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Important Stuff on Ind AS 21, The Effects of Changes in Foreign Exchange Rates

Indian Accounting Standard (Ind AS) 21, The Effects of Changes in Foreign Exchange Rates, Important Material

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

If a company has overseas business/trade, it will buy or sell goods or services in foreign currencies. Therefore, the value of goods or services bought or sold has to be translated in rupees for the purpose of recording in the accounts.

A company may have a subsidiary abroad and in that case the subsidiary will trade in its own local currency. It will keep books of account and prepare the annual accounts in its local currency. But at the year end, the holding company must consolidate the results of the overseas subsidiary into its group accounts, the assets and liabilities and the annual profit of the subsidiary must be translated from the foreign currency into functional currency.

For the translation from the foreign currency into functional currency, the foreign currency exchange rates are required. If foreign currency exchanges rates remained constant, there would be no accounting problem.

In actual parlance foreign exchange rates are continually changing. The accounting principles are required to be laid down in which the transactions from one currency to another currency is to be translated and what the accounting treatment should be of exchange difference arising on application of different foreign currency exchange rates. Ind AS-21 deals with these questions.


An entity may carry on foreign activities in two ways:

(i) transactions in foreign currencies or it may have

(ii) foreign operations.

(a) The objective of this Standard is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity; and
(b) how to translate financial statements into a presentation currency;
(c) The principal issues are which exchange rate(s)to use; and
(d) how to report the effects of changes in exchange rates in the financial statements.


This Standard shall be applied:
(a) Reporting foreign currency transactions in the functional currency;
(b) Translation of foreign operations;
(c) Translation of the presentation currency.

Non applicability:
(a) To the presentation in a statement of cash flows of the cash flows arising from transaction in a foreign currency or of a foreign operation.
(b) To long-term foreign currency monetary items for which an entity has opted for the exemption given in Ind AS 101.

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