IND AS 21 : THE EFFECTS OF CHANGES IN

FOREIGN EXCHANGE POLICY

[I) Types of Currencies

TYPES OF CURRENCIES

FUNCTIONAL FOREIGN PRESENTATION

CURRENCY CURRENCY CURRENCY

Currency of the
primary economic
This is the currency
environment in which
in which Financial
an entity operates.
currency Statements are
('.'Jot necessarily the
presented.
home currency).
(Note 1)

Accounts are
Usually this is the
prepared in the Transactions in Foreign
Functional Currency.
Functional Currency. Currency need to
However any other
(i.e. Transactions be converted into
currency may also be
Recorded in Functional Currency.
taken.
Functional Currency).

Note 1
Determination of Functional Currency
FACTORS DETERMINING FUNCTIONAL CURRENCY

Additional
Primary
(Note B)

Currency that
mainly influences the
Currency in
following (Note A) Sources of Which Earnings
finanre are Usually
Retained

,L,1 Competitive
' regulatory
1!111
,. -
nvironment
eo~uJl-c:,-~,.,,...--~---
M.Lt ~~ ~ f\M'w! -)
.... CA BHAVIK CHOKSHI
 Note A

Emphasis should be given to the currency that deteuntn~ the pricing of transactions
and(Qpt necessarily)the currency in which transactions are denominated. Example:
A u.s airline determines prices in dollars, but Is shows airfare In Rupees for the
con.1,_enle~~ its Indian Customers. ~ - - - ______ • rW
'-; ~~ ')'Y\.Q~ ~ ~~~ ~ 4-l,l/.) • ~~
~--- ~ (d-.flMIJJ _ _
The determination ofFunctional Currency should be done based on Primary Indicators
~ However, in case there is a cpnflict In the primary indicators, only then would
the Additional indicators be referred. The determination involves subjectivity and
the management needs to apply Judgement for the same.
-----------
(Refer Q. 1, 2, 3)

(II) Conversion Principles

Conversion Principles for Foreign Currency

Transactions
y

Subsequent
Initial Recognition Recognition
[Balance Sheet Date]

')cml«t±
Spot Rate on Date
q.,i~ {)d.N'-J
of Transaction Non Monetary Monetary - (/tL&A~

y 04~ J
¼)jf/V\f,A/

Closing Rate O/f~

KEY POINTS

1. Monetar y Items: Items where amounts realizabl e are contractu ally fixed
/ determin able i.e. Balance Sheet value reflects realizabl e value. Eg: Bank
Debtors, Loan etc. ,
2. Non-Mon etary Items: Items where the amounts to be realized are not
contractu ally fixed / determin able i.e. Amounts appearin g in Balance Sheet do
not necessar ily reflect realizable values. Eg: Land, Intangibl es, Inventor y etc.
3. Foreign Exchang e Gain/ Loss: Usually, Forex Gain/ Loss is of moneta ry/ non-
monetar y items recorded in Stateme nt of P/L. However, in case Fair Value Gain
/ Loss on an underlyin g non- monetar y item is recorded in !)CI, then t!:!._e Forex
Gain / Loss on such an item will also be recorded in OCI. -

EXAMPL E

Land (Non-mo netary) (using revaluati on model)

Date $ Rate t
1/1/17 $ 100 t 50/$ t 5,000
31/3/17 $ 120 t 60/$ t 7,200

..
Land a/c Dr. 2,200
··•··-··-
To Revaluat ion Reserve (OCI) 1,CuO
[$ 120 - $ 100] X t 50/$
To Revaluat ion Reserve (Forex Gain) (OCI) 1,200
[' 60/$ - t 50/$] x $ 120

KEY POINT

In case the investme nts were bonds (moneta ry) at FVTOCI, forex gains/ loss would
go to profit and loss account. Also, in case of Investme nt in Equity Shares (FVTOCI)
{Non Monetary ), we will take the Forex impact In the Profit & Loss

CA BHAVI K CHOKS HI
 Note 1
Impact of Forex Gain / Loss

FOREX GAIN / LOSS

y

Always P/L

y ' In case the value of an asset (like inventory or PPE) is to be determine by

I)'(\~ comparing two differe,salues (like cost or NRV) / (cost or recoverable value)

~
then we should first convert each of the_,JAlues by applying the appropriate
C>6 exchange rates and then apply the accotfriff'ng principles of comparison based
~ on the amounts as determined in the functional currency.
\~{~ Example: Inventory
Particulars I Date I $ I Rate I f
~ COST 01/01 $100 t 50/$ t 5,000
NRV 31/03 $ 90 t 60/$ t 5,400
We will compare cost (t 5,000) and NRV (t 5,400) and conclude that there is
~ i t e p;!jand inventory will continue to appear at f 5,000. I><>{'
Application of IND AS - 21 in the amortised cost method of IND AS-, 5'-1
- 109 - The loan is a monetary item and hence should be recorded at the ~o~
closing rate at each balance sheet date. However, the effective interest would !l.f:::
be recorded ~t average and coupon payments on the rate as ~n, the date ~~'
of payment. In order to accurately calculate the forex gain / loss, we neea
r---~
to find the closing balance of loan in foreign currency (by preparing the
(])amortization table in foreign currency). Further, we will apply IND AS - 21

CA BHAVIK CHOKSHI
 principles and convert each oY?he items at appropriate rates. The b~n .
figure (if any) is attributable to different exchange rates used and h ~ n
cing
- cew·11
be forex gain/ loss. 1

Forex Loan - Amortized Cost Table($)

1 $ XX $ XX ($ XX) NA $ XX

Forex Loan - Amortized Cost Table (t)

Year Opening EIR@xO/o Coupons Forex gain Closing
I I I I (P/L) I
1 f xx f xx (f XX) f xx f xx
Opening
Average Rate
Payment/
Balancing
-
Rate Closing Closing rate

The above treatment would remain the same for Bonds at FVTOCI. Additionally, two more
columns need to be prepared i.e. FV Reserve (OCI) and Closing Fair Value (converted at
Closing rate)

Particulars Amount (IND AS - 109)

I I Rate (IJ"'_D AS - 21)
Initial A - FV- Transaction Cost Rate On Transaction date
Effective Interest B - Opening X EIR Average Rate
Coupon / principal repaid C - Repayment Amount Rate on Transaction date
--·

/4Reven ue when Multiple Advance Payments are ~ved (Appendix to Ind AS

21) ~
a. Unearned Revenue (Advance) (Non Monetary item): Rate on Date of
Transaction. (_, Kfit-6\.Q..~ ~ •
~ ~Revenu e = Sum total of Unearned Revenue -(No remeasureme nt) +
t,J>- ~
tA Receivable/ Receipt on the Date when Revenue is recorded. \
Ml~ c. For unearned revenue, we are not_.fil(posed to any exchang,e rate
difference as amount is already received. Hence no remeasurem~ fo.

(Refer Q. 4, S, 6, 7, 15)

(Ill) Foreign Operations .,:,

·\t
Foreign Operation refer to branches, subsidiaries, Joint Ventures, Associates wh~se
functional currency is different from the functional currency of the Parent. The following
additional factors should be considered:

CA BHAVIK CHOKSHI
 PARTICULARS Functional Currency Functional
Different From Parent Currency
[INDEPENDENT] Same as Parent
[DEPENDENT]
Dependence on Parent ?
2. Proportion of Transactions with Parent ~ -) D ~ HIGH ~
L.:3:_._ _A_bi_lit~y_t_o_F_in_a_nc_e_O_w_n_O-'--p_er_a_ti_on_s_ _...1__ ___:_=:...:.--L------..!J-,<....L---L_O_W_ _~_l : 'r· ~P
(Refer Q. 8)

(IV) Translation Principles

In case the functional currency of .the foreign operation is different from the parent, then
at the time of consolidation, we will have to translate the subsidiary's Financials into the
parent's currency as per the following principles:

Assets / Liabilities: Closing Rate (For ~at~ Monetary and Non-

2 Monetary Items]

3 Equity Capital: Rate on the_ Date of Acquisition

Foreig_n':.S'it~t,·. ? ,,.; •. ;fj"_il~lation .. Res. ~rve•ffCTR): After applying

'•.~:'--.~~.~~'1-l,\~•.'f;t",1<-,'~1f:,.,~: J':'·..f.~.J.J/,,f,l,l.;,w,•,,ar~~f--.'f'•,',,'_' 'I • ,-,

the abov~fPtlf.f~~rpl~~{~'thE !,;E3~1a_n'cer?he.~t

,. •,..;;;'1-,o•fl•••-./;,(~°?,"J,J./ ~ -~ •._••( ·• ·• ,,
o~•the subsidiary in
I , , . . . . ;;_;,,,•• I "'._. . I '

parent's· 'cµr-~ency may pot t<l_lly: Tl:)i,s(d.iffe~ence arises because of

, . . ·;• • • .' 5 . ' • , • ,. , . • > ,J,fr, - · • '" ,:. • •
different foreign exchange rates:'.being applied and hence would
be accu~ulated under FCTR(OCI): ''., ••
. . ··••·""-~~-~-:,,-:-;---.~:.....,-,.;·~-•·!.... . •. . .
FCTR is a part of Reclassifiable_OCI and would be ultimately
transferred to the Sta(imentof Pii. at the time of disposal of the
foreign operation.

Goodwill On Consolidation
6 As per IND AS 21, Goodwill (in foreign currency) should be
convertible in the parents functional currency at the closinq rate

(Refer Q. 9, 17, 18)

CA BHAVIK CHOKSHI
•WW•e€itM4JGIHli·bH·@MM,iiMi4iJi■iii·li4M,►1fflttGi¥~
(1) Translate the Balance Sheet of the foreign subsidiary ($) into the paren ,
currency (f). While preparing note 1, take the subsidiary's restated Rupe:s
Balance Sheet s
(2) The F~R arising from the above Balance She.et needs to be analysed. This
FCTR 1s always POST as it pertains to exchange differences after acquisition
date. Further all items in subsidiary's Balance Sheet are attributabl e to Parent
and NCI both and hence this FCTR should also be split between Parent and
NCI both.
(3) ~wo Separate Goodwill Workings needs to be prepared:
(a) Goodwill Workings in Dollars: Goodwill from this account (in $) will be
converted in Rupees at closing rate
(b) Goodwill Workings in Rupees: This is calculated in a usual manner and
will help in finding the exchange difference.

The difference between (a) and (b) is FCTR on Goodwill which is POST and is
attributabl e to Parent only in case of Partial Goodwill and to Parent and NCI in
case of full Goodwill.

(Refer CFS Q.;;, 36)

(1) Unrealized Profits in inter-company inventory adjustments: The unrealized

profits should be determined in the functional currency of the parent. This can
be done by converting the profits at the exchange rate prevailing on the date
qf the inter-compaov tcaosaction. ( ~ l¼IY\.t--l ~(,w'W\ CN\L --1r,.,.,~
(Refer Q. 1.6) M Ptl- ~ CY'\ J.d,,., e,6 +rAMA~ )
(2) Inter Company Balances between Parent and Subsidiary:
In@ IND AS 21 would apply and foreign currenc.¥,.balances-.ao monetary
items will be converted at the closing~rate and Forex Gain / Los; would be

---
recorded in Stan..d.alone P/L.
At the stage of consolidation, all intercompany balances need to be
eliminated and FOtf(!X Gain/4Loss reco,rded in SFS will not be impacted
and hence will continue to ppear in Consolidated P/L.
(!_
The above treatment would apply in case intercompany transactions are
expected to be settled i.e., Payment will be made within stip-ulated time (Eg.
T~de Receivables, Term loans for 5 years etc.)
However, iQ case no settlement is planned (E.g.: Loans given by Parent with no
repayment stipulation), the acfounting in SFS continues to remain the same i.e.,
Forex Gain / Loss on Monetary Items would be taken to P/L. However, at the
stage of consolidation, the Forex / Loss would be reclassified from P/L to FCfR,

CA BHAVIK CHOKSHI
 Consolidation P/L a/c Dr.
To Consolidated FCTR a/c
This is because such a loan is treated to be in the nature of Investment
i.e. it is permanent in nature. Hence there is no real Glin / Loss as the
-.1\..settlement will not happen tm the time of disposal and hence such
Gains should be shown in FCTR[OCI] and not P/L.
-c:::::::::: ~

ITEMS~
◄i-fai!AiHfi!++i·H■ihH;-- COMPANY MO:-l::Afo'
iliiiM
~

SETTLEMENT PLANNED SETTLEMENT NOT PLANNED

[Eg: Debtors, 5 YR. [Eg: Loan without Repayment
Term Loan) Terms)

SFS: P/l
SFS: P/L CFS: Reclassify to FCTR
CFS: P/l (O.C.1)

If nothing is given, we assume settlement is planned.

(Refer Q. JO, JJ, 1.2, J3)

The balance in FCTR (attributable to Parent) should be transferred to P/L at the time of
disposal (Loss of Control). This is because FCTR arises on translation of Net Assets of
Subsidiary. Once control is lost, Net Assets of Subsidiary no longer get consolidated and
hence FCTR should entirely be eliminated when control is lost. (Irrespective of whether
~ st~ke is Retained or Not).

(Refer Q, 1.4)

CA BHAVIK CHOKSHI
 01/4 change in Functional ~urre~cy is permitte @f th~re. is a chan~n the
/ economic environment In which an entry operates. This 1s not a change in
acsg.wmng_pnlicy.-, ·,.~ no ~~~w. ~ ( ·: ~ itv-J(s-o.c.t)
~ I n case Presentation Currency is ~ n t from Functional Currency, the sarne
principles as applicable for Translating Foreign Operations would apply.
i.e. Income / Expenses : Rate on Date of Transaction / Average Rate. _
rWets / Liabilities : Closing Rate,---
i ,~Moneta ry/ Non-Monetary]
Eq~ital Historic Rate/
~ FCTR / t 6J r~)
yr ~rve Out: Existing Loans where Option 2 (Para 46A of AS 11) was taken
In case an Entity decided to continue Previous GAAP Policy (FCMITDA) as
per Ind AS 101 on date of Transition, then it will be permitted to capitalise
exchange differences on such existing loans to FCMITDA / PPE even after the
date of transition. This choice is not available for New Loans (Refer Q 6, 7 a
of IND A@ ~~-== =::::- 1

~-- -.~ •

~ ~h INC1'~

1) ~~~~
~) ~ l#Hv
~~+rl\K\4;- ft1.'>-)

CA BHAVIK CHOKSHI