CA Final · Financial Reporting

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

Full chapter guide

Key formulas

Functional currency: Currency of the primary economic environment in which the entity operates; That environment is normally the one in which it primarily generates and expends cash.
Primary indicators: (a) currency influencing sales prices; (b) currency of the country whose competitive forces and regulations mainly determine sales prices; (c) currency mainly influencing labour, material and other costs; Consider these first. They carry more weight than the secondary indicators.
Secondary indicators: (a) currency in which funds from financing are generated; (b) currency in which receipts from operating activities are usually retained; Use as supporting evidence when the primary indicators are mixed.
Additional factors for a foreign operation: Autonomy from the reporting entity; volume of transactions with the reporting entity; whether cash flows directly affect the reporting entity and are available for remittance; whether cash flows are sufficient to service debt without parent funds; These are considered together with the primary and secondary indicators. If the operation is an extension of the parent, its functional currency is usually the parent's.
Presentation currency: Currency in which financial statements are presented (Ind AS 21 in general allows any currency; for Indian companies Schedule III mandates Indian rupees); It is not determined from the entity's economic environment. For Indian companies it is mandated as INR, not chosen. Functional currency is a determination from facts.
Priority rule: Primary indicators first, then secondary and foreign operation factors; when indicators are mixed and the answer is not obvious, management uses judgement to pick the currency that most faithfully represents the economic effects; Management gives priority to the primary indicators first.
Initial recognition: Functional currency amount = Foreign currency amount × Spot rate on transaction date; Average rate is allowed only if rates do not fluctuate significantly.
Monetary items at reporting date: Carrying amount = Foreign currency amount × Closing rate; Includes cash, receivables, payables and loans to be settled in cash.
Non-monetary items at historical cost: Carrying amount = Foreign currency cost × Rate on transaction date; No retranslation. No exchange difference arises.
Non-monetary items at fair value: Carrying amount = Foreign currency fair value × Rate on date fair value was measured; Exchange component follows the fair value gain or loss (OCI or profit or loss).
Exchange difference on monetary item: Exchange difference = Foreign currency amount × (Closing or settlement rate − Previous rate); Recognise in profit or loss. Gain or loss depends on whether it is an asset or a liability.
Inventory at lower of cost and NRV: Compare cost (at transaction-date rate) with NRV (at rate when the value was determined); Write-down is made only if the comparison in functional currency shows NRV is lower.
Date of transaction (advance consideration): Date of transaction = date on which the non-monetary prepayment asset or non-monetary contract liability is first recognised; Applies when you pay or receive consideration in foreign currency before recognising the related asset, expense or income.
Rate for the advance part: Advance part (INR) = foreign currency advance × spot rate on the advance date; This amount is not retranslated at later reporting dates because the item is non-monetary.
Total asset, expense or income: Total (INR) = Σ (each advance × its own advance-date rate) + (balance in foreign currency × spot rate on the date the item is recognised); Each advance has its own transaction date. The balance is translated on the date you recognise the asset, expense or income.
Exchange difference on the balance: Exchange difference = foreign currency balance × (settlement rate − recognition rate); The balance payable or receivable is monetary. Take the difference to profit or loss. Read the sign by the type of balance. For a payable, a positive result is a loss (you pay more) and a negative result is a gain. For a receivable, a positive result is a gain (you receive more) and a negative result is a loss. The advance part never produces an exchange difference.
Accounting approach: Change in functional currency → apply new currency's translation procedures prospectively from the date of change; No restatement of comparatives. It is not treated as an error or a change in accounting policy under Ind AS 8.
Translation on date of change: Amount in new currency = Amount in old currency ÷ (units of old currency per 1 unit of new currency) = Amount in old currency × (units of new currency per 1 unit of old currency); Apply to all items. Check the direction of the quotation first. If ₹80 = US$1, divide ₹ amounts by 80 to get US$.
Historical cost of non-monetary items: Translated amount at date of change = New historical cost; Later depreciation, impairment and measurement use this carrying amount. Items at cost are not re-translated again.
Existing translation reserve: Cumulative exchange differences in OCI → remain in equity; recycled only on disposal of the foreign operation; Not reclassified to profit or loss at the date of change.
Disclosure: Disclose the fact of the change and the reason for the change in functional currency; Also state the new functional currency.
Assets and liabilities: Functional currency amount × closing rate at the balance sheet date; Applies to every asset and liability, monetary or non-monetary, of the foreign operation.
Income and expenses: Functional currency amount × rate on the transaction date (or average rate for the period if rates are fairly stable); Use the average rate only when it approximates transaction-date rates. If rates swing sharply, use shorter-period averages or actual rates.
Equity items: Share capital and pre-acquisition reserves at historical rate; post-acquisition profits at the rates at which profit or loss was translated; Do not retranslate equity at closing rate. The difference goes to FCTR.
Exchange difference for the year (single-entity check): Exchange difference = opening net assets × (closing rate − opening rate) + profit × (closing rate − average rate) − dividend × (closing rate − rate on the dividend date); Use it to cross-check your FCTR. All amounts in the brackets' multipliers are in functional currency. The formula is the same as: closing net assets at closing rate − opening net assets at opening rate − profit at average rate + dividend at its payment-date rate, where closing net assets are already after deducting the dividend. The dividend leaves net assets at the dividend-date rate, so it is deducted at (closing rate − dividend-date rate). With no dividend, the last term is nil.
Goodwill and fair value adjustments: Goodwill (or FV adjustment) in functional currency × closing rate; Treated as assets and liabilities of the foreign operation. The exchange difference goes to OCI.
Recognition of exchange differences: Translation differences → OCI → FCTR; reclassified to profit or loss on disposal; The share attributable to NCI is allocated to NCI.
Hyperinflationary functional currency: Restate under Ind AS 29, then translate all amounts, including comparatives, at the latest closing rate; except where the presentation currency is that of a non-hyperinflationary economy, when the comparatives are the amounts previously presented as current-year amounts; The comparatives exception applies only when the presentation currency is that of a non-hyperinflationary economy. In that case comparatives are not restated for later rate changes.
Tax follows the item: Tax on an exchange difference is recognised where the exchange difference is recognised; Profit or loss item gives profit or loss tax. OCI item gives OCI tax. Applied through Ind AS 12.
Deferred tax on timing difference: Deferred tax = Exchange difference × Applicable tax rate; Use it when tax is allowed or charged only on settlement. A deferred tax asset needs probable future taxable profit.
Exchange difference on a monetary item: Foreign currency amount × (Closing rate − Rate at initial recognition or last reporting date); Use the rate at initial recognition, or the rate at the last reporting date if the item existed then. Taken to profit or loss for monetary items. For a liability, a rise in rate is a loss.
FCTR reconciliation: Closing reserve = Opening reserve ± Net exchange difference in OCI for the year; Disclosure requires opening and closing balances of the separate component of equity. Show the reconciliation. The cumulative amount is reclassified to profit or loss on disposal of the foreign operation.
Exchange difference disclosure in profit or loss: Disclose exchange differences recognised in profit or loss, other than those arising on financial instruments measured at FVTPL under Ind AS 109; Differences on instruments at fair value through profit or loss are outside this disclosure, as para 52(a) of Ind AS 21 provides.
Currency disclosures: Disclose: presentation currency differs from functional currency, reason, and any change in functional currency with reason; Also disclose convenience translations as supplementary information with the currency and the method of translation.

Quick revision

Functional currency is the currency of the primary economic environment in which the entity operates.
Initial recognition uses the spot rate on the transaction date; an average rate may be used if rates do not fluctuate significantly.
Monetary items are retranslated at the closing rate at each reporting date.
Non-monetary items at historical cost stay at the transaction-date rate.
Non-monetary items at fair value use the rate on the date fair value was measured.
Exchange differences on monetary items go to profit or loss, unless they relate to a net investment in a foreign operation or a designated hedge.
Under Appendix B of Ind AS 21 (the counterpart of IFRIC 22), the transaction date for advance consideration is the date the non-monetary prepayment asset or deferred income liability was first recognised. Each payment or receipt in advance has its own transaction date.
A change in functional currency is applied prospectively from the date of change by translating all items into the new functional currency at the spot rate on that date. The translated amounts for non-monetary items become their new historical cost. Exchange differences previously recognised in OCI are not reclassified to profit or loss on the change.
In translation, assets and liabilities use the closing rate; income and expenses use the rate at the transaction date or a suitable average.
Translation differences go to OCI and accumulate in a separate component of equity.
On disposal of a foreign operation, the cumulative translation difference is reclassified from equity to profit or loss.
Goodwill and fair value adjustments on acquiring a foreign operation are treated as assets and liabilities of that operation and translated at the closing rate.

Common mistakes

Treating functional currency as a free choice of management or the currency in which shares are listed or the books are kept. Fix: State that functional currency is determined from facts about the primary economic environment. It is not chosen. Presentation currency is a separate matter, and for Indian companies Schedule III mandates the rupee.
Giving financing currency or the currency of retained cash priority over sales prices and costs. Fix: Financing and retained receipts are secondary indicators. Use them only to support or when the primary indicators are mixed.
Capitalising or taking to OCI all exchange differences on monetary items. Fix: Ind AS 21 requires exchange differences on monetary items to go to profit or loss. Only the portion of exchange differences on foreign currency borrowings that is regarded as an adjustment to interest cost is treated as a borrowing cost under Ind AS 23. That portion may be capitalised for qualifying assets. This is an Ind AS 23 matter, not an exception within Ind AS 21.
Treating advances paid to a foreign supplier as monetary and retranslating them at closing rate. Fix: An advance for goods or services is a non-monetary item. The related asset or expense is recorded at the rate on the date the advance was paid.
Translating the whole contract value at the delivery-date rate. Fix: Split the amount. The advance part uses the advance-date rate. Only the unpaid balance uses the delivery-date rate.
Retranslating the prepayment or contract liability at the reporting date. Fix: A prepayment or contract liability is non-monetary and carried at historical cost. It is not retranslated. Only monetary items are retranslated.
Restating comparative figures into the new functional currency Fix: Remember that a change in functional currency is a change in circumstances. Apply it prospectively from the date of change only.
Using the average rate or the year-end rate to translate balances Fix: Use the spot rate on the date of change for all items.
Taking the exchange difference to profit or loss. Fix: Translation differences on a foreign operation go to OCI and accumulate in FCTR. They are reclassified to profit or loss only on disposal.
Translating share capital and reserves at the closing rate. Fix: Only assets and liabilities use the closing rate. Equity uses historical rates, and the balancing gap is the exchange difference.

Exam tips

In case MCQs, find the currency of sales prices and main costs first. Most options can be eliminated on that alone.
In written answers, name the indicators as primary and secondary. Use a short list and then a conclusion line.
Always write one sentence that functional currency is determined from facts, and that presentation currency is separate: for Indian companies it is mandated as INR by Schedule III.
For foreign operations, quote the extension-of-parent test. Examiners often build a subsidiary case around it.
Check whether a question mentions a derivative or hedge. If so, say that Ind AS 109 governs it.
Begin every answer by classifying items as monetary or non-monetary. Examiners often award marks for this step.
Always state that exchange differences on monetary items go to profit or loss, and quote Ind AS 21 as the basis.
In case-scenario MCQs, check whether an advance, deposit or prepaid expense is involved. These are usually non-monetary traps.