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

Disposal of Foreign Operation and Disclosures under Ind AS 21

Updated 11 October 2026 · Fact-checked

When you dispose of a foreign operation, Ind AS 21 requires the cumulative exchange differences held in the separate component of equity (translation reserve) to be reclassified to profit or loss when the gain or loss on disposal is recognised. For partial disposals, only a proportionate share is reclassified, or re-attributed to NCI if control is retained.

Understand Disposal of Foreign Operation and Disclosures

A foreign operation (a subsidiary, associate, joint arrangement or branch with a different functional currency) is translated into the presentation currency for consolidation. The exchange differences from this translation go to other comprehensive income (OCI) and build up in a separate component of equity. They are not taken to profit or loss because exchange rate changes have little or no direct effect on present and future operating cash flows (para 41).

This reserve is parked, not forgotten. When you dispose of the foreign operation, the parked amount is released. Para 48 says the cumulative amount is reclassified from equity to profit or loss as a reclassification adjustment, at the time the gain or loss on disposal is recognised. So the disposal gain or loss and the release of the reserve hit profit or loss together.

Disposal can happen by sale, liquidation, repayment of share capital or abandonment of all or part of the operation (para 49). A write-down of the carrying amount, whether from the operation's own losses or from impairment recognised by the investor, is not a partial disposal. So nothing is reclassified on a write-down.

Partial disposals need care. Para 48A treats two partial disposals as full disposals: loss of control of a subsidiary (even if you keep a non-controlling interest in the former subsidiary), and a partial disposal of a joint arrangement or associate interest where the retained interest is a financial asset that includes a foreign operation. Any other reduction in ownership is a partial disposal under para 48D.

For a partial disposal of a subsidiary where control is kept, you re-attribute the proportionate share of the cumulative differences to NCI. Nothing goes to profit or loss. For any other partial disposal, such as part of an associate where significant influence continues, you reclassify only the proportionate share to profit or loss (para 48C). On disposal of a subsidiary, the amount already attributed to NCI is derecognised but not reclassified to profit or loss (para 48B).

Key rules to remember

Full disposal (para 48): Reclassify 100% of cumulative exchange differences from equity to profit or loss; Done when the gain or loss on disposal is recognised. It is a reclassification adjustment under Ind AS 1.
Loss of control (para 48A(a)): Treated as full disposal, even if an NCI is retained; The retained interest does not stop the full release of the reserve attributable to the owners.
Partial disposal, subsidiary, control retained (para 48C): Amount re-attributed to NCI = Cumulative exchange differences × (% interest sold ÷ % interest held before sale); No reclassification to profit or loss. The proportion is of the entity's own holding before the sale.
Other partial disposal (para 48C): Reclassified to profit or loss = Cumulative exchange differences × (% interest sold ÷ % interest held before sale); Applies, for example, to a partial sale of an associate where significant influence is kept.
NCI share on disposal of subsidiary (para 48B): Exchange differences attributed to NCI are derecognised, not reclassified to profit or loss; The NCI amount is removed along with NCI.
Write-down (para 49): Write-down or impairment is not a partial disposal; no reclassification; Applies to losses of the operation or impairment recognised by the investor.

How to solve Disposal of Foreign Operation and Disclosures questions

Use this order for any disposal question on a foreign operation.

1Identify the type of foreign operation and your interest: subsidiary, associate, joint arrangement or branch.
2Identify the event: sale, liquidation, repayment of share capital, abandonment, or only a write-down. If it is only a write-down or impairment, stop: no reclassification.
3Decide whether it is a full disposal or is treated as one: loss of control of a subsidiary, or a retained interest that is a financial asset (para 48A).
4Find the cumulative exchange differences in the translation reserve. Split the amount between owners and NCI if the subsidiary is not wholly owned.
5Apply the rule. Full disposal: reclassify the owners' share to profit or loss and derecognise the NCI share. Partial disposal with control kept: re-attribute the proportion to NCI. Other partial disposal: reclassify the proportion to profit or loss.
6Compute the proportion using the share sold relative to the share held before the sale.
7Pass the journal entry, show the effect on profit or loss, and state the paragraph basis.
8If asked, list the relevant disclosures, such as the functional currency change date and reason.

Quickest way: Three-question filter

When to use it: Use it for MCQs and short theory-plus-numerical questions where time is tight.

Q1: Is it only a write-down or impairment? Then no reclassification.
Q2: Is control of a subsidiary lost, or is the retained stake a financial asset? Then reclassify everything, as a full disposal.
Q3: Otherwise it is a partial disposal. Control kept in a subsidiary: proportion goes to NCI. Any other case: proportion goes to profit or loss.
Remember that the NCI portion is never reclassified to profit or loss on disposal of a subsidiary.

Common mistakes in Disposal of Foreign Operation and Disclosures

Reclassifying the translation reserve when the investment is written down for impairment.
Students link any reduction in value with a disposal.
Fix: Para 49 says a write-down, whether from own losses or investor impairment, is not a partial disposal. Leave the reserve in equity.
Taking the proportionate share of the reserve to profit or loss when a subsidiary is partly sold but control is kept.
Students apply the general partial-disposal rule without checking for a subsidiary.
Fix: Para 48C requires re-attribution to NCI for a partial disposal of a subsidiary. Profit or loss is not affected.
Treating loss of control with a retained stake as a partial disposal.
Students see that some shares are still held.
Fix: Para 48A(a) treats it as a disposal regardless of the retained NCI. Reclassify the full owners' amount.
Reclassifying the NCI's share of exchange differences to profit or loss on disposal of a subsidiary.
Students reclassify the whole reserve in the consolidated statements.
Fix: Para 48B says the amount attributed to NCI is derecognised but not reclassified to profit or loss.
Calculating the proportion on the original investment instead of the holding before the sale.
Students use the total shares of the foreign operation or the original percentage.
Fix: Use the share sold divided by the share held immediately before the sale.
Recognising exchange differences on a net investment monetary item in profit or loss in the consolidated statements.
Students remember the separate-statements rule only.
Fix: Para 32: profit or loss in separate or individual statements, but initially OCI in the consolidated statements, reclassified on disposal of the net investment.

Worked examples

Example 1

Alpha Ltd, an Indian company, owns 100% of Beta Inc., a foreign subsidiary. On 31 March 20X2 it sells 100% of Beta for a gain of ₹40,00,000 in consolidated terms before any reclassification. The translation reserve for Beta is a credit balance of ₹12,00,000. Compute the total effect on consolidated profit or loss.

Show the solution

The sale of the entire interest is a disposal under para 48.
The cumulative exchange differences of ₹12,00,000 (credit) are reclassified from equity to profit or loss when the gain on disposal is recognised.
Journal entry: Foreign currency translation reserve Dr ₹12,00,000 to Profit or loss Cr ₹12,00,000.
Total effect on profit or loss = ₹40,00,000 + ₹12,00,000 = ₹52,00,000.

Answer: Consolidated profit or loss includes a total gain of ₹52,00,000, of which ₹12,00,000 is the reclassification adjustment.

Example 2

Gamma Ltd holds 80% of Delta Inc., a foreign subsidiary. The cumulative exchange differences in the translation reserve are ₹10,00,000, of which ₹8,00,000 is attributable to owners of Gamma and ₹2,00,000 to NCI. Gamma sells 10% of Delta and still controls it. How much is re-attributed to NCI and how much is reclassified to profit or loss?

Show the solution

Control is kept, so this is a partial disposal of a subsidiary (para 48C). It is not a para 48A case.
Proportion sold = 10% ÷ 80% = 1/8.
Owners' reserve of ₹8,00,000 × 1/8 = ₹1,00,000 is re-attributed to NCI.
Nothing is reclassified to profit or loss.
Journal entry: Foreign currency translation reserve (owners) Dr ₹1,00,000 to Non-controlling interest Cr ₹1,00,000.

Answer: ₹1,00,000 is re-attributed to NCI, and ₹0 is reclassified to profit or loss.

Exam tips

For theory questions, quote the paragraph logic: reclassification on disposal, proportionate share on partial disposal, and no reclassification on write-down.
In numericals, write the proportion first, as share sold ÷ share held before sale. Examiners award marks for the method even if the data are simple.
Always split a non-wholly owned subsidiary's reserve between owners and NCI before computing.
In MCQs, watch the words: loss of control, write-down, retained interest, associate. Each one points to a different rule.
For disclosure questions, remember that Ind AS 21 requires, on a change in functional currency, disclosure of the fact, the reason and the date of the change. The date is an Ind AS addition over IAS 21.

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

Disposal of Foreign Operation and Disclosures in other exams

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

Disposal of Foreign Operation and Disclosures: frequently asked questions

When are exchange differences reclassified to profit or loss under Ind AS 21?

They are reclassified when a foreign operation is disposed of and the gain or loss on disposal is recognised. For partial disposals other than those of a subsidiary with control kept, the proportionate share is reclassified.

What happens to the translation reserve if a subsidiary is partly sold but control is retained?

The proportionate share of the cumulative exchange differences is re-attributed to non-controlling interests. Profit or loss is not affected.

Is impairment of a foreign operation a partial disposal?

No. A write-down, whether because of the operation's own losses or impairment recognised by the investor, is not a partial disposal. No part of the OCI exchange differences is reclassified at that time.

What extra disclosure does Ind AS 21 require compared with IAS 21?

When the functional currency of the reporting entity or of a significant foreign operation changes, both standards require disclosure of the fact and the reason. Ind AS 21 also requires disclosure of the date of change.

What if financial statements are shown in a currency other than the functional currency without meeting the standard's requirements?

Such conversions are not in accordance with Ind AS, for example converting only selected items or translating all items at the latest closing rate. Para 56 says the disclosures in para 57 are then required.