INDIAN ACCOUNTING STANDARD 21 9.

93

UNIT 2 :
INDIAN ACCOUNTING STANDARD 21 :
THE EFFECTS OF CHANGES IN FOREIGN
EXCHANGE RATES
LEARNING OUTCOMES
After studying this unit, you will be able to:
 Describe the objective and scope of the standard
 Define the terms used in the standard like closing rate, exchange
difference, exchange rate, fair value, foreign currency, foreign operation,
functional currency, monetary items, group, net investment in a foreign
operation, presentation currency and spot exchange rate
 Report foreign currency transactions in the functional currency
 Report at the end of subsequent reporting periods foreign currency
monetary and non-monetary items
 Recognise and account for the exchange differences
 Apply the translation procedures in case of change in functional currency
 Recognise the presentation currency and translate the items into it from
the functional currency
 Incorporate the results and financial position of a foreign operation on
translation
 Apply the provisions of translation in case of consolidation
 Deal with the disposal or partial disposal of a foreign operation
 Compute tax effects of all exchange differences
 Comply with the disclosure requirements given in the standard

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UNIT OVERVIEW

Accounting for Foreign Currency

Transactions

Recognition of Foreign
Initial
Recognition
at the
Exchange Gains and Losses
Transaction
Date

Monetary
Presentation and
Non-
Monetary
Items
Disclosure
Subsequent Net
Recognition
at the end of
Investment
in a Foreign Tax Other
Operation
each
Reporting
Change in
effect items
Period
Functional
Currency

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2.1 OBJECTIVE
The objective of the Standard is to address the accounting for foreign activities which include:
 transactions in foreign currencies; or
 foreign operations.
Considering that an entity may present its financial statements in a foreign currency, the Standard
also seeks to prescribe how to translate financial statements into a presentation currency.
In this context, the Standard defines foreign currency as a currency other than the functional
currency of the entity.
1. Functional currency is the currency of the primary economic environment in which the entity
operates.
In this regard, the primary economic environment will normally be the one in which it primarily
generates and expends cash i.e. it operates. The functional currency is normally the currency
of the country in which the entity is located. It might, however, be a different currency.
2. Foreign operation has been defined as an entity that is a subsidiary, associate, joint venture
or branch of a reporting entity, the activities of which are based or conducted in a country or
currency other than those of the reporting entity.
3. Presentation currency is the currency in which the financial statements are presented, the
presentation currency may be different from the entity’s functional currency.
4. Spot exchange rate is the exchange rate for immediate delivery.
5. Closing rate is the spot exchange rate at the end of the reporting period.
6. Exchange difference is the difference resulting from translating a given number of units of
one currency into another currency at different exchange rates is the exchange rate for
immediate delivery.

Types of Currency

Functional Presentation
Foreign currency
currency currency

A currency other than The currency of the The currency in which

the functional currency primary economic the financial statements
of the entity environment in which are presented
the entity operates

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2.2 SCOPE
 Ind AS 21 shall be applied:
(a) in accounting for transactions and balances in foreign currencies, except for derivative
transactions and balances covered by Ind AS 109.
Foreign currency derivatives not covered by Ind AS 109 (e.g., some foreign currency
derivatives that are embedded in other contracts) are within the scope of this Standard.
The Standard also applies for translation of amounts relating to derivatives from
functional currency to presentation currency.
(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.
 Ind AS 21 does not apply to:
(a) hedge accounting for foreign currency items, including the hedging of a net investment
in a foreign operation; Ind AS 109 should be applied for hedge accounting;
(b) presentation of cash flows from transactions in a foreign currency or to translation of
cash flows of a foreign operation in the statement of cash flows (Refer Ind AS 7,
Statement of Cash Flows); and
(c) long term foreign currency monetary items for which an entity has opted for the
exemption as per Ind AS 101. Such an entity may continue to apply the accounting
policy as opted for such long term foreign currency monetary items.

2.3 FUNCTIONAL CURRENCY

 An entity measures its assets, liabilities, equity, income and expenses in its functional
currency.
 All transactions in currencies other than the functional currency are foreign currency
transactions.
Ind AS 21 requires each entity to determine its functional currency.
 In determining its functional currency, an entity emphasises the currency that determines the
pricing of the transactions that it undertakes, rather than focusing on the currency in which
those transactions are denominated.
 The following are the factors that may be considered in determining an appropriate functional
currency (Primary indicators):

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(a) the currency:

i. that mainly influences sales prices for its goods and services. This will often be the
currency in which sales prices 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 labour, material and other costs of providing goods
and services. This will often be the currency in which these costs are denominated and
settled.
 Other factors that may provide supporting evidence to determine an entity’s functional
currency are (Secondary indicators):
(a) the currency in which funds from financing activities (i.e. issuing debt and equity
instruments) are generated; and
(b) the currency in which receipts from operating activities are usually retained.
 If an entity is a foreign operation, additional factors are set out in this Standard which
should be considered to determine whether its functional currency is the same as that of the
reporting entity of which it is a subsidiary, branch, associate or joint venture:
(a) Whether the activities of foreign operations are carried out as an extension of that
reporting entity, rather than being carried out with a significant degree of autonomy;
An example of the former is when the foreign operation only sells goods imported
from the reporting entity and remits the proceeds to it.
An example of the latter is when the foreign operations accumulates cash and other
monetary items, incurs expenses, generates income and arranges borrowings, all
substantially in its local currency.

(b) Whether the transactions with the reporting entity are a high or a low proportion of the
foreign operation’s activities;
(c) Whether cash flows from the activities of the foreign operations directly affect the cash
flows of the reporting entity and are readily available for remittance to it.
(d) Whether cash flows from the activities of the foreign operation are sufficient to service
existing and normally expected debt obligation without funds being made available by
the reporting entity.
These factors also demonstrate whether the entity is integral to the reporting entity or not.
In practice, the functional currency of a foreign operation that is integral to the parent /
reporting entity will usually be the same as that of the parent / reporting entity.
 Determining an entity’s functional currency depends on the facts and circumstances.

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 When the above indicators are mixed and the functional currency is not obvious, the
management will be required to use its judgement to determine the functional currency that
most faithfully represents the economic effects of the underlying transactions, events and
conditions. As part of this approach, management has to give priority to the primary indicators
before considering the other indicators, which are designed to provide additional supporting
evidence to determine an entity’s functional currency.
Illustration 1
Future Ltd. sells a revitalising energy drink that is sold throughout the world. Sales of the energy
drink comprise over 90% of the revenue of Future Ltd. For convenience and consistency in pricing,
sales of the energy drink are denominated in USD. All financing activities of Future Ltd. are in its
local currency (L$), although the company holds some USD cash reserves. Almost all of the costs
incurred by Future Ltd. are denominated in L$.
Determine the functional currency of Future Ltd.
Solution
The functional currency of Future Ltd. is L$ looking at the primary indicators. The facts presented
indicate that the currency that mainly influence the cost of producing the energy drink is the L$.
As stated in the fact pattern, pricing of the product in USD is done for convenience and consistency
purposes; there is no indication that the sales price is influenced by the USD.
*****
Illustration 2
Small India Private Limited (Small), a subsidiary of Big Inc., takes orders from Indian customers
for Big Inc’s merchandise and then bills and collects for the sale of the merchandise in Rupees.
Small also has a local warehouse in India to facilitate timely delivery and ensures that it remits to
its parent all cash flows that it generates as the operations of Small are primarily financed by
Big Inc. Big Inc is based out of US and has its functional currency as USD.
Determine the functional currency of Small India Private Limited.
Solution
Small, although based in India with its cash flows generated in India, is essentially a “pass through
company” established by its parent. Small is totally reliant on Big Inc. for financing and goods to
be sold, despite the fact that goods are sold within India and in Rupees ( ). Therefore, Small is
not a self-contained entity in India, rather an entity that is dependent on its parent.
Due to this dependence of Small on its parent company, it can be said that the primary economic
environment for Small is that of US and thus, its functional currency should also be USD.

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Hence all the transactions of Small which are denominated in any currency other than USD should
be recorded in USD at the spot rate and any changes in the exchange rate would result in an
exchange gain or loss to be taken to the statement of profit or loss.
*****
Illustration 3
A is an Oman based company having a foreign operation, B, in India. The foreign operation was
primarily set up to execute a construction project in India. The functional currency of A is OMR.
78% of entity B’s finances have been raised in USD by way of contribution from A. B’s bank
accounts are maintained in USD as well as Rupees ( ). Cash flows generated by B are transferred
to A on a monthly basis in USD in respect of repayment of finance received from A.
Revenues of B are in USD. Its competitors are globally based. Tendering for the construction
project happened in USD.
B incurs 70% of the cost in Rupees ( ) and remaining 30% costs in USD.
Comment since B is located in India, can it presume its functional currency to be Rupees ( ).
Solution
No, B cannot presume Rupees ( ) to be its functional currency on the basis of its location. It
needs to consider various factors listed in Ind AS for determination of functional currency.
Primary indicators:
1. the currency that mainly influences
(a) sales prices for its goods and services. This will often be the currency in which sales
prices are denominated and settled; and of the country whose competitive forces and
regulations mainly determine the sales prices of its goods and services.
(b) labour, material and other costs of providing goods and services. This will often be the
currency in which these costs are denominated and settled.
2. Other factors that may provide supporting evidence to determine an entity’s functional
currency are (Secondary indicators):
(a) the currency in which funds from financing activities (i.e. issuing debt and equity
instruments) are generated; and
(b) the currency in which receipts from operating activities are usually retained.
3. If an entity is a foreign operation, additional factors set out in Ind AS 21 should be
considered to determine whether its functional currency is the same as that of the reporting
entity of which it is a subsidiary, branch, associate or joint venture:
(a) Whether the activities of foreign operations are carried out as an extension of that
reporting entity, rather than being carried out with a significant degree of autonomy;

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(b) Whether the transactions with the reporting entity are a high or a low proportion of the
foreign operation’s activities;
(c) Whether cash flows from the activities of the foreign operations directly affect the cash
flows of the reporting entity and are readily available for remittance to it.
(d) Whether cash flows from the activities of the foreign operation are sufficient to service
existing and normally expected debt obligation without funds being made available by
the reporting entity.
On the basis of additional factors mentioned in point 3 above, B cannot be said to have functional
currency same as that of A Ltd.
Hence primary and secondary indicators should be used for the determination of functional
currency of B giving priority to primary indicators. The analysis is given below:
 Its significant revenues and competitive forces are in USD.
 Its significant portion of cost is incurred in Rupees ( ). Only 30% costs are in USD.
 78% of its finances have been raised in USD.
 It retains its operating cash flows partially in USD and partially in Rupees ( ).
Keeping these factors in view, USD should be considered as the functional currency of B.
*****
Illustration 4
S Ltd is a company based out of India which got listed on Bombay Stock Exchange in the financial
year ended 31 st March, 20X1. Since then, the company’s operations have increased considerably.
The company was engaged in the business of trading of motorcycles. The company only deals in
imported motorcycles. These motorcycles are imported from US.
After importing the motorcycles, these are sold across India through its various distribution
channels. The company had only private customers earlier, but the company also started
corporate tie-up and increased its customer base to corporates also. The purchase of the
motorcycles are in USD because the vendor(s) from whom these motorcycles are purchased those
are all located in US.
All other operating expenses of the company are incurred in India only because of its location and
they generally happen to be in Rupees ( ).
Currently, its customers are both corporate and private in the ratio of 70:30 approximately. The
USD denominated prices of motorcycles in India are different from those in other countries.
The company is also expecting that in the coming years, its customers base will increase
significantly in India and the current proportion may also change.

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Currently, the invoices are raised to the corporate customers in USD for the purpose of hedging.
However, private customers don’t accept the same arrangement and hence invoices are raised to
them in Rupees ( ) .
Determine the functional currency of the company.
Solution
The functional currency of S Ltd is Rupees ( ).
Following factors need to be considered for determination of functional currency:
Primary indicators
1. the currency that mainly influences
(a) sales prices for its goods and services. This will often be the currency in which sales
prices are denominated and settled; and of the country whose competitive forces and
regulations mainly determine the sales prices of its goods and services.
(b) labour, material and other costs of providing goods and services. This will often be the
currency in which these costs are denominated and settled.
2. Other factors that may provide supporting evidence to determine an entity’s functional
currency are (Secondary indicators):
(a) the currency in which funds from financing activities (i.e. issuing debt and equity
instruments) are generated; and
(b) the currency in which receipts from operating activities are usually retained.
Primary and secondary indicators should be used for the determination of functional currency of
S Ltd. giving priority to primary indicators.
The analysis is given below:
Ind AS 21 gives greater emphasis to the currency of the economy that determines the pricing of
transactions, as opposed to the currency in which transactions are denominated.
Sales prices for motorcycles are mainly influenced by the competitive forces and regulations in
India. The market for motorcycles depends on the economic situation in India and the company is
in competition with importers of other motor cycle brands.
Even though 70% of the revenue of the company is denominated in USD, Indian economic
conditions are the main factors affecting the prices. This is evidenced by the fact that USD
denominated sales prices in India are different from USD denominated sales prices for the same
motorcycles in other countries.
Management is able to determine the functional currency because the revenue is clearly
influenced by the Indian economic environment and expenses are mixed.

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On the basis of above analysis, Rupees ( ) should be considered as the functional currency of
the company.
*****

2.4 ACCOUNTING FOR FOREIGN CURRENCY

TRANSACTIONS
2.4.1 Initial recognition at the transaction date
 A foreign currency transaction is a transaction that is denominated or requires settlement in
a foreign currency (i.e., a currency other than the functional currency of the entity), including
transactions arising when an entity:
(a) buys or sells goods or services whose price is denominated in a foreign currency;
(b) borrows or lends funds with amounts denominated in a foreign currency; or
(c) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in
a foreign currency.
 A foreign currency transaction is initially recorded by translation in the entity’s functional
currency at the exchange rate on the transaction date.
For practical reasons, a rate that approximates the actual exchange rate is often used.
Example
An average rate for a week or a month might be used for all transactions in each foreign
currency occurring during that period.
However, if exchange rates fluctuate significantly, the use of the average rate for a period is
inappropriate.

2.4.2 Monetary vs non-monetary items

S. No. Particulars Monetary items Non-monetary item
1. Units of Units of currency held and assets and There is no fixed or
currency liabilities to be received or paid are in a fixed determinable number
or determinable number of units of currency. of units of currency
 Examples of monetary items include:
 pensions and other employee benefits to be paid in cash;
 provisions that are to be settled in cash;
 lease liabilities;

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 cash dividends that are recognised as a liability;

 contract to receive (or deliver) a variable number of the entity’s own equity instruments
or a variable amount of assets in which the fair value* to be received (or delivered)
equals a fixed or determinable number of units of currency.
 Most debt securities are considered as monetary items because their contractual cash
flows are fixed or determinable.
Note: Fair value is the price that would be recovered to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
 Examples of non-monetary items include:
 amounts prepaid for goods and services and income received in advance, on the basis
that no money will be paid or received in the future;
 goodwill;
 intangible assets;
 inventories;
 property, plant and equipment;
 right-of-use assets;
 provisions that are to be settled by the delivery of a non-monetary asset.
2.4.3 Subsequent recognition at the end of each reporting period
 At the reporting date, assets and liabilities denominated in a foreign currency are translated
as follows:
(a) monetary items are translated at the exchange rate at the reporting date i.e., closing
rate;
(b) non-monetary items measured at historical cost are translated at the exchange rate
at the date of the transaction; and
(c) non-monetary items measured at fair value in a foreign currency are translated at
the exchange rate on the date the fair value was determined.
 The carrying amount of the item is determined applying the relevant Accounting Standard.
Example
Property, plant and equipment may be measured at fair value or historical cost as per
Ind AS 16, Property, Plant and Equipment.

The carrying amount so determined, be it on the basis of historical cost or fair value, if in
foreign currency, is translated into the functional currency in accordance with this Standard.

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 In some cases, the carrying amount of items is determined by comparing two or more
amounts e.g.:
 Inventories - measured at lower of cost and net realisable value.
 Asset subject to impairment loss - lower of an asset’s carrying amount and its
recoverable amount.
If such an asset is non-monetary and measured in a foreign currency, the carrying amount
is determined by comparing:
(a) the cost or carrying amount, as appropriate, translated at the exchange rate at the date
when that amount was determined (i.e. the rate at the date of the transaction for an item
measured in terms of historical cost); and
(b) the net realisable value or recoverable amount, as appropriate, translated at the
exchange rate at the date when that value was determined (eg. the closing rate at the
end of the reporting period).
The above may result in an impairment loss being recognised in the functional currency but
not in the foreign currency, or vice versa.
Example 1
A foreign currency asset amounting to Euro 2,00,000 is recorded at the date of purchase
when the exchange rate was 52 at 104 lacs.
The recoverable amount of the asset on the reporting date is calculated as Euro 1,75,000.
The exchange rate on the date of valuation was 60 to a Euro.
The carrying value of the foreign currency asset will be determined based on the recoverable
amount of the asset converted into functional currency at the exchange rate on valuation
date which is 105 lacs.
The impairment loss of Euro 25,000 in foreign currency is not recognised.
 Where a country has multiple exchange rates, the rate used is that at which the future cash
flows represented by the transaction or balance could have been settled if those cash flows
had occurred at the measurement date. If exchangeability between two currencies is
temporarily lacking, the rate used is the first subsequent rate at which exchanges could be
made.

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Foreign Currency Transactions

Initial Recognition Subsequent Maesurement

Non Monetary Items at Non Monetary

Spot rate on the Monetary Items Historical Cost - shall be Items at Fair
date of transaction at Closing Rate translated using the Value - When
exchange rate at the date Fair Value is
of the transaction measured

2.4.4 Recognition of foreign exchange gains and losses

 Exchange difference is the difference resulting from translating a given number of units of
one currency into another currency at different exchange rates.
 When the transaction occurs and settles within the same accounting period, all the exchange
difference is recognized in that period. However, when the transaction is settled in a
subsequent accounting period, the exchange difference is recognised in each period till
settlement date based on change in exchange rates during each period.
[Link] Monetary items
Exchange differences arising on the settlement of monetary items or on translating monetary items
are recognised in profit or loss, except:
(i) for accounting of exchange difference as required by application of hedge accounting under
Ind AS 109. For example - Ind AS 109 requires that exchange differences on monetary items
that qualify as hedging instruments in a cash flow hedge should be recognised initially in
other comprehensive income to the extent that the hedge is effective;
(ii) for monetary items that in substance form part of the reporting entity’s net investment in a
foreign operation (discussed below);
(iii) for long-term foreign currency monetary items in case the entity has exercised the option for
recognising exchange differences on such items in equity (discussed below).
[Link] Non-monetary items
 Ind AS requires certain gains and losses to be recognised in other comprehensive income.
For example, revaluation gain or loss on property, plant and equipment is recognised in
other comprehensive income as per Ind AS 16. When such an asset is measured in a
foreign currency and its revalued amount is translated as per this Standard using the rate
at the date the fair value was determined, the resulting exchange gain or loss is also
recognised in other comprehensive income.

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 If the gain or loss on a non-monetary item is recognised in profit or loss, any exchange
component of that gain or loss is also recognized in profit or loss.
[Link] Net investment in a foreign operation
 Net investment in a foreign operation is the amount of the reporting entity’s interest in the
net assets of that operation.
 A monetary item receivable from or payable to a foreign operation may form part of the net
investment in a foreign operation if the settlement of the monetary item is neither planned
nor likely to occur in the foreseeable future.
A loan to a foreign entity which is repayable on demand might seem to be a short-term item,
rather than part of capital. However, if there is demonstrably no intent or expectation to
demand repayment (e.g., the short-term loan is getting rolled over continuously, whether or
not the foreign subsidiary is able to repay it), the loan has the same economic effect as that
of a capital contribution.
On the other hand, when there is a long-term loan with a fixed maturity period (say, 10 to 15
years) it does not automatically qualify to be treated as being part of the net investment
simply because it is of a long duration, unless management has expressed its intention to
renew the loan at maturity and accordingly, the period of repayment is not foreseeable.
It lies on the management to document its intention to renew by auditable evidence, such as
board minutes. Otherwise, in the absence of management’s intention to renew, the loan’s
maturity date implies that its settlement is planned in the foreseeable future.
 Such monetary items may include long-term receivables or loans but do not include trade
receivables or trade payables.
 Exchange differences arising on a monetary item that forms part of a reporting entity’s net
investment in a foreign operation (i.e. a subsidiary, associate or joint venture) should be
treated as follows:
 Such exchange differences are recognised in profit or loss in the separate financial
statements of the reporting entity and/or the individual financial statements of the
foreign operation, as appropriate:
 If such an item is denominated in the functional currency of the reporting entity, an
exchange difference arises in the foreign operation’s individual financial
statements.
 If such an item is denominated in the functional currency of the foreign operation,
an exchange difference arises in the reporting entity’s separate financial
statements.
 If such an item is denominated in a currency other than the functional currency of
either the reporting entity or the foreign operation, an exchange difference arises

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in the reporting entity’s separate financial statements and in the foreign operation’s
individual financial statements.
 In the financial statements that include the foreign operation and the reporting entity
(e.g., consolidated financial statements when the foreign operation is a subsidiary,
associate or joint venture), such exchange differences are recognised initially in other
comprehensive income and then reclassified from equity to profit or loss on disposal of
the net investment.
Illustration 5
Functional currency of parent P is EURO while the functional currency of its subsidiary S is USD.
P sells inventory to S and a transaction for the same was made for USD 300 during the year. At
the year end, a balance of the same amount is outstanding as receivable from S. It has been
observed that such balance amount has been continuing as receivable from S year on year and
even though the payments in respect of these balances are expected to be received in the
foreseeable future but if we look at the year-end then we see this balance as outstanding every
year.
In addition to the trading balances between P and S, P has lent an amount of USD 500 to S that
is not expected to be repaid in the foreseeable future.
Analyse whether the exchange difference, if any, should be recognised in the profit and loss.
Solution
The exchange gain or loss will arise in the books of accounts of P in respect of its trading balance
with S and the same should be recognised in profit or loss. This being a balance for in the nature
of trade receivable for P, it would not be considered as its net investment in a foreign operation
(i.e. S).
The amount lent by P should be regarded as its net investment in S (i.e. foreign operation). Thus,
the exchange gain or loss incurred by P on the USD 500 loan should be recognised in profit or
loss in P’s separate financial statements and in other comprehensive income in its consolidated
financial statements.
*****
Illustration 6
In the above illustration, suppose that for tax reasons, the ‘permanent’ funding (i.e. loan amount)
extended to S is made via another entity in the group, T, rather than from P directly. That is, on
the directions of P, T gives the loan to S. T is also a subsidiary of P.
Demonstrate where should the exchange difference, if any, be recognised.

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Solution

Parent P

100% 100%

Subsidiary T Subsidiary S
Loan

Any exchange difference in respect of the loan is recognised in other comprehensive income in
the consolidated financial statements because from the group’s point of view the funding relates
to an investment in a foreign operation. This is the case irrespective of the currency in which the
loan is denominated. So, if the loan is denominated in T’s functional currency, and this is different
from that of S, then exchange differences still should be recognised in other comprehensive
income in the consolidated financial statements.
*****
2.4.5 Change in functional currency
 Once an entity has determined its functional currency, it is not changed unless there is a
change in the relevant underlying transactions, events and conditions.
 If circumstances change and a change in functional currency is appropriate, then the change
is accounted for prospectively from the date of the change.
For example, a change in the currency that mainly influences the sales price of goods and
services may lead to a change in an entity’s functional currency.
 For accounting the effect of a change in functional currency prospectively:
 All items are translated into the new functional currency using the exchange rate at the
date of the change. The resulting translated amounts for non-monetary items are treated
as their historical cost.
 Exchange differences arising from the translation of a foreign operation previously
recognised in other comprehensive income are not reclassified from equity to profit or
loss until the disposal of the operation.
 Exchange gain or loss from long-term monetary items accumulated in equity (where
such option is exercised) are not transferred to profit or loss immediately on change of
the entity’s functional currency; the balance would be transferred to profit or loss as per
the manner provided by the option.

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 Since entities prefer to present financial statements in their functional currency, a

change in functional currency may be accompanied by a change in presentation
currency. The choice of presentation currency represents an accounting policy,
and any change should be applied retrospectively in accordance with Ind AS 8,
unless impracticable. This means that the change should be treated as if the new
presentation currency had always been the entity’s presentation currency, with
comparative amounts being restated into the new presentation currency.

2.5 USE OF A PRESENTATION CURRENCY OTHER THAN

THE FUNCTIONAL CURRENCY
2.5.1 Translation to the presentation currency
 An entity measures items in its financial statements; but it may decide to present its financial
statements in a currency or currencies other than its functional currency.
For example, an entity with Rupees ( ) functional currency may choose to present its
financial statements in US Dollar because of its reporting requirement in US.
 There can be situations wherein a group comprises operations with a number of functional
currencies. Under Ind AS 21, there is no concept of a “group” functional currency. Rather
the group has a presentation currency only. Each entity in the group prepares financial
statements in its own functional currency and translates these financial statements into the
group’s presentation currency (if different) for consolidation purposes.
 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 as
follows:
(a) assets and liabilities for each balance sheet presented (i.e., including comparatives)
are translated at the closing rate at the date of that balance sheet;
(b) income and expenses are translated at exchange rates at the dates of relevant
transactions; average rates for the period if often used if they are a reasonable
approximation;
(c) all resulting exchange differences should be recognised in other comprehensive
income as they have little or no direct effect on the present and future cash flows from
operations and are presented in a separate component of equity (generally referred to
as the foreign currency translation reserve or currency translation adjustment) until
disposal of the foreign operation;
(d) cash flows are translated at exchange rates at the dates of the relevant transactions,
although an appropriate average rate may be used.

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 When the exchange differences relate to a foreign operation that is consolidated but not
wholly-owned, accumulated exchange differences arising from translation and attributable to
non-controlling interests are allocated to, and recognized as a part of, non-controlling interest
in the consolidated balance sheet.
 The results and financial position of an entity whose functional currency is the currency of a
hyperinflationary economy shall be translated into a different presentation currency as
follows:
(a) all amounts (i.e. assets, liabilities, equity items, income and expenses, including
comparatives) shall be translated at the closing rate at the date of the most recent
balance sheet, except that
(b) when amounts are translated into the currency of a non-hyperinflationary economy,
comparative amounts shall be those that were presented as current year amounts in
the relevant prior year financial statements (ie not adjusted for subsequent changes in
the price level or subsequent changes in exchange rates).
 When an entity’s functional currency is the currency of a hyperinflationary
economy, the entity shall restate its financial statements in accordance with Ind
AS 29 before applying the translation method set out above, except for
comparative amounts that are translated into a currency of a non-hyperinflationary
economy.

2.6 TRANSLATION OF FOREIGN OPERATIONS

 The guidance provided on determining an entity’s functional currency equally applies to
determine the functional currency of a foreign operation of the entity.
 Effectively, the translation procedures those for translating foreign operations are the same
as those followed when an entity presents its financial statements in a presentation currency
that is different from its functional currency:
(a) assets and liabilities are translated at the exchange rate at the reporting date;
(b) items of income and expense are translated at exchange rates at the dates of the
relevant transactions, although appropriate average rates may be used;
(c) the resulting exchange differences are recognised in other comprehensive income and
are presented in a separate component of equity (generally referred to as the foreign
currency translation reserve or currency translation adjustment) until disposal of the
foreign operation; and
(d) cash flows are translated at exchange rates at the dates of the relevant transactions,
although an appropriate average rate may be used.

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 In addition to the exchange difference as stated above, the foreign currency translation
reserve may include exchange differences arising from loans that form part of the parent’s
net investment in the foreign operation and gains and losses related to hedges of a net
investment in a foreign operation.

2.7 DIFFERENCE IN THE REPORTING DATES

 When there is difference in the year end of foreign operation and that of the reporting entity,
the foreign operation often prepares additional statements as of the same date as the
reporting entity’s financial statements.
 When such financial statements are not prepared, Ind AS 110 allows the use of a different
date provided that the difference is no greater than three months and adjustments are made
for the effects of any significant transactions or other events that occur between the different
dates.
 In such a case, the assets and liabilities of the foreign operation are translated at the
exchange rate at the end of the reporting period of the foreign operation.
 Adjustments are made for significant changes in exchange rates up to the end of the reporting
period of the reporting entity in accordance with Ind AS 110.
 A similar approach is used in applying the equity method to associates and joint ventures in
accordance with Ind AS 28, Investment in Associates and Joint Ventures.

2.8 INTRA-GROUP TRANSACTIONS

 Although intra-group balances are eliminated on consolidation, any related foreign exchange
gains or losses will not be eliminated. This is because the group has a real exposure to a
foreign currency since one of the entities will need to obtain or sell foreign currency in order
to settle the obligation or realise the proceeds received.
 Accordingly, in the consolidated financial statements of the reporting entity, the exchange
difference arising on such intra group transactions is recognised in the statement of profit or
loss account, unless it arises from a monetary item that forms part of a reporting entity’s net
investment in a foreign operation in which case it is taken to other comprehensive income.
 A Group may have intra-group transactions like sale and purchase of various assets such as
property, plant and equipment, intangible assets or inventory. These transactions could result
in intra-group profits or losses. At the time of consolidation, these profits / losses are eliminated
until the profit or loss is realized i.e. when the asset is sold outside the group, depreciated,
amortised or written off as per the requirements of Ind AS 110. The elimination of intra-group
profits / losses arising from such transactions, like sales between entities that are consolidated,

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should be based on the spot rate i.e. the exchange rate of the date of the sale.

Example 2
Parent P has USD as its functional currency and Subsidiary S has Euro as its functional
currency. P, whose reporting date is 31 st March, lends USD 100 to S on 30 th September,
20X1. S converted the loan amount received into Euro on receipt.
USD EURO
Exchange rate at 30 th September, 20X1 1 = 1.5
Exchange rate at 31 st March, 20X2 1 = 2.0
Entries in the books of account of S Debit Credit
(EURO) (EURO)
Date Particulars
30 th September, Bank A/c Dr. 150
20X1 To Intra-group payable 150
(To recognize intra-group loan)
31 st March, 20X2 Exchange loss A/c Dr. 50
To Intra-group payable 50
(To recognize exchange loss on intra-group loan)
In S’s second entry, the liability is remeasured at 31 st March, 20X2 and a translation loss is
recorded.
Entries in the books of account of P
Debit (USD) Credit (USD)
30 th September,20X1 Intra group receivable Dr. 100
To Cash 100
(To recognize intra-group loan on issue)
On consolidation at 31 st March, 20X2, the receivable and payable (in respect of Intra-group
receivable and payable) will be eliminated. However, an exchange loss equivalent to EURO
50 for the year ended 31 st March, 20X2 will remain on consolidation. This is appropriate
because S will need to obtain USD in order to repay the liability. Therefore, the group has a
foreign currency exposure. The exchange loss will be taken to consolidated profit or loss,
unless the loan forms part of P’s net investment in S in which case it will be transferred to
other comprehensive income at the time of consolidation.

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Illustration 7
The functional and presentation currency of parent P is USD while the functional currency of its
subsidiary S is EURO. P sold goods having a value of USD 100 to S when the exchange rate was
USD 1 = Euro 2. At year-end, the amount is still due, and the exchange rate is USD 1 = Euro 2.2.
Advise how should the exchange difference, if any, be accounted for in the consolidated financial
statements.
Solution
At year-end, S should restate its accounts payable to EURO 220, recognising a loss of Euro 20 in
its profit or loss. Thus, in the books of S, the balance payable to P will appear at EURO 220 while
in the books of P the balance receivable from S will be USD 100.
For consolidation purposes, the assets and liabilities of S will be translated to USD at the closing
rate.
At the time of consolidation, USD 100 which will get eliminated against the receivable in the books
of P but the exchange loss of EURO 20 recorded in the subsidiary’s statement of profit or loss has
no equivalent gain in the parent’s financial statements. Therefore, exchange loss of EURO 20 will
remain in the consolidated statement of profit or loss.
The reason for this is that the intra-group balance represents a commitment to translate Euro into
USD and this is similar to holding a foreign currency asset in the books of the parent company.
i.e. the subsidiary would be required to buy USD to settle the obligation to the parent, so the Group
has an exposure to foreign currency risk.
*****
Illustration 8
M Ltd is engaged in the business of manufacturing of bottles for pharmaceutical companies and
non-pharmaceutical companies. It has a wholly owned subsidiary, G Ltd, which is engaged in the
business of pharmaceuticals. G Ltd purchases the pharmaceutical bottles from its parent
company. The demand of G Ltd is very high and hence to cater to its shortfall, G Ltd also
purchases the bottles from other companies. Purchases are made at the competitive prices.
M Ltd sold pharmaceuticals bottles to G Ltd for Euro 12 lacs on 1 st February, 20X1. The cost of
these bottles was 830 lacs in the books of M Ltd at the time of sale. At the year-end i.e.
31 st March, 20X1, all these bottles were lying as closing stock and payable with G Ltd.
Euro is the functional currency of G Ltd. while Indian Rupee is the functional currency of M Ltd.
Following additional information is available:
Exchange rate on 1 st February, 20X1 1 Euro = 83
Exchange rate on 31 st March, 20X1 1 Euro = 85

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Provide the accounting treatment for the above in books of M Ltd. and G Ltd. Also show its
impact on consolidated financial statements. Support your answer by Journal entries, wherever
necessary, in the books of M Ltd.
Solution
Accounting treatment in the books of M Ltd (Functional Currency Rupees ( ))
M Ltd will recognize sales of 996 lacs (12 lacs Euro x 83)
Profit on sale of inventory = 996 lacs – 830 lacs = 166 lacs.
On balance sheet date receivable from G Ltd. will be translated at closing rate i.e. 1 Euro = 85.
Therefore, unrealised forex gain will be recorded in standalone profit and loss of 24 lacs. (i.e.
(85 - 83) x 12 Lacs)
Journal Entries

(in Lacs) (in Lacs)

G Ltd. A/c Dr. 996
To Sales 996
(Being revenue recorded on initial recognition)
G Ltd. A/c Dr. 24
To Foreign exchange difference (unrealised) 24
(Being foreign exchange difference recorded at year end)

Accounting treatment in the books of G Ltd (Functional currency EURO)

G Ltd will recognize purchases on 1 st February, 20X1 of Euro 12 lacs which will also be its closing
stock at year end.
Journal Entry

(in Euros) (in Euros)

Purchases Dr. 12 lakhs
To M Ltd. 12 lakhs

Accounting treatment in the consolidated financial statements

Receivable and payable in respect of above-mentioned sale / purchase between M Ltd and G Ltd
will get eliminated.
The closing stock of G Ltd will be recorded at lower of cost or NRV.

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Euro (in lacs) Rate (in lacs)

Cost 12 83 996
NRV (Assumed Same) 12 85 1020

Therefore, no write off is required.

The amount of closing stock of 996 lacs includes two components–
 Cost of inventory for 830 lacs; and
 Profit element of 166 lacs; and
At the time of consolidation, the second element amounting to 166 lacs will be eliminated from
the closing stock.
Journal Entry

(in Lacs) (in Lacs)

Consolidated P&L A/c Dr. 166
To Inventory 166
(Being profit element of intragroup transaction eliminated)

*****
2.8.1 Dividends
If a subsidiary pays a dividend to the parent during the year the parent should record the dividend
at the rate ruling when the dividend was declared. An exchange difference will arise in the parent’s
own financial statements if the exchange rate moves between the declaration date and the date
the dividend is actually received. This exchange difference is required to be recognised in profit
or loss and will remain there on consolidation.
The same will apply if the subsidiary declares a dividend to its parent on the last day of its financial
year and this is recorded at the year-end in both entities’ financial statements. There is no problem
in that year as both the intragroup balances and the dividends will eliminate on consolidation with
no exchange differences arising. However, as the dividend will not be received until the following
year an exchange difference will arise in the parent’s financial statements in that year if exchange
rates have moved in the meantime. Again, this exchange difference should remain in consolidated
profit or loss as it is no different from any other exchange difference arising on intragroup balances
resulting from other types of intragroup transactions. It should not be recognised in other
comprehensive income.

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It may seem odd that the consolidated results can be affected by exchange differences on inter-
company dividends. However, once the dividend has been declared, the parent now effectively
has a functional currency exposure to assets that were previously regarded as part of the net
investment. In order to minimise the effect of exchange rate movements entities should, therefore,
arrange for inter-company dividends to be paid on the same day the dividend is declared, or as
soon after the dividend is declared as possible.

2.9 GOODWILL AND FAIR VALUE ADJUSTMENTS ARISING

FROM A BUSINESS COMBINATION
 Any goodwill and any fair value adjustments to the carrying amounts of assets and liabilities
arising on a foreign operation’s acquisition are treated as assets and liabilities of the foreign
operation.
 Hence, they are expressed in the functional currency of the foreign operation and should be
translated at the closing exchange rate as is the case for other assets and liabilities.

2.10 DISPOSAL OR PARTIAL DISPOSAL OF FOREIGN

OPERATIONS
2.10.1 Full disposal
 A disposal may arise, for example, through sale, liquidation or repayment of share capital.
On disposal of the foreign operation, the cumulative exchange differences relating to that
foreign operation recognised in other comprehensive income and accumulated in equity are
reclassified from equity to profit or loss (reclassification adjustment) when the gain or loss
on disposal is recognised.
 On disposal of a subsidiary that includes a foreign operation, the cumulative amount of the
exchange differences related to that foreign operation that have been attributed to the non-
controlling interests is derecognised, but it is not reclassified to profit or loss.
 In addition to the disposal of an entity’s entire interest in a foreign operation, the following
partial disposals are accounted for as disposals:
 when the partial disposal involves the loss of control of a subsidiary that includes a
foreign operation, regardless of whether the entity retains a non-controlling interest
(NCI) in its former subsidiary after the partial disposal; and
 when the retained interest after the partial disposal of an interest in a joint arrangement
or a partial disposal of an interest in an associate that includes a foreign operation is a
financial asset that includes a foreign operation.

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Example 3
Parent P owns 100 percent of foreign subsidiary S. P sells 70 percent of its investment and loses
control of S. The entire balance in the foreign currency translation reserve in respect of S is
reclassified to profit or loss.

2.10.2 Partial disposal

A partial disposal of an entity’s interest in a foreign operation is any reduction in an entity’s
ownership interest in a foreign operation, except for those reductions that are accounted for as
disposals.
In the case of the partial disposal of a subsidiary that includes a foreign operation, the entity re-
attributes the proportionate share of the cumulative amount of the exchange differences
recognised in other comprehensive income to the NCI in that foreign operation.
In any other partial disposal of a foreign operation, the entity reclassifies to profit or loss only the
proportionate share of the cumulative amount of the exchange differences recognised in other
comprehensive income.
Examples 4 & 5
4. Parent P owns 100 percent of foreign subsidiary S. P sells 10 percent of its investment and
retains control over S. Therefore, 10 percent of the balance in the foreign currency
translation reserve is reclassified to NCI.
5. Parent P owns 35 percent of foreign associate B. P sells a 5 percent stake and retains
significant influence over B. Therefore, one-seventh (5/35) of the balance in the foreign
currency translation reserve is reclassified to profit or loss.
A write-down of the carrying amount of a foreign operation, either because of its own losses or
because of an impairment recognised by the investor, does not constitute a partial disposal.
Accordingly, no part of the foreign exchange gain or loss recognised in other comprehensive
income is reclassified to profit or loss at the time of a write-down.

2.11 TAX EFFECT OF ALL EXCHANGE DIFFERENCES

Ind AS 12, Income Taxes, applies to tax effects of gains and losses on foreign currency
transactions and exchange differences arising on translating the results and financial position of
an entity (including a foreign operation) into a different currency.

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2.12 DISCLOSURES
Ind AS 21 requires following disclosures:
(a) amount of exchange differences recognised in profit or loss except for those arising on
financial instruments measured at fair value through profit or loss in accordance with
Ind AS 109;
(b) net exchange differences recognised in other comprehensive income and accumulated in a
separate component of equity, along with the reconciliation of the amount at the beginning
and end of the period;
(c) when the presentation currency is different from the functional currency - that fact shall be
stated, together with disclosure of the functional currency and the reason for using a different
presentation currency;
(d) in case of change in functional currency of either the reporting entity or a significant foreign
operation:
(i) fact of such change;
(ii) reason for the change and;
(iii) date of change in functional currency;
(e) if presentation currency is different from functional currency, the financial statements can be
described as complying with Ind AS only if all Ind AS including the translation method of this
Standard is complied with.
However, if an entity presents its financial statements or supplementary financial information
in a currency other than its functional or presentation currency:
(i) the information should be clearly identified as supplementary information to distinguish
it from the information that complies with Ind AS;
(ii) the currency in which the supplementary information is displayed should be disclosed;
and
(iii) the entity’s functional currency and the method of translation used to determine the
supplementary information should be disclosed.

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2.13 EXTRACTS OF FINANCIAL STATEMENTS OF LISTED

ENTITIES
Following is the extract from the financial statements of the listed entity ‘Tata Consultancy
Services Limited’ for the financial year 2021-2022 with respect to Ind AS 21 ‘The Effects of
Changes in Foreign Exchange Rates’.

Basis of preparation

The functional currency of the Company and its Indian subsidiaries is the Indian Rupee (`).
The functional currency of foreign subsidiaries is the currency of the primary economic
environment in which the entity operates. Foreign currency transactions are recorded at
exchange rates prevailing on the date of the transaction. Foreign currency denominated
monetary assets and liabilities are retranslated at the exchange rate prevailing on the
balance sheet dates and exchange gains and losses arising on settlement and restatement
are recognised in the statement of profit and loss. Non-monetary assets and liabilities that
are measured in terms of historical cost in foreign currencies are not retranslated.

Foreign currency translation reserve

The exchange differences arising from the translation of financial statements of foreign
operations with functional currency other than Indian Rupee is recognised in other
comprehensive income and is presented within equity in the foreign currency translation
reserve.
(Source: Annual Report for 2021-2022 of Tata Consultancy Services Limited)

2.14 SIGNIFICANT DIFFERENCES IN IND AS 21 VIS-À-VIS

AS 11

S. No. Particulars Ind AS 21 AS 11

1. Forward Exchange Excludes from its scope AS 11 deals with accounting for
Contracts and other forward exchange contracts forward exchange contracts
similar Financial and other similar financial (except forward exchange
Instruments instruments, which are contracts entered into to hedge
treated in accordance with the foreign currency risks of
Ind AS 109. future transactions in respect of
which firm commitments are

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made or which are highly
probable forecast transactions).

2. Exchange Ind AS 21 does not give the AS 11, gives an option to

Differences arising on above option. However, recognise exchange differences
Translation of Certain Ind AS 21 does not apply to arising on translation of certain
Long-term Monetary long-term foreign currency long-term monetary items from
Items from Foreign monetary items recognised in foreign currency to functional
Currency to the financial statements currency directly in equity, to be
Functional Currency before the beginning of the transferred to profit or loss over
first Ind AS financial the life of the relevant
reporting period as per the liability/asset if such items are
previous GAAP, i.e. AS 11. not related to acquisition of
However, as provided in Ind depreciable capital assets;
AS 101, such an entity may where such items are related to
continue to apply the acquisition of depreciable
accounting policy so opted capital assets, the foreign
for such long-term foreign exchange differences can be
currency monetary items as recognised as part of the cost of
per the previous GAAP. the asset. (paragraphs 46 and
46A of AS 11)

3. Approach for Ind AS 21 is based on Under AS 11 there is no

Translation functional currency concept of functional currency.
approach. An entity is The method used to translate
required to determine its the financial statements of a
functional currency which foreign operation depends on
can be different from its the classification of foreign
presentation currency based operation (integral foreign
on factors envisaged in the operation or non-integral
standard. foreign operation).

4. Presentation As per Ind AS 21, AS 11 does not explicitly state

Currency presentation currency can be so.
different from local currency
and it gives detailed
guidance in this regard.

5. Exchange differences As per Ind AS 21 (paragraph As per AS 11, exchange

on monetary items, 32), exchange differences on differences on monetary items,

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forming part of net monetary items, that in that in substance, form part of
investment in a substance, form part of net net investment in a foreign
foreign operation investment in a foreign operation, are recognised in
operation, are recognised in ‘Foreign Currency Translation
profit or loss in the period in Reserve’ both in the separate
which they arise in the and consolidated financial
separate financial statements until the disposal of
statements and in other the net investment, at which
comprehensive income in the time income or expense on the
consolidated financial same are recognised in profit or
statements and reclassified loss.
from equity to profit or loss
on disposal of the net
investment.

6. Guidance on foreign Ind AS 21 includes Appendix AS 11 does not contain such

Currency B which gives guidance on guidance.
Transactions and foreign Currency
Advance Transactions and Advance
Consideration Consideration

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FOR SHORTCUT TO IND AS WISDOM: SCAN ME!

TEST YOUR KNOWLEDGE

Questions
1. Parent P acquired 90 percent of subsidiary S some years ago. P now sells its entire
investment in S for 1,500 lakhs. The net assets of S are 1,000 and the NCI in S is
100 lakhs. The cumulative exchange differences that have arisen during P’s ownership
are gains of 200 lakhs, resulting in P’s foreign currency translation reserve in respect of S
having a credit balance of 180 lakhs, while the cumulative amount of exchange differences
that have been attributed to the NCI is 20 lakhs
Calculate P’s gain on disposal in its consolidated financial statements.
2. Entity A, whose functional currency is Rupees ( ), has a foreign operation, Entity B, with a
Euro functional currency. Entity B issues to A perpetual debt (i.e. it has no maturity)
denominated in euros with an annual interest rate of 6 per cent. The perpetual debt has no
issuer call option or holder put option. Thus, contractually it is just an infinite stream of
interest payments in Euros.
Analyse in A's consolidated financial statements, whether the perpetual debt can be
considered in accordance with para 15 of Ind AS 21, a monetary item "for which settlement
is neither planned nor likely to occur in the foreseeable future" (i.e. part of A's net investment
in B), with the exchange gains and losses on the perpetual debt therefore being recorded in
equity?
3. Infotech Global Ltd. has a functional currency of USD and needs to translate its financial
statements into the functional and presentation currency of Infotech Inc. (L$).
The following balances appear in the books of Infotech Global Ltd. at the year-end prior to
translation:
USD L$
Property, plant and equipment 50,000

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Receivables 9,35,000
Total assets 9,85,000
Issued capital 50,000 30,055
Opening retained earnings 28,000 15,274
Profit & Loss A/c (Profit for the year) 20,000
Accounts payable 8,40,000
Accrued liabilities 47,000
Total equity and liabilities 9,85,000
Translate the above balances of Infotech Global Ltd. into L$ ready for consolidation by
Infotech Inc. (Share capital and opening retained earnings have been pre-populated.)
Prepare a working of the cumulative balance of the foreign currency translation reserve.
Additional information:
Relevant exchange rates are:
Rate at beginning of the year L$ 1 = USD 1.22
Average rate for the year L$ 1 = USD 1.175
Rate at end of the year L$ 1 = USD 1.13
4. On 30 th January, 20X1, A Ltd. purchased a machinery for $ 5,000 from USA supplier on credit
basis. A Ltd.’s functional currency is Rupees. The exchange rate on the date of transaction
is 1 $ = 60. The fair value of the machinery determined on 31 st March, 20X1 is $ 5,500.
The exchange rate on 31 st March, 20X1 is 1$ = 65. The payment to overseas supplier
done on 31 st March 20X2 and the exchange rate on 31 st March 20X2 is 1$ = 67. The fair
value of the machinery remains unchanged for the year ended on 31 st March 20X2. Tax rate
is 30%. A Ltd. follows revaluation method in respect of Plant & Machinery.
Pass the Journal entries for the year ended on 31 st March 20X1 and year 20X2 according to
Ind AS 21.
5. On 1 st January, 20X2, P Ltd. purchased a machine for $ 2 lakhs. The functional currency of
P Ltd. is Rupees. At that date the exchange rate was $1= 68. P Ltd. is not required to pay
for this purchase until 30 th June, 20X2. Rupees strengthened against the $ in the three
months following purchase and by 31 st March, 20X2 the exchange rate was $1 = 65. CFO
of P Ltd. feels that these exchange fluctuations wouldn’t affect the financial statements
because P Ltd. has an asset and a liability denominated in rupees, which was initially the
same amount. He also feels that P Ltd. depreciates this machine over four years so the
future year-end amounts won’t be the same.

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Examine the impact of this transaction on the financial statements of P Ltd. for the year
ended 31 st March, 20X2 as per Ind AS.
6. Supplier, A Ltd., enters into a contract with a customer, B Ltd., on 1 st January, 20X2 to deliver
goods in exchange for total consideration of USD 50 million and receives an upfront payment
of USD 20 million on this date. The functional currency of the supplier is Rupees ( ). The
goods are delivered and revenue is recognised on 31 st March, 20X2. USD 30 million is
received on 1 st April, 20X2 in full and final settlement of the purchase consideration.
The exchange rates on 1 st January, 20X2 and 31 st March, 20X2 are 72 per USD and 75
per USD respectively.
State the date of transaction for advance consideration and recognition of revenue. Also
state the amount of revenue in Rupees ( ) to be recognized on the date of recognition of
revenue.
7. Global Limited, an Indian company acquired on 30 th September, 20X1 70% of the share
capital of Mark Limited, an entity registered as company in Germany. The functional currency
of Global Limited is Rupees and its financial year end is 31 st March, 20X2.
(i) The fair value of the net assets of Mark Limited was 23 million EURO and the purchase
consideration paid is 17.5 million EURO on 30 th September, 20X1.
The exchange rates as at 30 th September, 20X1 was 82 / EURO and at
31 st March, 20X2 was 84 / EURO.
Determine the value at which the goodwill has to be recognised in the financial
statements of Global Limited as on 31 st March, 20X2, when NCI is valued at
proportionate share of fair value of net assets of Mark Limited.
(ii) Mark Limited sold goods costing 2.4 million EURO to Global Limited for 4.2 million
EURO during the year ended 31 st March, 20X2. The exchange rate on the date of
purchase by Global Limited was 83 / EURO and on 31 st March, 20X2 was
84 / EURO. The entire goods purchased from Mark Limited are unsold as on
st
31 March, 20X2.
Determine the unrealised profit to be eliminated in the preparation of consolidated
financial statements.
8. On 1 st April, 20X1, Makers Ltd. raised a long term loan from foreign investors. The investors
subscribed for 6 million Foreign Currency (FCY) loan notes at par. It incurred incremental
issue costs of FCY 2,00,000. Interest of FCY 6,00,000 is payable annually on 31 st March,
starting from 31 st March, 20X2. The loan is repayable in FCY on 31 st March, 20X7 at a
premium and the effective annual interest rate implicit in the loan is 12%. The appropriate
measurement basis for this loan is amortised cost. Relevant exchange rates are as follows:
- 1 st April, 20X1 - FCY 1 = 2.50.

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- 31 st March, 20X2 – FCY 1 = 2.75.

- Average rate for the year ended 31 st Match, 20X2 – FCY 1 = 2.42. The functional
currency of the group is Indian Rupee.
Advise the appropriate accounting treatment for the foreign currency loan in the books of
Makers Ltd. for the financial year 20X1-20X2. Also calculate the initial measurement amount
for the loan, finance cost for the year, closing balance and exchange gain / loss.
Answers
1. P’s gain on disposal in its consolidated financial statements would be calculated in the
following manner:

( in Lakhs)
Sale proceeds 1,500
Net assets of S (1,000)
NCI derecognised 100
Foreign currency translation reserve 180
Gain on disposal 780

2. Yes, as per Ind AS 21 net investment in a foreign operation is the amount of the reporting
entity’s interest in the net assets of that operation.
As per para 15 of Ind AS 21, an entity may have a monetary item that is receivable from or
payable to a foreign operation. An item for which settlement is neither planned nor likely to
occur in the foreseeable future is, in substance, a part of the entity’s net investment in that
foreign operation. Such monetary items may include long-term receivables or loans. They
do not include trade receivables or trade payables.
Analysis on the basis of above mentioned guidance
Through the origination of the perpetual debt, A has made a permanent investment in B. The
interest payments are treated as interest receivable by A and interest payable by B, not as
repayment of the principal debt. Hence, the fact that the interest payments are perpetual
does not mean that settlement is planned or likely to occur. The perpetual debt can be
considered part of A's net investment in B.
In accordance with para 15 of Ind AS 21, the foreign exchange gains and losses should be
recorded in equity at the consolidated level because settlement of that perpetual debt is
neither planned nor likely to occur.

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3. Translation of the balances for the purpose of consolidation

USD Rate L$
Property, plant and equipment 50,000 1.13 44,248
Receivables 9,35,000 1.13 8,27,434
Total assets 9,85,000 8,71,682
Issued capital 50,000 — 30,055
Opening retained earnings 28,000 — 15,274
Profit for the year 20,000 1.175 17,021
Accounts payable 8,40,000 1.13 7,43,363
Accrued liabilities 47,000 1.13 41,593
Total equity and liabilities USD 9,85,000 8,47,306
Foreign Currency Translation Reserve (Refer WN-1) 24,376
Total equity and liabilities L$ 8,71,682

Working Note
1 Cumulative balance of the FCTR

Particulars Actual translated Amount Difference

amount in L$ (Refer WN-2)
A B B-A
Issued capital 30,055 44,248 14,193
Opening retained earnings 15,274 24,779 9,505
Profit for the year 17,021 17,699 678
62,350 86,726 24,376

2 Translated amount if the same conversion rate is applied to following items as

applied on other items

Translated amount
Issued capital 50,000 1.13 44,248
Opening retained earnings 28,000 1.13 24,779
Profit for the year 20,000 1.13 17,699
98,000 86,726

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 INDIAN ACCOUNTING STANDARD 21 9.127

4. Journal Entries
Purchase of Machinery on credit basis on 30 th January 20X1:

Machinery A/c ($ 5,000 x 60) Dr. 3,00,000

To Creditors-Machinery A/c 3,00,000
(Initial transaction will be recorded at exchange rate on the
date of transaction)

Exchange difference arising on translating monetary item on 31st March 20X1:

Profit & Loss A/c [($ 5,000 x 65) – ($ 5,000 x 60)] Dr. 25,000
To Creditors-Machinery A/c 25,000
Machinery A/c Dr. 30,000
To Revaluation Surplus (OCI) 30,000
[Being Machinery revalued to USD 5,500; ( 60 x ($ 5,500 -
$ 5,000)]
Machinery A/c Dr. 27,500
To Revaluation Surplus (OCI) 27,500
(Being Machinery measured at the exchange rate on 31.3.20X1
[$ 5,500 x ( 65 - 60)]
Revaluation Surplus (OCI) Dr. 17,250
To Deferred Tax Liability 17,250
(DTL created @ of 30% of the total OCI amount)

Exchange difference arising on translating monetary item and settlement of creditors on

31 st March 20X2:

Creditors-Machinery A/c ($ 5,000 x 65) Dr. 3,25,000

Profit & loss A/c [(5,000 x ( 67 - 65)] Dr. 10,000
To Bank A/c 3,35,000
Machinery A/c [{$ 5,500 x ( 67 - 65)}] Dr. 11,000

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To Revaluation Surplus (OCI) 11,000
Revaluation Surplus (OCI) Dr. 3,300
To Deferred Tax Liability 3,300
(DTL created @ of 30% of the total OCI amount)

5. As per Ind AS 21 ‘The Effects of Changes in Foreign Exchange Rates’ the asset and liability
would initially be recognised at the rate of exchange in force at the transaction date ie
1 st January, 20X2. Therefore, the amount initially recognised would be 1,36,00,000
($ 2,00,000 x 68).
The liability is a monetary item, so it is retranslated using the rate of exchange in force at
31 st March, 20X2. This makes the closing liability of 1,30,00,000 ($ 2,00,000 x 65).
The gain on re-translation of 6,00,000 ( 1,36,00,000 – 1,30,00,000) is recognised in the
Statement of profit and loss.
The machine is a non-monetary asset carried at historical cost. Therefore, it continues to be
translated using the rate of 68 to $ 1.
Depreciation of 8,50,000 ( 1,36,00,000 x ¼ x 3/12) would be charged to profit or loss for
the year ended 31 st March, 20X2.
The closing balance in property, plant and equipment would be 1,27,50,000 ( 1,36,00,000
– 8,50,000). This would be shown as a non-current asset in the balance sheet.
6. This is the case of Revenue recognised at a single point in time with multiple payments. As
per the guidance given in Appendix B to Ind AS 21:
A Ltd. will recognise a non-monetary contract liability amounting 1,440 million, by
translating USD 20 million at the exchange rate on 1 st January, 20X2 ie 72 per USD.
A Ltd. will recognise revenue at 31 st March, 20X2 (that is, the date on which it transfers the
goods to the customer).
A Ltd. determines that the date of the transaction for the revenue relating to the advance
consideration of USD 20 million is 1 st January, 20X2. Applying paragraph 22 of Ind AS 21,
A Ltd. determines that the date of the transaction for the remainder of the revenue as
31 st March, 20X2.
On 31 st March, 20X2, A Ltd. will:
 derecognise the non-monetary contract liability of USD 20 million and recognise
USD 20 million of revenue using the exchange rate as at 1 st January, 20X2 ie 72 per
USD; and

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 recognise revenue and a receivable for the remaining USD 30 million, using the
exchange rate on 31 st March, 20X2 ie 75 per USD.
 the receivable of USD 30 million is a monetary item, so it should be translated using the
closing rate until the receivable is settled.
7. (i) Para 47 of Ind AS 21 requires that goodwill arose on business combination shall be
expressed in the functional currency of the foreign operation and shall be translated at
the closing rate in accordance with paragraphs 39 and 42. In this case the amount of
goodwill in EURO will be as follows:
Net identifiable asset Dr. 23 million
Goodwill (bal. fig.) Dr. 1.4 million
To Bank 17.5 million
To NCI (23 x 30%) 6.9 million
Thus, goodwill on reporting date would be 1.4 million EURO x 84 = 117.6 million
(ii)

Particulars EURO in million

Sale price of Inventory 4.20
Unrealised Profit [a] 1.80

Exchange rate as on date of purchase of Inventory [b]` 83 / Euro

Unrealized profit to be eliminated [a x b]` 149.40 million
As per para 39 of Ind AS 21 “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”.
In the given case, purchase of inventory is an expense item shown in the statement
profit and loss. Hence, the exchange rate on the date of purchase of inventory is taken
for calculation of unrealized profit which is to be eliminated while preparation of financial
statements.
8. Initial carrying amount of loan in books
Loan amount received = 60,00,000 FCY
Less: Incremental issue costs = 2,00,000 FCY
58,00,000 FCY
Ind AS 21, “The Effect of Changes in Foreign Exchange Rates” states that foreign currency
transactions are initially recorded at the rate of exchange in force when the transaction was

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first recognized.
Loan to be converted in Rupees ( ) = 58,00,000 FCY x 2.50/FCY
= 1,45,00,000
Therefore, the loan would initially be recorded at 1,45,00,000.
Calculation of amortized cost of loan (in FCY) at the year end:

Period Opening Financial Interest @ Cash Flow Closing

Liability (FCY) 12% (FCY) (FCY) Financial
A B C Liability (FCY)
A+B-C
20X1-20X2 58,00,000 6,96,000 6,00,000 58,96,000

The finance cost in FCY is 6,96,000

The finance cost would be recorded at an average rate for the period since it accrues over a
period of time.
Hence, the finance cost for financial year 20X1-20X2 in Rupees ( ) is 16,84,320 (6,96,000
FCY x 2.42 / FCY)
The actual payment of interest would be recorded at 6,00,000 x 2.75 = 16,50,000
The loan balance is a monetary item, so it is translated at the rate of exchange at the
reporting date.
So, the closing loan balance in Rupees ( ) is 58,96,000 FCY x 2.75 / FCY = 1,62,14,000
The exchange differences that are created by this treatment are recognized in profit and loss.
In this case, the exchange difference is
[1,62,14,000 - (1,45,00,000 + 16,84,320 – 16,50,000)] = 16,79,680.
This exchange difference is taken to profit and loss.

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