## Ind AS 21, The Effects of Changes in Foreign Exchange Rates, Important Questions with Solutions for CA Final Financial Reporting May & Nov 2021 Exams

Question 1 –

On 30th January, 20X1, A Ltd. purchased a machinery for \$5,000 from USA supplier on credit basis. A’s Ltd. functional currency is the Rupee. The exchange rate on the date of transaction is 1\$= Rs. 60. The fair value of  the machinery determined  on 31st  March, 20X1 is \$ 5,500. The exchange rate on 31st March, 20X1 is  1\$=  Rs.  65.  The  payment  to overseas supplier done on 31st March 20X2 and the exchange rate on 31st March 20X2 is  1\$= Rs. 67. The fair value of the machinery remain unchanged for the year ended on 31 st March 20X2. Prepare the Journal entries for  the  year  ended  on  31st  March  20X1  and year 20X2 according to Ind AS 21.

Solution –

Journal Entries

Purchase of Machinery on credit basis on 30th January 20X1:

 Rs. Rs. Machinery A/c (5,000 x  \$ 60) 3,00,000 To Creditors 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:

 Rs. Rs. Machinery A/c [(5,500 x \$ 65)  – (5,000 x  \$ 60)] 57,500 To Profit & loss a/c (Exchange Profit & Loss) 57,500 Profit & Loss A/c [(5,000 x \$ 65)  – (5,000 x  \$ 60)] 25,000 To Creditors 20,000

Exchange difference arising on translating monetary item and settlement of creditors on 31st March 20X2:

 Rs. Rs. Creditors A/c (5,000  x \$65) 3,25,000 Profit  & loss  A/c [(5,000 x (\$ 67 -\$ 65)] 10,000 To Bank A/c 3,35,000 Machinery A/c [(5,500*(\$67-\$ 65)) 11,000 To Profit & loss A/c 11,000

Question 2 –

On 1st  January, 2018, P Ltd. purchased a machine for  \$ 2 lakhs. The functional currency of P Ltd. is Rupees.  At that date the exchange rate was \$1=  Rs. 68. P Ltd. is not required   to pay for this purchase until 30th June, 2018. Rupees  strengthened against the \$ in the  three months following purchase and by 31st March, 2018 the exchange rate was

\$1 = Rs. 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.

Examine the impact of this transaction on the financial statements of P Ltd. for the year ended 31st March, 2018 as per Ind AS.

Solution –

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 1st January, 2018. Therefore, the amount initially recognised would be Rs. 1,36,00,000  (\$  2,00 000 x Rs. 68).

The liability is a monetary item so it is retranslated using the rate of exchange in force at 31st March, 2018. This makes the closing liability of Rs. 1,30,00,000 (\$ 2,00,000 x Rs. 65).

The loss on re-translation of Rs. 6,00,000 (Rs. 1,36,00,000 – Rs. 1,30,00,000) is recognised in the Statement of profit or loss.

The machine is a non-monetary asset carried at historical cost. Therefore, it continues to be translated using the rate of Rs. 68 to \$ 1.

Depreciation of Rs. 8,50,000  (Rs. 1,36,00,000 x ¼ x 3/12) would be charged to profit or loss for the year ended 31st March, 2018.

The  closing  balance in property, plant and equipment would be  Rs.  1,27,50,000 (Rs. 1,36,00,000 – Rs. 8,50,000). This would be shown as a non-current asset in the statement of financial position.

Question 3 –

Supplier, A Ltd., enters into a contract with a customer , B Ltd., on 1st January, 2018 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 INR. The goods are delivered and revenue is recognised on  31 st  March, 2018. USD 30 million is received on 1st April, 2018 in full and final settlement of the purchase consideration.

State the date of transaction for advance consideration and recognition of revenue. Also state the amount of revenue in INR to be recognized on the date of recognition  of revenue. The exchange rates on 1st January, 2018 and 31st March, 2018 are  Rs. 72 per USD and Rs. 75 per USD respectively.

Solution –

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 Rs. 1,440 million, by translating USD 20 million at the exchange rate on 1st January, 2018 ie Rs. 72 per USD.

A Ltd. will recognise revenue at 31st March, 2018 (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  1st  January,  2018.   Applying  paragraph  22   of Ind AS 21, A Ltd. determines that the date of the transaction for the remainder of the revenue as 31st March, 2018.

On 31st March, 2018, 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, 2018 ie Rs. 72 per USD; and
• recognise revenue and a receivable for the remaining USD 30 million, using the exchange rate on 31st March, 2018 ie Rs. 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.

Question 4 –

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 the operations of M Ltd are very large 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 1st February, 2011. The cost of these bottles was  Rs. 830 lacs in  the  books of  M  Ltd at  the  time of  sale.  At the year-end i.e. 31st March, 2011, all these bottles were lying as closing stock with G Ltd. What should be the accounting treatment for the above? Following additional information is available:

Exchange rate on 1st February, 2011, 1 Euro = Rs. 83

Exchange rate on 31st March, 2011, 1 Euro = Rs. 85

Solution –

Accounting treatment in the books of M Ltd

M Ltd will recognize sales of Rs. 996 lacs (12 lacs Euro X 83) Profit on sale of inventory = 996 lacs – 830 lacs = Rs. 166 lacs. Accounting treatment in the books of G Ltd.

G Ltd will recognize inventory on 1February, 2011 of Euro 12 lacs which will also be its closing stock at year end.

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 translated at year end resulting in amount of closing stock of Rs. 1,020 lacs (12 lacs Euro X 85).

The restated amount of closing stock includes three components–

• Restated amount of cost of inventory for Rs. 850 lacs
• Profit element of Rs. 166 lacs; and
• Translated amount of profit element of Rs. 4 lacs.

At the time of consolidation, the two elements amounting to Rs. 170 lacs will be eliminated from the closing stock.

Question 5 –

Global Limited, an Indian company acquired on 30th 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 31st 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 30th September, 20X1.

The  exchange  rates  as  at  30th  September,  20X1   was   Rs. 82  /   EURO   and  at 31st March, 20X2 was Rs. 84 / EURO.

What is the value at which the goodwill has to be recognised i n the financial  statements of Global Limited as on 31st March, 20X2?

(ii) Mark Limited sold goods costing 2.4 million EURO to Global Limited for 4.2 million EURO during the year ended 31st March, 20X2. The exchange rate on the date of purchase by Global Limited was Rs. 83 / EURO and on 31st March, 20X2 was Rs. 84 / EURO. The entire goods purchased from Mark Limited are unsold as on 31st March, 20X2. Determine the unrealised  profit  to  be  eliminated  in  the preparation of consolidated financial statements.

Solution –

(i) 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 this case the amount of goodwill 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 × Rs.84 = Rs.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] = Rs. 83/Euro

Unrealized profit to be eliminated [a x b] = Rs. 149.40 million

As per 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 account. Hence, the exchange rate on the date of purchase of inventory is taken for calculation of unrealized profit which is to be eliminated on the event of consolidation.

Question 6 –

Parent P acquired 90 percent of subsidiary S some years ago. P now sells its entire investment in S for Rs. 1,500 lakhs. The net assets of S are 1,000 and the NCI in S is Rs. 100 lakhs. The cumulative exchange differences that have arisen during P’s ownership are gains of Rs. 200 lakhs, resulting in P’s foreign currency translation reserve in respect of S having a credit balance of Rs.180 lakhs, while the cumulative amount of exchange differences that have been attributed to the NCI is Rs. 20 lakhs.

Calculate P’s gain on disposal.

Solution –

P’s gain on disposal would be calculated in the following manner:

 (Rs. in Lakhs) Sale proceeds 1500 Net assets of S (1000) NCI derecognized 100 Foreign currency translation reserve 180 Gain on disposal 780

Question 7 –

On 1st 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 31st March, starting from 31st March, 20X2. The loan is repayable in FCY on 31st 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:

– 1st April, 20X1 – FCY 1 = Rs. 2.50.

– 31st March, 20X2 – FCY 1 = Rs. 2.75.

– Average rate for the year ended 31st Match, 20X2 – FCY 1 = Rs. 2.42. The functional currency of the group is Indian Rupee.

What would be the appropriate accounting treatment for the foreign currency loan in the books of Makers Ltd. for the FY 20X1-20X2? Calculate the  initial  measurement amount  for the loan, finance cost for the year, closing balance and exchange gain / loss.

Solution –

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 first recognized.

Loan to be converted in INR
= 58,00,000 FCY x Rs. 2.50/FCY
= Rs. 1,45,00,000

Therefore, the loan would initially be recorded at Rs. 1,45,00,000.

Calculation of amortized cost of loan (in FCY) at the year end:

 Period Opening Financial Liability (FCY) A Interest @ 12% (FCY) B Cash Flow (FCY) C Closing Financial 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 FY 20X1-20X2 in INR is Rs. 16,84,320 (6,96,000 FCY x Rs. 2.42 / FCY)

The actual payment of interest would be recorded at 6,00,000 x 2.75 = INR 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 INR is 58,96,000 FCY x INR 2.75 / FCY = Rs. 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 Rs. [1,62,14,000 – (1,45,00,000 + 16,84,320 – 16,50,000)] = Rs. 16,79,680.

This exchange difference is taken to profit and loss.