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

Recognition of Exchange Differences under Ind AS 21

Updated 11 October 2026 · Fact-checked

An exchange difference arises when foreign currency amounts are translated at different rates. Under Ind AS 21, differences on monetary items go to profit or loss when they arise. Exception: monetary items forming part of a net investment in a foreign operation go to OCI in consolidated statements. Non-monetary items follow where their own gain or loss goes.

Understand Recognition of Exchange Differences

A foreign currency transaction is first recorded at the spot rate on the transaction date. Later, the rate changes. When you settle the item, or translate it at a closing rate different from the earlier rate, you get an exchange difference. The question is where that gain or loss is shown.

The general rule is in paragraph 28. Exchange differences on settlement of monetary items, or on translating monetary items at rates different from those used earlier, are recognised in profit or loss in the period they arise. Paragraph 29 adds that if the transaction is settled in a later period, the difference in each period is based on the change in rates during that period.

For non-monetary items, paragraph 30 says the exchange component follows the item. If the gain or loss on the item goes to OCI, its exchange component goes to OCI. If the gain or loss goes to profit or loss, so does its exchange component. Paragraph 31 gives an example: a revalued PPE item measured in a foreign currency, where the exchange difference sits in OCI along with the revaluation gain.

The main exception is the net investment in a foreign operation. Under paragraph 15, a monetary item receivable from or payable to a foreign operation, whose settlement is neither planned nor likely in the foreseeable future, is in substance part of the net investment. It can include long-term receivables or loans. It does not include trade receivables or trade payables.

For such an item, the difference goes to profit or loss in the separate financial statements of the reporting entity or in the foreign operation's individual statements. In the financial statements that include both (for example, consolidated statements with a subsidiary), it goes to OCI first. It is reclassified from equity to profit or loss on disposal of the net investment (paragraph 48).

Two other points. Hedge accounting under Ind AS 109 can change the treatment (paragraph 27), for example a cash flow hedge, where the effective part goes to OCI. Also, Ind AS 21 carries a carve-out (paragraph 7AA) for long-term foreign currency monetary items where a first-time adopter chose the Ind AS 101 exemption in paragraph D13AA, and so continues its previous GAAP policy.

Key rules to remember

General rule for monetary items: Exchange difference on settlement or translation of a monetary item → profit or loss in the period it arises; Paragraph 28. Exception: paragraph 32 (net investment) and hedge accounting under Ind AS 109.
Non-monetary items: Exchange component goes where the gain or loss on the item goes (OCI or profit or loss); Paragraph 30. Example: revalued PPE in foreign currency, paragraph 31.
Net investment item: separate or individual statements: Exchange difference → profit or loss; Paragraph 32, first sentence. Applies to the reporting entity's separate statements or the foreign operation's individual statements.
Net investment item: consolidated statements: Exchange difference → OCI first; reclassified from equity to profit or loss on disposal; Paragraphs 32 and 48. Applies where the foreign operation and the reporting entity are in the same statements.
What counts as net investment: Monetary item with settlement neither planned nor likely in the foreseeable future; Paragraph 15. May include long-term receivables or loans. Excludes trade receivables and trade payables.
Intragroup monetary items: Cannot be eliminated without showing currency fluctuation in consolidated statements; Paragraph 45. The difference goes to profit or loss, or to OCI if paragraph 32 applies.
Partial disposal: Subsidiary: re-attribute proportionate share to NCI. Other partial disposal: reclassify only the proportionate share to profit or loss; Paragraph 48C.

How to solve Recognition of Exchange Differences questions

Use this order for any question on where an exchange difference goes.

1Identify the item: is it monetary (cash, receivables, payables, loans) or non-monetary (PPE, inventory, advances for goods)?
2For a non-monetary item, find where its own gain or loss is recognised. Put the exchange component in the same place (paragraph 30).
3For a monetary item, check if it is a loan or receivable from or to a foreign operation with no planned or likely settlement in the foreseeable future. Trade balances never qualify.
4If it is not a net investment item, compute the difference between the rate on initial recognition (or the previous reporting date rate) and the settlement or closing rate. Take it to profit or loss.
5If it is a net investment item, ask whose statements you are preparing. Separate or individual statements: profit or loss. Consolidated statements: OCI.
6Check for hedge accounting under Ind AS 109. If a hedge applies, follow its treatment.
7On disposal of the foreign operation, reclassify the cumulative OCI amount to profit or loss. For partial disposal, apply paragraph 48C.
8State the answer with the paragraph number and the amount, with gain or loss clearly marked.

Quickest way: Three-question filter

When to use it: Use in MCQs and short case questions where you must pick profit or loss or OCI.

Monetary or non-monetary? If non-monetary, follow the item's own gain or loss.
If monetary, is it long-term, with no settlement planned, and owed to or by a foreign operation? If not, profit or loss.
If yes, ask: separate statements or consolidated? Separate: profit or loss. Consolidated: OCI, then recycle on disposal.

Common mistakes in Recognition of Exchange Differences

Taking all exchange differences on a foreign subsidiary loan to OCI in the parent's separate statements.
Students remember 'net investment goes to OCI' and forget it applies only in the statements that include both entities.
Fix: In separate or individual statements it goes to profit or loss. OCI treatment applies in consolidated statements.
Treating trade receivables from a foreign subsidiary as net investment.
The balance is with a foreign operation, so it looks similar.
Fix: Paragraph 15 excludes trade receivables and trade payables. They are settled in the normal course, so use profit or loss.
Eliminating an intragroup foreign currency loan in full on consolidation, leaving no exchange difference.
Students apply the normal rule of eliminating intragroup balances.
Fix: Paragraph 45 says such a monetary item cannot be eliminated without showing the currency effect. Show the difference in profit or loss, or OCI if paragraph 32 applies.
Recognising the exchange difference on a revalued foreign currency asset in profit or loss.
Students treat every exchange difference as a profit or loss item.
Fix: It is a non-monetary item. If the revaluation gain is in OCI, the exchange component is in OCI as well.
Leaving the OCI balance in equity forever when the foreign operation is sold.
Students forget reclassification.
Fix: On disposal, reclassify the cumulative amount from equity to profit or loss (paragraph 48). For partial disposal, use only the proportionate share, or attribute it to NCI for a subsidiary.
Applying Ind AS 21 to long-term foreign currency monetary items where the Ind AS 101 option was chosen.
Students overlook the carve-out.
Fix: Paragraph 7AA scopes out such items. The entity continues its previous GAAP policy for them, as allowed by paragraph D13AA of Ind AS 101.

Worked examples

Example 1

Indian parent P Ltd lends US$ 1,00,000 to its wholly owned US subsidiary on 1 April 2026 (rate ₹80 per US$). Settlement is neither planned nor likely in the foreseeable future. The loan is denominated in US$, which is neither company's functional currency issue to consider here beyond P Ltd's functional currency being INR and the subsidiary's being US$. The closing rate on 31 March 2027 is ₹84. Show the exchange difference and where it is recognised in P Ltd's separate and consolidated statements.

Show the solution

The loan is a monetary item and, being long-term with no planned settlement, forms part of the net investment (paragraph 15).
The loan is denominated in the subsidiary's functional currency (US$). So the exchange difference arises in P Ltd's separate statements (paragraph 33).
Difference = US$ 1,00,000 × (₹84 − ₹80) = ₹4,00,000 gain.
In P Ltd's separate statements: recognise the ₹4,00,000 gain in profit or loss (paragraph 32).
In the consolidated statements: recognise it initially in OCI, accumulated in a separate component of equity (paragraphs 32 and 45).
On disposal of the subsidiary, reclassify the cumulative amount from equity to profit or loss (paragraph 48).

Answer: Exchange gain of ₹4,00,000. Profit or loss in P Ltd's separate statements; OCI in the consolidated statements, reclassified to profit or loss on disposal of the subsidiary.

Example 2

Q Ltd (functional currency INR) imports goods from a US supplier on 1 January 2027 for US$ 50,000 at ₹82 per US$, on credit. At the year end, 31 March 2027, the rate is ₹85. The payable is settled on 15 April 2027 at ₹86. Show the exchange differences in each period.

Show the solution

The trade payable is a monetary item. It is not part of a net investment, so paragraph 28 applies: profit or loss.
Initial recognition: US$ 50,000 × ₹82 = ₹41,00,000.
At 31 March 2027: US$ 50,000 × ₹85 = ₹42,50,000. Loss for the year = ₹42,50,000 − ₹41,00,000 = ₹1,50,000. Recognise in profit or loss of FY 2026-27.
On settlement: US$ 50,000 × ₹86 = ₹43,00,000. Loss for the next period = ₹43,00,000 − ₹42,50,000 = ₹50,000. Recognise in profit or loss of FY 2027-28 (paragraph 29).
Total loss = ₹2,00,000, which equals US$ 50,000 × (₹86 − ₹82).

Answer: Exchange loss of ₹1,50,000 in FY 2026-27 and ₹50,000 in FY 2027-28, both in profit or loss. Total ₹2,00,000.

Exam tips

Always name the statement: separate, individual or consolidated. Marks are lost when the answer says only 'OCI' or 'profit or loss'.
Quote the paragraph numbers (28, 30, 32, 45, 48) in written answers. They show the examiner you know the basis.
In case-scenario MCQs, check whether the loan is long-term and with settlement unplanned. A trade balance is a trap.
For comparison questions with AS 11, remember that Ind AS 21 carves out items under paragraph 7AA for first-time adopters. Note the point and do not add detail you cannot support.
Show the computation line by line: opening rate, closing rate, quantity in foreign currency, then gain or loss.

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

Recognition of Exchange Differences in other exams

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

ACCA Applied SkillsExchange Differences in Profit or Loss

Recognition of Exchange Differences: frequently asked questions

When do exchange differences go to OCI under Ind AS 21?

Two main cases. First, exchange differences on a monetary item forming part of a net investment in a foreign operation, in the statements that include both the foreign operation and the reporting entity. Second, the exchange component of a non-monetary item whose own gain or loss is in OCI, such as a revalued asset.

What is a net investment in a foreign operation?

It is a monetary item receivable from or payable to a foreign operation for which settlement is neither planned nor likely in the foreseeable future. Long-term receivables or loans can qualify. Trade receivables and trade payables cannot.

Are intragroup foreign currency balances eliminated on consolidation?

The balances are eliminated, but the exchange difference is not. Paragraph 45 says a monetary item represents a commitment to convert one currency into another, so the currency effect must show in the consolidated statements. It goes to profit or loss, or to OCI if paragraph 32 applies.

What happens to exchange differences in OCI when the foreign operation is sold?

The cumulative amount held in the separate component of equity is reclassified to profit or loss when the gain or loss on disposal is recognised. For a partial disposal of a subsidiary, the proportionate share is re-attributed to non-controlling interests. For other partial disposals, only the proportionate share is reclassified.