Indian Accounting Standard (Ind AS) 21 Summary
Indian Accounting Standard (Ind AS) 21, The Effects of Changes in Foreign Exchange Rates shall be applied:
– In accounting for transactions and balances in foreign currencies, except for those derivative transactions and balances that are within the scope of Ind AS 109, Financial Instruments,
– In translating the results and financial position of foreign operations that are included in the financial statements of the entity by consolidation or the equity method, and
– In translating the entity’s results and financial position into a presentation currency.
The entity measures its assets, liabilities, income and expenses in its functional currency, which is the currency of the primary economic environment in which it operates.
The entity needs to determine its functional currency based on the primary economic environment in which it operates. The primary economic environment is normally the one in which the entity primarily generates and expends cash.
While determining the functional currency of its Foreign Operation (FO), the entity needs to consider certain additional factors, including the degree of autonomy with which the FO operates, the significance of the transactions and cash flows of the FO to the entity and the dependability of FO on the entity for servicing its debts.
Transactions that are not denominated in the entity’s functional currency are foreign currency transactions. They are translated at actual rates or appropriate averages, exchange differences arising on translation are generally recognised in the statement of profit and loss.
The financial statements of foreign operations are translated as follows:
– Assets and liabilities are translated at the closing rate,
– Income and expenses are translated at the exchange rates or appropriate averages, and
– Equity components are translated at the exchange rates at the date of the relevant transactions.
Exchange differences arising on the translation of the financial statements of a foreign operation are recognized in Other Comprehensive Income (OCI) and accumulated in a separate component of equity. The amount attributable to any Non-Controlling Interests (NCI) is allocated to, and recognised as part of NCI.
The entity may present its financial statements in a currency other than its functional currency (presentation currency). The entity that translates its financial statements into a presentation currency other than its functional currency uses the same method as for translating the financial statements of a foreign operation.
If the functional currency of a foreign operation is the currency of a hyperinflationary economy, then its financial statements are first adjusted to reflect the purchasing power at the current reporting date and then translated into a presentation currency using the exchange rate at the current reporting date. If the presentation currency is not the currency of a hyperinflationary economy, then comparative amounts are not restated.
If the entity disposes of its entire interest in a foreign operation, or loses control over a foreign subsidiary or retains neither joint control nor significant influence over an associate or joint arrangement as a result of a partial disposal, then the cumulative exchange differences recognised in OCI are reclassified to the statement of profit and loss.
A partial disposal of a foreign subsidiary without the loss of control leads to a proportionate reclassification of the cumulative exchange differences in OCI to NCI.
A partial disposal of a joint arrangement or an associate with retention of either joint control or significant influence results in a proportionate reclassification of the cumulative exchange differences recognised in OCI to profit or loss.
The entity may present supplementary financial information in a currency other than its presentation currency if certain disclosures are made.