Library / Technical Accounting Manual: IFRS, IAS and Ind AS Equivalents

IAS 21 - The Effects of Changes in Foreign Exchange Rates

Indian equivalent: Ind AS 21 - The Effects of Changes in Foreign Exchange Rates

Objective and scope

IAS 21 explains how to account for transactions in foreign currencies and how to translate the results of foreign operations into the reporting currency, including where the resulting exchange gains and losses go.

Core principle

When a company deals in dollars but reports in rupees, exchange rates move and create gains and losses. IAS 21 sets the rules: identify your functional currency, translate monetary items at the closing rate, and decide whether differences hit profit (transactions) or OCI (translating a foreign subsidiary).

Defined terms and technical terminology

Term	Technical meaning
Functional currency	The currency of the primary economic environment in which the entity operates - the currency that mainly drives its prices and costs.
Presentation currency	The currency in which the financial statements are presented (can differ from functional).
Monetary items	Money held, and assets/liabilities to be received or paid in fixed amounts of currency (cash, receivables, payables, loans).
Non-monetary items	Items not settled in fixed currency amounts (inventory, PPE, goodwill).
Spot rate	The exchange rate for immediate delivery at a given date.
Closing rate	The spot rate at the reporting date.

Application and worked illustrations

Accounting for a foreign-currency transaction

Record the transaction at the spot rate on the transaction date. At each reporting date: retranslate monetary items at the closing rate (differences → profit or loss); carry non-monetary items at historical cost at the original rate (no retranslation); and carry non-monetary items measured at fair value at the rate when fair value was determined.

Worked example 1 - a foreign purchase

An Indian company buys goods from a US supplier for $10,000 when $1 = ₹80, recording a payable of ₹8,00,000. At year-end the invoice is unpaid and $1 = ₹83. The payable (a monetary item) is retranslated to ₹8,30,000, and the ₹30,000 exchange loss goes to profit or loss. The inventory itself (a non-monetary item) stays at ₹8,00,000 - it is not retranslated.

Journal entry - Record the year-end exchange loss
Account	Debit (₹)	Credit (₹)
Exchange loss (P&L)	30,000
Trade payable		30,000

Worked example 2 - translating a foreign subsidiary

A parent (functional currency ₹) owns a US subsidiary (functional currency $). To consolidate, the subsidiary's assets and liabilities are translated at the closing rate, its income and expenses at rates on the transaction dates (often an average), and the resulting exchange difference goes to Other Comprehensive Income as a foreign currency translation reserve - not to profit - because it does not affect current cash flows. On disposal of the subsidiary, this reserve is recycled to profit.

Common mistake: retranslating inventory or PPE at the closing rate. Non-monetary items at historical cost stay at the original rate.

IND AS LINK

Ind AS 21 aligns with IAS 21. Historically India allowed capitalising certain exchange differences on long-term foreign borrowings - under Ind AS this optional treatment is restricted, a point of difference from older Indian GAAP (AS 11).

Further worked illustrations

Extra numeric example - a foreign sale settled next year

An Indian exporter sells goods for $20,000 on 1 March when $1 = ₹82 → records revenue and a receivable of ₹16,40,000. At 31 March (year-end) the invoice is unpaid and $1 = ₹84 → the receivable (a monetary item) is retranslated to ₹16,80,000, giving an exchange gain of ₹40,000 in profit. When paid on 20 April at $1 = ₹83, the receivable is ₹16,60,000, so a ₹20,000 loss is booked in the new year. The revenue itself stays fixed at ₹16,40,000 - only the monetary receivable moves.

Journal entry - Year-end retranslation of receivable (gain)
Account	Debit (₹)	Credit (₹)
Trade receivable	40,000
Exchange gain (P&L)		40,000

INDIAN REGULATORY CONTEXT

Old Indian GAAP (AS 11) let companies capitalise exchange differences on long-term foreign-currency loans used to buy fixed assets. Under Ind AS 21 this optional capitalisation is largely withdrawn - exchange differences generally go to profit or loss. This was a significant, sometimes unpopular, change for Indian companies with large dollar borrowings.

TECHNICAL EDGE CASE

A company receives a $10,000 advance from a customer before delivering goods. An advance is a non-monetary item (it will be settled by delivering goods, not cash), so it is recorded at the rate on the date the advance was received and is not retranslated at year-end. Only when revenue is recognised does that fixed rate apply - a common trap where people wrongly retranslate the advance.