Ind AS 21, The Effects of Changes in Foreign Exchange Rates

Ind AS 21

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.

Functional currency

Functional 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).

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.

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.

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:

  • 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 thedate 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

Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous financial statements shall be recognised in profit or loss in the period in which they  arise.

However, Exchange differences arising on a  monetary item  that forms part of a reporting entity’s net investment in a foreign operation (see paragraph 15) shall be recognised in profit or loss in  the separate  financial  statements  of the reporting entity or the individual financial statements of the foreign operation, as appropriate. In the financial statements that include the foreign operation and the reporting entity (eg consolidated financial statements when the foreign operation is a subsidiary), such exchange differences shall be recognised initially in other comprehensive income and reclassified  from  equity to profit or loss on disposal of the net investment.

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.

Translation to the presentation currency/Translation of a foreign operation

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 hyperinflationary economy shall be translated into a different presentation currency using the following procedures:

  • 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

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  a nd 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.

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 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:

  • Reporting currency: The currency in which the financial statements are presented
  • Foreign Currency: It is the currency other than reporting currency.
Ind AS 21 states that there can be 3 types of currencies:

  • Presentation Currency: Currency in which financial statements are presented
  • Functional Currency: Currency of the primary economic environment, in which the entity operates.
  • Foreign Currency: It is a currency, other than functional currency.

Hence, if a transaction takes place in foreign currency, then it will be first converted into functional currency, and then, it will be converted into presentation currency (In case functional and presentation currency are different).

Similarly, a transaction in functional currency will have to be converted into presentation currency (In case functional and presentation currency are different)

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.

However, in Ind AS 21, the factors to be considered in determining an entity’s functional currency are similar to the indicators in existing AS 11 to identify non-integral foreign operations. As a result, despite the difference in the terminology used, there are no substantive differences in respect of accounting of a foreign operation.

AS 11 contains an option for capitalization/deferral of exchange differences arising on reporting of long-term foreign currency monetary items.

  • If the exchange difference relate to acquisition of depreciable capital asset, they can be adjusted in the cost of the asset and thereby depreciated over the balance life of asset.
  • If the exchange difference relate to the acquisition of a non-depreciable capital asset, then it can be accumulated in a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s financial statements and amortized over the balance period of such long-term asset/ liability, by recognition as income or expense in each of such periods, but not beyond 31st March, 2020.
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.

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