Financial Reporting · Ind AS 21 The Effects of Changes in Foreign Exchange Rates

Change in Functional Currency under Ind AS 21: Accounting Treatment

Updated 5 October 2026 · Fact-checked

When the underlying circumstances change, an entity changes its functional currency and applies the new currency's translation procedures prospectively from the date of change. It translates all items into the new currency at the spot rate on that date. The translated amounts of non-monetary items become their new historical cost. Earlier periods are not restated.

Understand Change in Functional Currency

Functional currency is the currency of the primary economic environment in which the entity operates. It is not a free choice. It follows facts: the currency that mainly influences sales prices, costs, financing and the currency in which operating receipts are retained.

Because it is decided by facts, it should not change often. Ind AS 21 allows a change only if there is a change in the underlying transactions, events and conditions relevant to the entity. An example is a shift in the main market from the domestic market to exports invoiced in US dollars. A mere management preference is not a reason.

The accounting is simple in principle. The change is treated like a change in circumstances, not like an error or a change in accounting policy. So you do not restate comparatives. You apply the translation procedures of the new functional currency prospectively from the date of change.

In practice, on the date of change you translate all items into the new functional currency at the spot exchange rate on that date. The translated amounts of non-monetary items become their historical cost from then on. Exchange differences on translating a foreign operation that were earlier accumulated in other comprehensive income (the foreign currency translation reserve) are not reclassified to profit or loss on the change. They stay in equity until the foreign operation is disposed of.

The entity also discloses the fact of the change and the reason for it, as required by Ind AS 21.

Key rules to remember

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.

How to solve Change in Functional Currency questions

Use this order for any question on a change in functional currency. Decide first if the change is valid, then translate on the date of change, then carry on from there.

1Read the facts and identify the indicators of functional currency: sales price currency, cost currency, financing currency and currency of retained receipts.
2Confirm that a real change in underlying circumstances has occurred. If it is only a preference or a presentation choice, there is no change in functional currency.
3Fix the date of change. This is the date when the underlying circumstances changed, not the start of the financial year unless the facts say so.
4Translate every balance sheet item (monetary and non-monetary) into the new functional currency at the spot rate on the date of change.
5Treat the translated figures of non-monetary items as their new historical cost. Use them for later depreciation and measurement.
6Do not restate comparatives and do not recognise any gain or loss on the change itself. Leave the existing translation reserve in equity.
7After the date of change, record transactions in the new functional currency, with foreign currency items per the usual Ind AS 21 rules.
8Write the disclosure: the fact, the reason and the new functional currency.

Quickest way: Date, rate, carry forward

When to use it: Use this when time is short and the question only asks for the treatment or the amounts after the change.

State: prospective, no restatement, not an error or policy change.
Convert each old-currency balance at the spot rate on the date of change, checking whether to divide or multiply.
Write the result as the new opening carrying amount and, for non-monetary items, the new historical cost.
Keep any translation reserve in OCI; no recycling.
Add one line on disclosure of fact and reason.

Common mistakes in Change in Functional Currency

Restating comparative figures into the new functional currency
Students link the change to a change in accounting policy under Ind AS 8, which is retrospective.
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
Students confuse this with translation to a presentation currency or with the usual reporting-date rules.
Fix: Use the spot rate on the date of change for all items.
Recycling the foreign currency translation reserve to profit or loss on the change
Students assume a change in currency is like disposing of the foreign operation.
Fix: The reserve stays in equity. Recycling happens only on disposal of the foreign operation.
Recognising a gain or loss on the translation at the date of change
Students treat the difference between old and new amounts as an exchange difference.
Fix: The translation only restates the measurement basis. The translated amounts become the new carrying amounts, and for non-monetary items the new historical cost, with no profit or loss effect.
Accepting a change in functional currency because management wants it
Students treat functional currency as a choice, as with presentation currency.
Fix: Check for a real change in the underlying facts. Without it, the functional currency stays the same.
Forgetting the disclosure
Students focus only on the numbers.
Fix: Always add a line on disclosing the fact of the change and the reason for it.

Worked examples

Example 1

Alpha Ltd, an Indian company, has so far sold its products in India and its functional currency was ₹. From 1 October 2026, almost all its sales are exported with prices fixed in US dollars, and the major costs and borrowings are also in US dollars. On that date Alpha has a machine (non-monetary, carried at cost) with a carrying amount of ₹2,40,00,000. The spot rate on 1 October 2026 is ₹80 per US$1. How should Alpha treat the change, and what is the machine's new carrying amount?

Show the solution

The sales prices, costs and financing have changed to US dollars. This is a genuine change in underlying circumstances, so the functional currency changes from ₹ to US$ from 1 October 2026.
The change is applied prospectively from 1 October 2026. Comparatives are not restated.
The rate is ₹80 per US$1, so divide the ₹ amount by 80 to get US$ (the same as multiplying by US$1/80 per ₹). Translate the machine: ₹2,40,00,000 ÷ 80 = US$3,00,000.
US$3,00,000 becomes the new historical cost of the machine. Later depreciation is based on this amount.
No gain or loss is recognised on the change. Disclose the fact of the change and the reason.

Answer: Functional currency changes to US$ prospectively from 1 October 2026. The machine is carried at US$3,00,000 as its new historical cost. There is no restatement of comparatives and no profit or loss on the change.

Example 2

Beta Ltd, an Indian company, has a foreign subsidiary Gamma Ltd. Gamma's functional currency changes from Euro to US$ on 1 January 2027 because its sales and financing moved to US$. On that date Gamma's plant (non-monetary, carried at cost) has a carrying amount of €5,00,000 and the spot rate is €1 = US$1.10. Beta's consolidated financial statements show a foreign currency translation reserve of ₹12,00,000 (credit) in OCI, arising from earlier translation of Gamma. How should the plant and the reserve be treated on the change?

Show the solution

The change is genuine because the underlying facts have shifted to US$. It is applied prospectively from 1 January 2027.
Translate Gamma's plant into US$ at the spot rate on that date: €5,00,000 × 1.10 = US$5,50,000.
US$5,50,000 becomes the carrying amount and the new historical cost of the plant. No profit or loss arises on the translation. Gamma's other items are translated the same way.
The cumulative exchange differences of ₹12,00,000 already in OCI are not reclassified to profit or loss on the change. They remain in other comprehensive income / equity until Gamma is disposed of.
From the date of change, Beta translates Gamma's US$ financial statements to its presentation currency for consolidation in the usual way, and discloses the change and its reason. No ₹ rate is given, so no ₹ translation of the plant is computed here.

Answer: Gamma's plant is carried at US$5,50,000, its new historical cost. The ₹12,00,000 reserve stays in OCI and is recycled only on disposal of Gamma. Nothing is restated and no gain or loss is recognised on the change.

Exam tips

In theory questions, start with the three words: prospective, spot rate, no recycling. Marks are usually allotted to each.
In case MCQs, first test whether a real change in facts exists. If the case only mentions management intent, the answer is usually that functional currency does not change.
Check the direction of the exchange rate before dividing or multiplying. A wrong direction loses the whole number.
Contrast clearly with a change in accounting policy (retrospective) and a change in presentation currency. Examiners like this comparison.
Add the disclosure line at the end of every answer; it is an easy mark.

Practice questions from Ind AS 21 The Effects of Changes in Foreign Exchange Rates

Change in Functional Currency in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Change in Functional Currency: frequently asked questions

Is a change in functional currency a change in accounting policy?

No. It is a change in underlying circumstances, so Ind AS 8 retrospective treatment does not apply. You apply the new currency's translation procedures prospectively from the date of change.

Which exchange rate is used on a change in functional currency?

Use the spot exchange rate on the date of change to translate all items into the new functional currency. The translated amounts of non-monetary items become their new historical cost.

What happens to the foreign currency translation reserve when functional currency changes?

It stays in other comprehensive income and equity. It is reclassified to profit or loss only when the foreign operation is disposed of.

Can an entity change its functional currency whenever it likes?

No. Functional currency depends on facts about the primary economic environment. It changes only if the underlying transactions, events and conditions change.