of the country whose competitive forces and regulations mainly determine the sales prices of its goods and
- the currency that mainly influences labour, 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 currencyForeign 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.
- foreign currency monetary items shall be translated using the closing rate;
- 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
- 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.
Translation to the presentation currency / Translation of a foreign operation
- assets and liabilities for each balance sheet presented (ie including comparatives) shall be translated at the closing rate at the date of that balance sheet;
- income and expenses for each statement of profit and loss presented (ie including comparatives) shall be translated at exchange rates at the dates of the transactions; and
- all resulting exchange differences shall be recognised in other comprehensive
Difference Between IndAS 21 and AS 11
|AS 11||Ind AS 21|
|AS 11 does not make such exclusion.||Ind AS 21 excludes from its scope, forward exchange contracts and other similar financial instruments, which are treated as per with Ind AS 109.|
|AS 11 does not explicitly states so.||As per Ind AS 21, presentation currency can be different from the local currency and it gives detailed guidance in this regard.|
|Under AS 11, there is no concept of functional currency. It makes reference only to two types of currencies:
||Ind AS 21 states that there can be 3 types of currencies: |
|AS 11 is based on “integral foreign operations” and “non-integral foreign operations” approach for accounting for a foreign operation.||Ind AS 21 Is based on “functional currency approach” for accounting for a foreign operation.
|AS 11 contains an option for capitalization/deferral of exchange differences arising on reporting of long-term foreign currency monetary items.
||Ind AS 21 does not permit such optional alternative treatment. Accordingly, the entire exchange difference, arising on reporting of long term foreign currency monetary items has to be debited to P&L Account (Statement of Other Comprehensive Income) only. However, if an enterprise has an accounting policy of capitalization of exchange differences, arising on reporting of long term foreign currency monetary items, at the time of transition to Ind AS, Ind AS 101 permits the enterprise to continue with such accounting policy.|