This presentation contains brief explanation of the topic with practical examples.

1. Ind AS-21
Effects of changes in
Foreign Exchange Rates
By- Sakshi Agarwal

2. Scope
This standard applies to:
 In accounting for transactions and balances in foreign currencies.
In translating the results and financial position of foreign operations that are included in the
financial statements of the entity.
In translating an entity’s results and financial position into a presentation currency.

3. Exclusions
This standard does not applies to:
Derivative transactions and balances that are within the scope of Ind AS- 39-Financial Instruments.
Hedge Accounting for Foreign currency items covered by Ind AS- 39.
Presentation in Statement of cash flows of transactions in a foreign currency or of a foreign
operation. (Ind AS-7 Statement of Cash Flows)

4. Key Definitions
Functional Currency
Currency of the primary
economic environment
in which an entity
operates.
Foreign Currency
Currency other than
entity’s functional
Currency
Presentation Currency
Currency in which the
financial statements are
presented.

5. Primary Factors
Currency that affects
Cost of Goods and
Services that will
ultimately affect
returns of entity.
Currency that is used
to determine Pricing
of Products for sale.
Currency used in
Competitive
business.
Factors to identify Primary Economy
Environment

6. Secondary Factors
Currency in
which funding
is obtained.
Currency in
which most of
Receipts and
Payments
occur.

8. Solution-
A LTD.
 Functional currency = US dollars
 Financial statements will be presented in USD
 If wants to present financial statement in Indian Rupees – Use Translation Procedures as per Ind AS
for converting into presentation currency.

9. Foreign Operation
Foreign Operation
Subsidiary, Associate, joint venture, 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.

10. In case of Foreign Operation
If such foreign operation is extension of business of entity, it should have same Functional
Currency as of entity.
Meaning of Extension of business
Such Foreign
Operations is not
having greater
autonomy in
operations.
These Foreign
Operations have
significant (high
volume) transactions
with entity.
Cash Flow
transactions are
mostly with parents
(Most of the sales
and purchases are for
parent.)
Foreign Operation
cannot service its
debt on independent
basis.

11. Example-
 N ltd, a subsidiary in India, purchases goods from A Inc. , its holding company in USA.
 Purchases are done in USD and are based on prices in US market.
 It sells goods in INR but the sale price is influenced by the country of the holding company.
 Other expenses are incurred locally.
 N Ltd has an external commercial borrowing from A Inc. for financing its activities.

13. Accounting Treatment
 Following treatments are to be covered:-
 Transactions in Foreign Currency
 Translation of Foreign Currency to Presentation Currency
 Consolidation of Foreign Subsidiary

14. Transactions in Foreign Currency
Initial
Recognition
Subsequent
Recognition
Use Spot Rate or Average Rate
of specified period (having low
fluctuations) like for a
week/month etc.
See next slide

15. Monetary Item v/s Non-Monetary Item
MONETARY ITEM
 Assets/ Liabilities
 whose settlement is by contract with fixed
amount
 and such settlement is in Foreign Currency.
E.g.- Debtors, Creditors, Investments in Debt
Securities, Deposits and Bank accounts, Cash,
loans, Accruals, Current Tax Liability, Deferred
Tax Assets and Liabilities, Provisions for
Employee Benefits etc.
NON-MONETARY ITEM
 Items which are not Monetary item are
considered as Non- Monetary Items.
 E.g.- PPE, Intangible Assets, Equity
Investments(Shares), Inventories, Share Capital,
Deferred Income

16. Subsequent Recognition
• Rate at the Reporting Date
Monetary
Items
• Rate at the date of transaction
Non- Monetary
items at Historical
Cost
• Rate on the date of calculating
Fair Value
Non-Monetary
items at Fair Value

19. Special Treatment on Transition
AS-11 had para 46&46A which specified that Exchange Difference arising on-
 Long- Term Foreign Currency Monetary Item were treated as follows:-
Depreciable Assets
ED was capitalised
Depreciation would change for
current and subsequent period.
Non- Depreciable
Assets
ED was capitalised under “Foreign
Exchange Monetary Item
Translation difference Account”
Amortised over the period
 Short- Term Foreign currency Item:- Transfer to Profit and Loss A/c

20. Para D-13AA in Ind AS-101
Regarding Long- Term Foreign Exchange Monetary Item, a new para D-13AA was introduced
in Ind AS-101, which gave following option:-
 Exchange Difference on LT foreign Exchange Monetary Item, can still be capitalised with
Depreciable Asset/ FCMIT Difference A/c as given in AS-11 till 31.03.2020 and keep on
amortising as earlier, but these ED should only relate to items on Date of Transition.
 FCMIT Difference Account should be written off in Profit and Loss A/c.

21. Exceptions to Para D-13AA
 If any new loan or any earlier sanctioned loan is received, post date of transition, then para D-13AA
cannot be applied on such item.
 If earlier AS-11 allowed accounting in Domestic Currency (INR), and FC monetary item was in
Foreign currency(USD). Now upon application of Ind AS, Entity has such Foreign currency as
Functional currency(USD), then Para D-13AA not to be applied on such monetary item or other
monetary item.
 If entity has capitalised ED earlier with Depreciable asset and has now opted not to follow D-
13AA, it is not required to change its carrying amount which includes previously capitalised ED.

22. Translation to Presentation Currency
Assets and
Liabilities
Closing Rate
Share capital
Date of Issue/
Date of
obtaining control
Income and
Expenses
Rate at the date
of transaction
Retained Earning
Earning Date
Rate/ Date of
obtaining control
Any Exchange Difference is called “Foreign Currency Translation Reserve(FCTR) and directly be
transferred to Other Comprehensive Income(OCI) and then in Statement of changes in Equity.

23. Consolidation of Foreign operation
(1) Treatment of Contra Balances (Generally Short Term in nature) in Financial
Statements-
 Amount payable and receivable within group should be treated as per “Initial
Recognition and Subsequent Recognition” principles of Ind AS-21.
 Such ED will be recognized in Profit and Loss in Separate Financial Statements.
 In Consolidated Financial Statements(CFS), contra Balances will get cancelled and
Exchange difference recorded in Separate Financial Statements(SFS) will continue in
CFS.

24. (2) Treatment of Contra Balances (Generally Long term in nature) without any
settlement plan-
In Separate Financial Statement-
 In Parent co. SFS, it is recorded as “Net Investment in Foreign Operations” along with
Investment in Equity Shares of Subsidiary.
 Initial and Subsequent Recognition is required for payable/ receivable within group ( ED will
be transferred to P/L)
 Investment in Subsidiary being a Non-Monetary item will be at Rate on the date of
transaction only.
In Consolidated Financial Statement-
 In Parent Co. CFS, Payable/ Receivable are cancelled.
 Its ED which was earlier recorded in P/L, it will now be recorded in OCI as “Exchange
Difference on Translation of Foreign Operation”.
 This ED will later on be reclassified from Equity to Profit or loss upon disposal of Subsidiary
in CFS (See Ind AS- 1 Presentation of Financial Statements)

25. Example-
• A Ltd. (FNC Rs.) transfers loan to its subsidiary for $10,000 (Spot Rate Rs.62/$) on 01/05/17.
• A Ltd. had Investments in Subsidiary for Rs. 30,00,000.
• Closing Rate Rs.70/$
• Subsidiary FNC is $
Present above in SFS and CFS of Parent.

26. A ltd. A ltd.
Balance Sheet as on 31st March,2018 (Extract) Consolidated Balance Sheet as on 31st March,2018(Extract)
Particulars Amount Particulars Amount
Assets Assets
Non-Current Assets Non-Current Assets
Investment in Subsidiary 30,00,000 Investment in Subsidiary -
Current-Assets Current-Assets
Receivable from S Ltd. 7,00,000 Receivable from S Ltd. -
Equity and Liability
Current-Liability
Payable to A Ltd. -
Statement of Profit and Loss (Extract) Statement of Profit and Loss (Extract)
Particulars Amount Particulars Amount
Income Income
Other Income( Exch. Diff. A/c) 80,000 Other Income( Exch. Diff. A/c) 80,000
(7,00,000-6,20,000)
Loan is Short- Term in nature

27. A ltd. A ltd.
Balance Sheet as on 31st March,2018 (Extract) Consolidated Balance Sheet as on 31st March,2018 (extract)
Particulars Amount Particulars Amount
Assets Assets
Non-Current Assets Non-Current Assets
Net Investments in Foreign operation 37,00,000 Net Investments in Foreign operation -
( 30,00,000+7,00,000)
Equity and Liability
Non Current-Liability
Payable to A Ltd. -
Statement of Profit and Loss (Extract) Statement of Profit and Loss (Extract)
Particulars Amount Particulars Amount
Income Income
Other Income( Exch. Diff. A/c) 80,000 Other Income( Exch. Diff. A/c) -
Other Comprehensive Income
Exchange Difference on Foreign Opeartion 80000
Loan is Long- Term in nature without any settlement plan

28. Disposal of Foreign Operation

29. Change of Functional Currency & its
procedure
An entity cannot change its functional currency unless facts and circumstances relevant to its
determination changes. In case if such facts and circumstances changes then Translation procedures
should be applied to the new functional currency prospectively from the date of change.
 All items are translated into the new functional currency using the exchange rate at the date of
change.
 Resulting translated amounts for non- monetary items are treated at their historical cost.
 ED earlier recognized in equity shall continue to be recognised as such.

30. Example-
 Entity A has considered the Functional Currency of the entity to be €.
However as a result of change in circumstances affecting operations of the entity, mgmt. determines
that on 1st January 2018 the functional currency of the entity is now the USD. The exchange rate at
that date is €1= US$1.20
Included in the Balance Sheet of Entity A as at January 1, 2018 is PPE with a cost of €33,000 and
Net Book Value of €16,500. This equipment was originally purchased for ₤20,000 in 2014 and has
been translated at the date of purchase of ₤1= €1.65

31. Solution-
Particulars Foreign Currency ₤ Functional Currency € New Functional
Currency US$
Original Cost 20,000 33,000
(20,000*1.65)
39,600
(33,000*1.2)
Net Book Value 16,500 19,800
(16,500*1.2)
Entity A does not go back and translate the ₤20,000 cost at whatever the ₤sterling /US$ exchange rate was at
the date of purchase.

32. Disclosure Requirement
 Exchange rate differences included in:
1. Statement of Profit and Loss (except for financial instruments measured at FV)
2. OCI and Accumulated as a separate component of Equity and its reconciliation of beginning
and end.
 Fact of presentation currency being different from functional currency, date and the reason
thereof
 Change in functional currency of reporting entity or significant foreign operation the
reason thereof and the date of change.

34. Thank You