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

Ind AS 21 Foreign Currency Transactions: Initial and Subsequent Measurement

Updated 11 October 2026 · Fact-checked

A foreign currency transaction is recorded in the functional currency at the spot rate on the transaction date. At each reporting date, monetary items are translated at the closing rate, non-monetary items at historical cost at the transaction-date rate, and non-monetary items at fair value at the rate on the date fair value was measured.

Understand Foreign Currency Transactions: Initial and Subsequent Measurement

A foreign currency is any currency other than the entity's functional currency. Functional currency is the currency of the primary economic environment in which the entity operates. If an Indian company buys goods priced in US dollars, it must show the purchase in rupees, if rupees are its functional currency.

On initial recognition, you apply the spot exchange rate (the rate for immediate delivery) at the date of the transaction. The date of the transaction is the date on which the transaction first qualifies for recognition under Ind AS. A rate that approximates the actual rate, such as an average for a week or month, is often used for practical reasons. Ind AS 21 says an average rate is inappropriate if exchange rates fluctuate significantly.

At each later reporting date, the treatment depends on the type of item. Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of currency units. Examples are receivables, payables, loans and cash. They are translated at the closing rate, the spot rate at the end of the reporting period.

Non-monetary items (inventory, PPE, advances for goods or services, intangibles) are not retranslated if carried at historical cost. They stay at the transaction-date rate. If they are carried at fair value, you use the rate on the date the fair value was measured.

The difference caused by translating at different rates is an exchange difference. Its recognition is covered in a separate topic. Here you need the correct rate for each item and the correct carrying amount.

Key rules to remember

Initial recognition
Functional currency amount = Foreign currency amount × Spot rate on transaction date
The transaction date is when the transaction first qualifies for recognition. An approximate rate, such as an average, may be used unless rates fluctuate significantly.
Monetary items at reporting date
Amount = Foreign currency amount × Closing rate
Applies to payables, receivables, loans and cash held in foreign currency (para 23(a)).
Non-monetary items at historical cost
Amount = Foreign currency cost × Rate on transaction date
No retranslation at the closing rate (para 23(b)).
Non-monetary items at fair value
Amount = Foreign currency fair value × Rate on date fair value was measured
Applies to revalued PPE or investments at fair value (para 23(c)).
Lower of cost and NRV or recoverable amount
Compare (cost × rate on date cost was determined) with (NRV or recoverable amount × rate on date that value was determined)
Para 25. An impairment loss may arise in the functional currency but not in the foreign currency, or the reverse.
Advance consideration
Transaction date = date the non-monetary asset or liability from the advance is initially recognised
Appendix B. With multiple advances, each payment or receipt has its own date. It does not apply if the related item is initially measured at fair value.

How to solve Foreign Currency Transactions: Initial and Subsequent Measurement questions

Use this method for any question on foreign currency transactions and reporting-date measurement.

  1. 1Identify the functional currency. Treat every other currency as foreign.
  2. 2List each item and the date it first qualifies for recognition. Note any advance paid or received, as this changes the date.
  3. 3Pick the initial spot rate for each item. Use the given rate for that date, or an average only if the question allows it.
  4. 4Classify each item at the reporting date as monetary, non-monetary at historical cost, or non-monetary at fair value.
  5. 5Apply the matching rate: closing rate, transaction-date rate, or rate at fair value measurement date.
  6. 6For inventory or impaired assets, compare cost and NRV (or recoverable amount), each translated at its own date's rate, and take the lower.
  7. 7Show the carrying amount in the functional currency in a clear table, and compute any exchange difference if asked.
  8. 8State the answer with the paragraph rule you used.

Quickest way: Classify first, then pick the rate

When to use it: Use it when the question has many items and a table of rates, and time is short.

  1. Draw three columns: monetary, non-monetary at cost, non-monetary at fair value.
  2. Put each item in a column. Ask: will it be settled in a fixed number of currency units? If yes, it is monetary.
  3. Assign the rate: closing rate, original rate, or fair value date rate.
  4. Multiply and write the rupee figure next to each item.
  5. For advances, remember that an advance paid for goods or services is non-monetary, so it is not retranslated.

Common mistakes in Foreign Currency Transactions: Initial and Subsequent Measurement

  • Retranslating inventory or PPE at the closing rate

    Students treat every foreign currency balance alike.

    Fix: If an item is non-monetary and at historical cost, keep the transaction-date rate. Only monetary items use the closing rate.

  • Treating an advance paid to a foreign supplier as a monetary item

    It is cash paid, so it looks like a receivable.

    Fix: Advance consideration for goods or services creates a non-monetary asset. It stays at the rate on the payment date and is not retranslated.

  • Using the delivery or invoice date when an advance was paid earlier

    Students ignore Appendix B.

    Fix: The transaction date for the related asset, expense or income is when the advance asset or liability was recognised. With several advances, use a separate rate for each.

  • Comparing cost and NRV at the same closing rate

    Students convert both amounts at one rate to save time.

    Fix: Translate cost at the rate when cost was determined and NRV at the rate when NRV was determined, usually the closing rate. Then take the lower.

  • Using an average rate when rates move sharply

    Averages are convenient.

    Fix: An average is acceptable only as an approximation. Ind AS 21 says it is inappropriate if exchange rates fluctuate significantly.

Worked examples

Example 1

Bharat Ltd, whose functional currency is the rupee, imported machinery on 1 December 2026 for USD 50,000 (rate ₹83 per USD) and unpaid raw materials of USD 20,000 on 1 February 2027 (rate ₹84). The machinery is carried at cost. At 31 March 2027 the closing rate is ₹85. Show the carrying amounts in the balance sheet at 31 March 2027.

Show the solution
  1. Machinery is non-monetary and at historical cost, so it uses the transaction-date rate: USD 50,000 × ₹83 = ₹41,50,000.
  2. The payable for raw materials is a monetary item, so use the closing rate: USD 20,000 × ₹85 = ₹17,00,000.
  3. Initial payable was USD 20,000 × ₹84 = ₹16,80,000.
  4. Exchange difference on the payable = ₹17,00,000 − ₹16,80,000 = ₹20,000 loss, if the payable is unpaid. Recognition is dealt with under the exchange differences topic.
  5. If the machinery payable is also unpaid, it is a monetary item too: USD 50,000 × ₹85 = ₹42,50,000, a ₹1,00,000 difference from ₹41,50,000. The machinery itself stays at ₹41,50,000.

Answer: Machinery is carried at ₹41,50,000 and is not retranslated. The raw material payable is shown at ₹17,00,000, with a ₹20,000 exchange loss on it since initial recognition.

Example 2

Kaveri Ltd (functional currency INR) bought 1,000 units of inventory on 10 January 2027 for USD 100 per unit at ₹83 per USD. At 31 March 2027 the closing rate is ₹85 and the NRV is USD 98 per unit. Find the carrying amount of the inventory.

Show the solution
  1. Cost in USD = 1,000 × 100 = USD 1,00,000. Translated at the transaction-date rate: 1,00,000 × ₹83 = ₹83,00,000.
  2. NRV in USD = 1,000 × 98 = USD 98,000. Translated at the closing rate, the rate when NRV was determined: 98,000 × ₹85 = ₹83,30,000.
  3. Compare: cost ₹83,00,000 is lower than NRV ₹83,30,000.
  4. Inventory is carried at the lower of cost and NRV, so ₹83,00,000. No write-down is needed in rupees, although in USD the NRV is below cost.

Answer: Inventory is carried at ₹83,00,000. No write-down is recognised in the functional currency, even though USD NRV is below USD cost.

Exam tips

  • In MCQs, first decide whether the item is monetary or non-monetary. This one decision usually fixes the answer.
  • Watch for advances paid or received in foreign currency. They are the favourite trap in case scenarios.
  • In inventory and impairment problems, translate each figure at its own date's rate before comparing them, as para 25 requires.
  • Write the paragraph rule in one line beside each item, for example: closing rate for monetary items. This earns marks for reasoning even if arithmetic slips.
  • Use Indian grouping and show rupee figures in a neat table so the examiner can follow each item.

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

Foreign Currency Transactions: Initial and Subsequent Measurement in other exams

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

Foreign Currency Transactions: Initial and Subsequent Measurement: frequently asked questions

Which rate applies to a foreign currency receivable at the year end?

A receivable is a monetary item, so you translate it at the closing rate. The closing rate is the spot rate at the end of the reporting period.

Are advances paid to foreign suppliers retranslated at the closing rate?

Generally no. An advance for goods or services creates a non-monetary asset, which stays at the rate on the date it was recognised. Appendix B sets the date of the transaction as the date the advance asset or liability is recognised.

Can I use an average rate to record transactions?

Yes, a rate that approximates the transaction-date rates, such as a period average, is often used for practical reasons. It is inappropriate if exchange rates fluctuate significantly.

How do I translate PPE carried at fair value in a foreign currency?

Translate the fair value at the exchange rate on the date the fair value was measured. This is the rule for non-monetary items at fair value under para 23(c).