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

Ind AS 21: Net Investment in a Foreign Operation and Disposal

Updated 5 October 2026

A monetary item owed to or by a foreign operation, with settlement neither planned nor likely in the foreseeable future, forms part of the net investment. Its exchange difference goes to profit or loss in separate statements, but to OCI in consolidated statements. On disposal, the accumulated amount is reclassified to profit or loss.

Understand Net Investment in a Foreign Operation and Disposal

A foreign operation is a subsidiary, associate, joint arrangement or branch whose activities are in a country or currency different from the reporting entity's. The net investment in it is the reporting entity's interest in its net assets.

Sometimes the parent funds the foreign operation with a loan instead of share capital. If settlement of that loan is neither planned nor likely to occur in the foreseeable future, the loan is in substance an extension of the investment. It is then treated as part of the net investment. Only monetary items qualify. Long-term loans and receivables can qualify. Ordinary trade receivables and trade payables do not.

An exchange difference on such an item arises only where the item is denominated in a currency other than the functional currency of the entity in whose books it sits. If the loan is in the foreign operation's functional currency, the difference arises in the parent's books and not in the foreign operation's books. If it is in the parent's functional currency, it arises in the foreign operation's books. If it is in a third currency, which is the functional currency of neither entity, a difference arises in both sets of books, because each entity holds the item in a currency other than its own functional currency. Ind AS 21.32 requires the difference to be recognised in profit or loss in the separate statements of the reporting entity or the individual statements of the foreign operation, whichever books it arises in. In the financial statements that include both the foreign operation and the reporting entity, that is, the consolidated statements, the difference is recognised in OCI and accumulated in a separate component of equity, often called the foreign currency translation reserve (FCTR). So in the third-currency case, the differences sitting in profit or loss in both sets of books are taken to OCI on consolidation. This keeps the consolidated profit free of exchange effects on a long-term investment.

The FCTR is a holding place, not a permanent reserve. When the foreign operation is disposed of, the cumulative amount is reclassified from equity to profit or loss, as a reclassification adjustment, when the gain or loss on disposal is recognised. Disposal covers sale, liquidation, repayment of share capital and abandonment.

Partial disposals need care. If a parent sells part of a subsidiary but keeps control, nothing goes to profit or loss. The proportionate share of the FCTR is reattributed to non-controlling interest (NCI). This is because the buyer of the interest becomes a non-controlling holder, and that share of the subsidiary's FCTR now belongs to those new NCI holders. If control is lost, the whole FCTR attributable to owners is reclassified, even if the parent keeps an interest that is an associate, a joint arrangement or a financial asset. The FCTR attributable to NCI is derecognised, not reclassified. For an associate or joint arrangement that is a foreign operation, only the proportionate share is reclassified on a partial disposal, and only where the retained interest remains an associate or joint arrangement. If the retained interest becomes a financial asset, the whole FCTR is reclassified. A write-down for the operation's own losses or impairment is not a partial disposal, so nothing is reclassified.

Key rules to remember

Net investment test: Monetary item is part of net investment if settlement is neither planned nor likely in the foreseeable future; Applies to long-term loans and receivables. Trade receivables and payables are excluded. The test is about the parent's intention and likelihood, not the legal term of the loan.
Exchange difference on net investment item, separate or individual statements: Recognised in profit or loss; Ind AS 21.32 requires this in the separate statements of the reporting entity or the individual statements of the foreign operation, whichever books the difference arises in. It arises only if the item is denominated in a currency other than that entity's functional currency. In a third-currency loan, a difference arises in both sets of books.
Exchange difference on net investment item, consolidated statements: Recognised in OCI and accumulated in FCTR (equity); Ind AS 21.32 requires OCI in the financial statements that include the foreign operation and the reporting entity. Any third-currency difference in both sets of books is taken to OCI on consolidation. It stays in equity until disposal of the net investment.
Full disposal or loss of control: Reclassify the entire cumulative FCTR attributable to owners from equity to profit or loss; Done when the gain or loss on disposal is recognised. This applies even if the parent keeps an interest that is an associate, a joint arrangement or a financial asset. The FCTR attributable to NCI is derecognised, not reclassified.
Partial disposal of a subsidiary, control retained: Amount reattributed to NCI = Owners' cumulative FCTR × (Interest sold ÷ Interest held before sale); No reclassification to profit or loss. It is a transfer within equity from owners to NCI. It reflects the new NCI holders' share of the subsidiary, as the buyer of the interest sold becomes part of NCI.
Partial disposal of an associate or joint arrangement: Amount reclassified to P&L = Cumulative FCTR × (Interest sold ÷ Interest held before sale); Proportionate reclassification applies only when the retained interest remains an associate or joint arrangement. The rest stays in FCTR. If the retained interest becomes a financial asset, the whole FCTR is reclassified.
Not a partial disposal: Write-down for own losses or impairment of the foreign operation: no FCTR reclassification; Reclassification is triggered by a reduction in ownership interest, not by a lower carrying amount.

How to solve Net Investment in a Foreign Operation and Disposal questions

Use this order for any question on net investment or disposal of a foreign operation.

1Identify the foreign operation and its functional currency. Check whether the item is monetary.
2Apply the net investment test. Is settlement neither planned nor likely in the foreseeable future? Exclude trade balances.
3Compute the exchange difference as the foreign currency amount × (closing rate − opening or transaction rate). Decide gain or loss from the side of the balance sheet (asset or liability).
4Place the difference by the level of statements: profit or loss in separate or individual statements, OCI and FCTR in consolidated statements.
5On disposal, identify the type of event: full disposal, loss of control, partial disposal with control retained, or partial disposal of an associate or joint arrangement.
6Split the FCTR between owners and NCI. Reclassify the owners' share, in full or in proportion, as the event requires.
7Reattribute to NCI for partial disposals with control retained. Do not reclassify the NCI share on loss of control. It is simply derecognised.
8State the final entries and the P&L effect, citing the paragraph logic in one line.

Quickest way: Four-question shortcut

When to use it: Use this when a case scenario gives a loan, an FCTR balance and a sale, and you must answer in a few minutes.

Question 1: Is the loan part of the net investment? If it is a trade balance or will be repaid soon, it is not. Treat it as an ordinary monetary item.
Question 2: Which statements? Separate means P&L. Consolidated means OCI and FCTR.
Question 3: Was control lost, or was it a full disposal? If yes, take the whole owners' FCTR to P&L.
Question 4: Is control retained after a sale? Then move owners' FCTR × sold ÷ held to NCI within equity, with no P&L effect. For an associate or joint arrangement, reclassify the same proportion to P&L.

Common mistakes in Net Investment in a Foreign Operation and Disposal

Treating a trade receivable from the foreign subsidiary as part of the net investment.
Students see an intragroup balance in a foreign currency and assume it qualifies.
Fix: Only a monetary item with settlement neither planned nor likely in the foreseeable future qualifies. Trade balances are normally settled in the ordinary course, so they fail the test. Their exchange differences stay in profit or loss, including in the consolidated statements (Ind AS 21.45).
Taking the exchange difference on a net investment loan to OCI in the parent's separate statements.
Students mix up the separate and consolidated treatments.
Fix: Separate or individual statements: profit or loss. Consolidated statements: OCI and FCTR. Always state the level of statements.
Reclassifying FCTR to profit or loss on a partial sale where control is retained.
Students think any sale of shares triggers reclassification.
Fix: With control retained, only reattribute the proportionate FCTR to NCI. No P&L effect arises.
Reclassifying the NCI's share of FCTR to profit or loss on loss of control.
Students reclassify the total FCTR balance without splitting it.
Fix: Split the FCTR first. Reclassify only the owners' share. The NCI's share is derecognised with the NCI, not reclassified.
Computing the proportion on the original holding instead of the holding before the sale.
Students use the percentage sold over 100% rather than over the interest held.
Fix: Use interest sold ÷ interest held immediately before the sale. Selling 20% out of 80% held gives one-quarter, not one-fifth.
Reclassifying FCTR when the foreign operation is written down for its own losses or impairment.
Students treat a lower carrying amount as a partial disposal.
Fix: A write-down is not a partial disposal. The FCTR stays in equity until ownership interest actually reduces.

Worked examples

Example 1

Alpha Ltd, an Indian company with INR as functional currency, gives a loan of USD 1,00,000 to its wholly owned US subsidiary Beta Inc. on 1 April 20X1. The loan is repayable on demand, but Alpha has no plan to demand repayment and settlement is unlikely in the foreseeable future. Beta's functional currency is USD. The rate on 1 April 20X1 is ₹80 per USD and on 31 March 20X2 (the reporting date) it is ₹83 per USD. Show the exchange difference and its treatment in Alpha's separate and consolidated statements.

Show the solution

Test: settlement is neither planned nor likely in the foreseeable future, and the loan is monetary. The loan is part of Alpha's net investment in Beta.
Exchange difference in Alpha's books: USD 1,00,000 × (₹83 − ₹80) = ₹3,00,000 gain, since the loan is an asset denominated in USD, which is not Alpha's functional currency.
Beta's books: the loan is a USD liability and Beta's functional currency is USD, so no exchange difference arises in Beta.
Separate statements of Alpha: ₹3,00,000 gain recognised in profit or loss for the year ended 31 March 20X2.
Consolidated statements: the ₹3,00,000 is recognised in OCI on consolidation and accumulated in FCTR, not in profit or loss, as it relates to a monetary item forming part of the net investment.
Note: translating Beta's own net assets from USD into INR gives a separate translation difference. That is also an OCI item accumulated in FCTR. It is not part of the ₹3,00,000 and needs Beta's net asset figures to compute.
On a later disposal of Beta, the cumulative FCTR, including this ₹3,00,000, would be reclassified to profit or loss when the gain or loss on disposal is recognised.

Answer: Gain of ₹3,00,000. It goes to profit or loss in Alpha's separate statements. In the consolidated statements it is recognised in OCI and accumulated in FCTR, alongside the separate translation difference on Beta's net assets. The cumulative FCTR is reclassified to profit or loss on disposal of Beta.

Example 2

Pico Ltd holds 80% of Zeta Inc., a foreign subsidiary. The cumulative FCTR is ₹50,00,000, of which ₹40,00,000 is attributable to owners of Pico and ₹10,00,000 to NCI. Case A and Case B are alternatives, and each starts from this original position. Case A: Pico sells a 20% interest in Zeta and retains control with a 60% holding. Case B: Pico sells a 30% interest in Zeta to another investor and keeps 50%. Assume as given facts that, under a contractual arrangement with that investor, decisions about Zeta's relevant activities need the unanimous consent of both parties. So Pico and the investor have joint control, Pico no longer controls Zeta, and Zeta is classified as a joint arrangement. Show the FCTR treatment in each case.

Show the solution

Case A: control is retained, so there is no reclassification to profit or loss.
Proportion of owners' interest disposed of = 20% ÷ 80% = one-quarter.
Amount reattributed to NCI = ₹40,00,000 × 1/4 = ₹10,00,000, a transfer within equity from owners' FCTR to NCI.
The buyer of the 20% is an outside party who becomes a non-controlling holder. NCI's holding rises from 20% to 40%, and the ₹10,00,000 moved is the new NCI holders' share of the FCTR.
After Case A, FCTR attributable to owners is ₹30,00,000. NCI's share rises from ₹10,00,000 to ₹20,00,000.
Case B starts from the original position (80% held, owners' FCTR ₹40,00,000, NCI's FCTR ₹10,00,000), not from the position after Case A.
Case B: by the given facts, the contractual arrangement gives Pico and the other investor joint control. Pico has lost control of Zeta, and the retained 50% is an interest in a joint arrangement. Because control is lost, the entire owners' FCTR is reclassified to profit or loss, even though Pico keeps an interest in Zeta.
Reclassification in Case B = ₹40,00,000, recognised as part of the gain or loss on disposal.
The NCI's FCTR of ₹10,00,000 is derecognised along with the NCI. It is not reclassified to profit or loss.

Answer: Case A: ₹10,00,000 is reattributed to NCI, with no effect on profit or loss. NCI's FCTR becomes ₹20,00,000 because the outside buyer joins NCI. Case B (starting from the original 80% holding): under the given contractual arrangement for joint control, control is lost and the retained 50% is a joint arrangement, so ₹40,00,000 is reclassified to profit or loss as part of the disposal gain or loss, and the NCI's ₹10,00,000 is derecognised without reclassification.

Exam tips

Write the level of statements in the first line of your answer. Marks usually depend on separating profit or loss in separate statements from OCI in consolidated statements.
In a case with a loan to a foreign subsidiary, quote the test: settlement neither planned nor likely in the foreseeable future. Then state the conclusion.
For disposal questions, name the event first: full disposal, loss of control, partial disposal with control retained, or partial disposal of an associate. The treatment follows from the event.
Show the proportion working in one line, such as ₹40,00,000 × 20/80. Examiners award marks for the method even if the arithmetic slips.
For MCQs, watch for the traps: trade receivables, NCI share of FCTR, and write-downs that are not partial disposals.

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

Net Investment in a Foreign Operation and Disposal: frequently asked questions

What is a net investment in a foreign operation under Ind AS 21?

It is the reporting entity's interest in the net assets of the foreign operation. It includes monetary items receivable from or payable to the operation where settlement is neither planned nor likely in the foreseeable future. Trade receivables and payables are not part of it.

Where do exchange differences on a net investment loan go?

In the separate or individual financial statements, they go to profit or loss. In the consolidated statements, they go to OCI and are accumulated in the foreign currency translation reserve. They are reclassified to profit or loss on disposal of the foreign operation.

What happens to the FCTR when a foreign subsidiary is sold?

The cumulative amount attributable to owners is reclassified from equity to profit or loss when the gain or loss on disposal is recognised. The amount attributable to NCI is derecognised but not reclassified. The same applies when control is lost.

How is a partial disposal of a foreign subsidiary treated if control is retained?

No amount is reclassified to profit or loss. The proportionate share of the cumulative FCTR is reattributed to NCI within equity. The share is the interest sold divided by the interest held before the sale.

Is a write-down of a foreign operation a partial disposal?

No. A write-down of carrying amount for the operation's own losses or impairment does not reduce the ownership interest. So no part of the FCTR is reclassified to profit or loss.