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

Ind AS 21: Translation to a Presentation Currency and Foreign Operations

Updated 5 October 2026 · Fact-checked

Translation converts a foreign operation's functional-currency financial statements into the presentation currency. Translate assets and liabilities at the closing rate, income and expenses at transaction-date rates (an average rate if suitable), and equity at historical rates. Take the balancing exchange difference to OCI and accumulate it in a foreign currency translation reserve. Goodwill and fair value adjustments use the closing rate.

Understand Translation to a Presentation Currency and Foreign Operations

Every entity measures its own books in its functional currency, the currency of its main economic environment. An entity may present its financial statements in a different currency, called the presentation currency. A group also has to bring a foreign operation (a subsidiary, associate, joint arrangement or branch whose functional currency differs from the reporting entity's) into the group's currency. In both cases you translate. You do not remeasure.

Translation keeps the relationships inside the statements intact. Assets and liabilities are translated at the closing rate. Income and expenses are translated at the rate on the date of each transaction. For practical purposes you can use an average rate for the period, if rates have not fluctuated significantly. Equity items such as share capital and pre-acquisition reserves stay at the historical rate.

Because balance sheet items move at closing rate and the profit and loss account moves at average rate, the statements do not balance on their own. The balancing figure is an exchange difference. It comes from two sources: the opening net assets re-translated from the old rate to the new closing rate, and the profit for the year translated at average rate but held in net assets at closing rate. You recognise this difference in other comprehensive income (OCI) and accumulate it in a separate component of equity, the foreign currency translation reserve (FCTR). It does not touch profit or loss. When the foreign operation is disposed of, the cumulative amount is reclassified to profit or loss. Any part attributable to non-controlling interests is allocated to NCI.

Goodwill and fair value adjustments arising on acquiring a foreign operation are treated as assets and liabilities of that foreign operation. They are expressed in its functional currency and translated at the closing rate. So they create their own exchange differences in OCI each year.

If the foreign operation's functional currency is that of a hyperinflationary economy, restate its financial statements under Ind AS 29 first. Then translate all amounts, including comparatives, at the closing rate of the latest balance sheet. The exception is when you translate into the currency of a non-hyperinflationary economy. In that case the comparatives are the amounts that were presented as current-year amounts in the earlier year's statements.

Key rules to remember

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.

How to solve Translation to a Presentation Currency and Foreign Operations questions

Use this order for any translation question. It keeps the numbers reconciled and the OCI figure easy to check.

1Confirm the functional currency of the foreign operation and the presentation currency. If the functional currency is hyperinflationary, restate under Ind AS 29 first.
2List the rates given: opening rate, closing rate, average rate, and the rate on the acquisition date or other historical dates.
3Translate the balance sheet: assets and liabilities at closing rate. Translate share capital and pre-acquisition reserves at historical rates.
4Translate the profit and loss account: income and expenses at average (or actual) rates. Take the translated profit to retained earnings.
5Add goodwill and fair value adjustments in the foreign functional currency, then translate them at closing rate.
6Find the balancing figure: translated net assets less translated equity. This is the exchange difference. Cross-check it with the formula on opening net assets and profit.
7Take the exchange difference to OCI and FCTR. Split between owners of the parent and NCI where the subsidiary is not wholly owned.
8State what happens on disposal: cumulative FCTR is reclassified to profit or loss. Add the relevant disclosure if the question asks for it.

Quickest way: Net assets bridge

When to use it: Use it when the question asks only for the exchange difference or the FCTR balance and you do not need the full statements.

Compute opening net assets in functional currency and multiply by (closing rate − opening rate).
Compute profit for the year in functional currency and multiply by (closing rate − average rate). Add this to the result of the first step.
If a dividend was paid, multiply the dividend in functional currency by (closing rate − rate on the dividend date) and subtract it from the total. This is the same sign convention as the main formula.
Treat goodwill and fair value adjustments as extra net assets of the foreign operation, and apply the same closing rate effect to them.
Multiply by the parent's share for the parent's FCTR and by the NCI share for NCI.

Common mistakes in Translation to a Presentation Currency and Foreign Operations

Taking the exchange difference to profit or loss.
Students confuse translation with transaction accounting, where differences on monetary items go 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.
Students think the whole balance sheet moves at one rate.
Fix: Only assets and liabilities use the closing rate. Equity uses historical rates, and the balancing gap is the exchange difference.
Leaving goodwill in the parent's currency.
Goodwill is computed in the consolidation, so it looks like a parent asset.
Fix: Treat goodwill and fair value adjustments as assets of the foreign operation. Compute them in its functional currency and translate at closing rate each year.
Using the closing rate for income and expenses.
Students want one rate for everything.
Fix: Use the transaction-date rate, or an average rate when it is a fair approximation. Say so in the answer.
Not allocating the exchange difference to NCI.
Students allocate profit to NCI but forget OCI also has an NCI share.
Fix: Allocate the exchange difference between owners and NCI in the proportion of their interests. Include goodwill differences only to the extent goodwill is attributed to NCI.
Applying the hyperinflation rule to every high-inflation country.
Students treat it as an inflation-rate test only.
Fix: Hyperinflation is a judgement based on several characteristics, with a cumulative three-year inflation rate near or above 100% as one indicator. Ind AS 29 restatement comes before translation.

Worked examples

Example 1

P Ltd, an Indian company with INR as presentation currency, formed a wholly-owned subsidiary F Inc on 1 April 2025 by investing USD 1,000 as share capital when the rate was ₹80 per USD. F Inc's functional currency is USD. For 2025-26 its profit was USD 200 and it paid no dividend. At 31 March 2026 its assets were USD 1,500 and liabilities USD 300. The average rate for the year was ₹82 and the closing rate ₹84. Translate the closing balance sheet and find the exchange difference for OCI.

Show the solution

Closing net assets in USD = 1,500 − 300 = USD 1,200, which equals share capital 1,000 plus profit 200.
Translate assets: 1,500 × 84 = ₹1,26,000. Translate liabilities: 300 × 84 = ₹25,200. Net assets = ₹1,00,800.
Translate equity: share capital 1,000 × 80 = ₹80,000. Profit 200 × 82 = ₹16,400. Total = ₹96,400.
Exchange difference = 1,00,800 − 96,400 = ₹4,400.
Cross-check: 1,000 × (84 − 80) = ₹4,000 and 200 × (84 − 82) = ₹400. Sum = ₹4,400.
The ₹4,400 is a gain recognised in OCI and accumulated in FCTR. It is all attributable to P Ltd, because it owns 100%.

Answer: Translated net assets are ₹1,00,800. The exchange difference of ₹4,400 (gain) goes to OCI and FCTR, not to profit or loss.

Example 2

On 1 April 2025, P Ltd acquired 80% of F Inc (functional currency USD) for USD 1,200 when the rate was ₹80. The fair value of F Inc's identifiable net assets was USD 1,000, which includes a fair value uplift of USD 100 on plant over its carrying amount. NCI is measured at its proportionate share of identifiable net assets. Closing rate on 31 March 2026 is ₹84. Ignore depreciation and deferred tax. Compute goodwill, its closing carrying amount in INR, and the exchange differences on goodwill and on the fair value adjustment only, split between owners and NCI.

Show the solution

Goodwill in USD = 1,200 + NCI (20% × 1,000 = 200) − 1,000 = USD 400. Because NCI is at proportionate share, goodwill belongs wholly to the parent.
Goodwill at acquisition = 400 × 80 = ₹32,000. At 31 March 2026 = 400 × 84 = ₹33,600. Exchange gain = ₹1,600, all to owners of the parent.
The fair value adjustment is treated as a foreign operation asset: USD 100 × 80 = ₹8,000 at acquisition, USD 100 × 84 = ₹8,400 at closing. Exchange gain = ₹400.
Split the ₹400 gain: owners 80% = ₹320, NCI 20% = ₹80.
Total exchange gain in OCI on these two items = 1,600 + 400 = ₹2,000. Owners = 1,600 + 320 = ₹1,920. NCI = ₹80.
Note that only the goodwill and fair value adjustment differences are computed here. The other net assets of F Inc also generate exchange differences in FCTR, which are not included in this ₹2,000.

Answer: Goodwill is USD 400, carried at ₹33,600. The exchange gain on goodwill is ₹1,600 and on the fair value adjustment ₹400. These two items give ₹2,000 in OCI, split ₹1,920 to owners and ₹80 to NCI. The exchange difference on F Inc's other net assets is additional and is not part of this figure.

Exam tips

Write the rate used beside every line (closing, average, historical). Markers give marks for the rate choice even if arithmetic slips.
Always show the exchange difference as the balancing figure and cross-check it with the opening net assets and profit formula.
In case-scenario MCQs, check first whether the question is about translation (goes to OCI) or a foreign currency transaction (usually goes to profit or loss). Options often swap the two.
When goodwill appears, state in one line that it is an asset of the foreign operation, translated at closing rate. This single sentence earns a mark.
For hyperinflation questions, write the sequence: restate under Ind AS 29, then translate at the closing rate. Mention the comparatives exception only if the presentation currency is non-hyperinflationary.

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

Translation to a Presentation Currency and Foreign Operations in other exams

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

Translation to a Presentation Currency and Foreign Operations: frequently asked questions

Where do translation differences on a foreign operation go?

They go to other comprehensive income and accumulate in the foreign currency translation reserve within equity. They are not shown in profit or loss. On disposal of the foreign operation the cumulative amount is reclassified to profit or loss.

Can I use an average rate for the whole year?

Yes, an average rate may be used for income and expenses if it approximates the rates on the transaction dates. If exchange rates fluctuate significantly, an average for the whole period is not reliable. Use shorter-period averages or actual rates instead.

At which rate is goodwill on acquiring a foreign operation translated?

Goodwill and fair value adjustments are treated as assets and liabilities of the foreign operation. You express them in its functional currency and translate them at the closing rate at each reporting date. The resulting differences go to OCI.

How is a hyperinflationary functional currency handled?

First restate the financial statements under Ind AS 29. Then translate all amounts at the closing rate of the latest balance sheet. If the presentation currency belongs to a non-hyperinflationary economy, the comparatives are the amounts previously presented as current-year amounts.

Is there an NCI share in the translation reserve?

Yes. The exchange difference on a partly-owned foreign subsidiary is allocated between owners of the parent and non-controlling interests in proportion to their interests. Check how NCI was measured at acquisition, because it decides whether goodwill differences reach NCI.