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

Foreign Currency Transactions with Advance Consideration (Ind AS 21 Appendix B / IFRIC 22)

Updated 5 October 2026 · Fact-checked

Under Ind AS 21 Appendix B (IFRIC 22), when you pay or receive a foreign currency advance before recognising the related asset, expense or income, the transaction date is when you first recognise the non-monetary prepayment asset or contract liability. Use that date's spot rate for each advance separately. Do not retranslate the advance afterwards.

Understand Foreign Currency Transactions with Advance Consideration (IFRIC 22)

A foreign currency transaction is recorded at the spot rate on the date of the transaction. This is simple when goods are bought and paid for on the same day. It gets harder when money moves first. Say you pay a foreign supplier in advance, or a foreign customer pays you in advance. Which date fixes the rate for the asset, expense or income: the advance date or the delivery date?

Appendix B of Ind AS 21 answers this. The date of the transaction is the date on which you initially recognise the non-monetary asset or non-monetary liability arising from the advance. For a payment, that asset is a prepayment or advance to supplier. For a receipt, that liability is a contract liability or deferred income under Ind AS 115.

These items are non-monetary because you will receive goods or services, not a fixed amount of foreign currency. Under Ind AS 21, non-monetary items carried at historical cost are not retranslated at the reporting date. So the advance stays at the rate on the day you paid or received it. When the related asset, expense or income is finally recognised, the advance part uses the advance-date rate. Any balance paid or received later uses the spot rate on its own date.

If there are several advances, you decide the transaction date for each payment or receipt separately. Each part of the final asset, expense or income then carries the rate of its own advance.

The Appendix applies only when the advance creates a non-monetary item. If the advance is really a monetary item, such as a refundable deposit, you retranslate it at each reporting date and this Appendix does not apply. It also does not apply when the related asset, expense or income is measured at fair value, or at the fair value of consideration paid or received at a date other than the date of recognising the non-monetary item. It need not be applied to income taxes, to insurance contracts (including reinsurance contracts) that the entity issues, or to reinsurance contracts that it holds.

Key rules to remember

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.

How to solve Foreign Currency Transactions with Advance Consideration (IFRIC 22) questions

Use the same sequence for any question on advance consideration. It stops you applying the wrong rate to the wrong part.

1Check that the advance creates a non-monetary item (prepayment or contract liability). If it is a refundable deposit or other monetary item, retranslate it at each reporting date and stop applying the Appendix.
2Check that the related asset, expense or income is not measured at fair value. If it is, the Appendix does not apply.
3List every payment or receipt in foreign currency with its date and the spot rate on that date. Each one is a separate transaction date.
4Record each advance at its date's spot rate as a prepayment or contract liability. Do not retranslate it at any reporting date in between.
5On the date the asset, expense or income is recognised, translate the unpaid balance at that day's spot rate.
6Add the advance amounts at their original rates to the balance at the recognition-date rate. This is the carrying amount of the asset, expense or income.
7Treat the balance as a monetary item. Retranslate it at each reporting date and on settlement, and take the exchange difference to profit or loss.

Quickest way: Freeze the advance, translate the balance

When to use it: Use this for a numerical question with one or two advances and a delivery date, when time is short.

Underline each advance date and rate. Write advance × rate and fix that figure. Do not touch it again.
Ignore any reporting-date rate for the advance. Use it only for the unpaid balance, if the balance is outstanding at that date.
On delivery, translate only the balance at the delivery-date rate and add it to the frozen advance.
Exchange difference = balance in foreign currency × (settlement rate − delivery rate). Check the sign: a positive result is a loss for a payable and a gain for a receivable. A negative result is a gain for a payable and a loss for a receivable.

Common mistakes in Foreign Currency Transactions with Advance Consideration (IFRIC 22)

Translating the whole contract value at the delivery-date rate.
Students remember that the asset or revenue is recognised on delivery and apply that date's rate to everything.
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.
Students treat the advance as a foreign currency receivable or payable, which is a monetary item.
Fix: A prepayment or contract liability is non-monetary and carried at historical cost. It is not retranslated. Only monetary items are retranslated.
Booking an exchange gain or loss on the advance.
Students compare the advance-date rate with the delivery-date rate and report the difference.
Fix: No exchange difference arises on the advance. It is locked in at the advance-date rate. Differences arise only on the monetary balance.
Using one date for several instalments.
Students take the first payment date for all payments, or the last one.
Fix: Fix a transaction date for each payment or receipt. Each instalment keeps its own rate.
Applying the Appendix to a refundable deposit or to items measured at fair value.
Students apply the rule to every advance without checking scope.
Fix: First ask whether the advance creates a non-monetary item and whether the related item is measured at fair value. If either test fails, the Appendix does not apply.

Worked examples

Example 1

A company has the rupee as its functional currency. On 1 February 2027 it pays an advance of USD 20,000 to a foreign supplier for machinery priced at USD 1,00,000. The spot rate that day is ₹83. The machinery is delivered and recognised on 1 May 2027, when the spot rate is ₹85. The balance of USD 80,000 is paid on 1 June 2027, when the spot rate is ₹86. The reporting date is 31 March 2027, when the spot rate is ₹84. Compute the cost of the machinery and the exchange difference on settlement.

Show the solution

The advance creates a prepayment, which is a non-monetary asset. The date of the transaction for the advance part is 1 February 2027.
Advance part = USD 20,000 × ₹83 = ₹16,60,000. At 31 March 2027 the prepayment stays at ₹16,60,000. It is not retranslated at ₹84.
On 1 May 2027 the machinery is recognised. The balance payable is USD 80,000 × ₹85 = ₹68,00,000.
Cost of machinery = ₹16,60,000 + ₹68,00,000 = ₹84,60,000.
On 1 June 2027 the balance is settled at ₹86: USD 80,000 × ₹86 = ₹68,80,000.
Exchange difference = ₹68,80,000 − ₹68,00,000 = ₹80,000 loss, taken to profit or loss.

Answer: Machinery is recognised at ₹84,60,000. The exchange loss on settling the balance is ₹80,000. There is no exchange difference on the advance.

Example 2

An Indian company sells goods to a foreign customer for USD 1,00,000. The customer pays USD 50,000 in advance on 10 December 2026 when the spot rate is ₹83. The company delivers the goods and satisfies its performance obligation on 20 January 2027, when the spot rate is ₹85. The balance of USD 50,000 is received on 20 February 2027, when the spot rate is ₹86. The reporting date is 31 December 2026, with a spot rate of ₹84. Compute the revenue and the exchange difference.

Show the solution

The advance creates a contract liability, which is non-monetary. The date of the transaction for this part is 10 December 2026.
Contract liability = USD 50,000 × ₹83 = ₹41,50,000. At 31 December 2026 it is not retranslated at ₹84.
On 20 January 2027 the goods are delivered. The contract liability is released to revenue at ₹41,50,000.
The balance receivable is USD 50,000 × ₹85 = ₹42,50,000, recognised as a receivable and as revenue.
Total revenue = ₹41,50,000 + ₹42,50,000 = ₹84,00,000.
On 20 February 2027 the receivable is settled at ₹86: USD 50,000 × ₹86 = ₹43,00,000.
Exchange difference = ₹43,00,000 − ₹42,50,000 = ₹50,000 gain, taken to profit or loss.

Answer: Revenue is ₹84,00,000. The exchange gain on the receivable is ₹50,000. There is no exchange difference on the advance.

Exam tips

Write the words non-monetary and not retranslated in your answer. The examiner looks for this reasoning more than the arithmetic.
Check the facts for several advances. If the question gives two or more instalments, show a separate rate for each one.
Show the split clearly: advance at the advance-date rate, balance at the delivery-date rate. Then give the total. Marks usually go to this layout.
If the question mentions a refundable deposit or an item at fair value, state in one line that the Appendix does not apply and why.
In case-scenario MCQs, read which date the question asks about: advance date, delivery date or reporting date. The three give different amounts, and wrong options are built from them.

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

Foreign Currency Transactions with Advance Consideration (IFRIC 22): frequently asked questions

What is the date of the transaction when advance consideration is paid in foreign currency?

It is the date on which you first recognise the non-monetary prepayment asset (or the non-monetary contract liability when you receive the advance). The spot rate on that date applies to the advance part of the related asset, expense or income.

Is an advance to a supplier a monetary or a non-monetary item?

A normal advance for goods or services is non-monetary, because you will get goods or services and not a fixed amount of currency. It is therefore not retranslated at reporting dates. A refundable deposit is different and is treated as monetary.

What if there are multiple advance payments?

You decide the date of the transaction for each payment or receipt separately. Each advance is translated at its own date's spot rate, and the balance is translated on the date the asset, expense or income is recognised.

Does Ind AS 21 Appendix B apply to all advances?

No. It applies only where the advance creates a non-monetary asset or liability and the related item is not measured at fair value. It also need not be applied to income taxes, to insurance contracts (including reinsurance contracts) that the entity issues, or to reinsurance contracts that it holds.