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

Translation to Presentation Currency and Foreign Operations under Ind AS 21

Updated 11 October 2026 · Fact-checked

Translation converts an entity's results and financial position from its functional currency into a different presentation currency. Translate assets and liabilities at the closing rate, income and expenses at transaction-date rates, and take all resulting exchange differences to other comprehensive income. The balancing figure builds up in a foreign currency translation reserve within equity.

Understand Translation to Presentation Currency and Foreign Operations

An entity keeps its books in its functional currency. It may present its financial statements in another currency. A parent also has to bring a foreign subsidiary, associate or joint venture into its consolidated statements. In both cases the numbers must be translated. Ind AS 21 gives the method (paragraphs 38 to 47).

For an entity whose functional currency is not hyperinflationary, paragraph 39 sets three rules. Assets and liabilities, including comparatives, go at the closing rate of each balance sheet. Income and expenses go at the rates on the dates of the transactions. All resulting exchange differences go to other comprehensive income (OCI).

Why does a difference arise? Paragraph 41 gives two sources. First, income and expenses are translated at transaction rates while assets and liabilities are translated at the closing rate. Second, opening net assets are translated at a closing rate that differs from the previous closing rate. These differences are not taken to profit or loss, because rate changes have little or no direct effect on present and future cash flows from operations. The cumulative amount sits in a separate component of equity, usually called the foreign currency translation reserve (FCTR), until the foreign operation is disposed of. If the subsidiary is not wholly owned, the share of the differences attributable to non-controlling interests (NCI) goes to NCI in the consolidated balance sheet.

For consolidation, paragraph 45 says normal procedures apply, such as eliminating intragroup balances and transactions. But an intragroup monetary item cannot be eliminated without showing the effect of currency movements. The exchange difference stays in consolidated profit or loss. If it arises from the circumstances in paragraph 32 (a monetary item that forms part of the net investment in a foreign operation), it goes to OCI and is accumulated in equity until disposal.

Paragraph 47 treats goodwill and fair value adjustments from acquiring a foreign operation as assets and liabilities of that foreign operation. They are expressed in its functional currency and translated at the closing rate. So they create exchange differences every year.

Key rules to remember

Translation rules (non-hyperinflationary), para 39: Assets and liabilities → closing rate | Income and expenses → rate at transaction date | Exchange differences → OCI; Applies to each balance sheet and statement of profit and loss presented, including comparatives.
Exchange difference (FCTR movement) for the year: Closing net assets at closing rate − [Opening net assets at opening rate + Profit at transaction rates (or average rate) − Dividends at their date rates ± other equity movements at their rates]; This is the balancing figure when the translated balance sheet is built up. Using an average rate for income is a practical approximation when rates do not fluctuate significantly.
Goodwill and fair value adjustments, para 47: Carrying amount in functional currency × closing rate; Treated as assets of the foreign operation, not of the parent.
Hyperinflationary economy, para 42: Restate under Ind AS 29 first, then translate ALL amounts at the latest closing rate; If translating into the currency of a non-hyperinflationary economy, comparatives are the amounts presented as current year amounts in the prior year statements (not adjusted).
NCI share of translation difference, para 41: NCI share = NCI % × exchange difference on the subsidiary's net assets (including goodwill if goodwill is measured on full basis); Allocate to NCI in a not wholly-owned subsidiary; the parent's share goes to FCTR.
Different reporting dates, para 46: Gap between reporting dates must not exceed three months; translate at the foreign operation's own period-end rate and adjust for significant rate changes up to the parent's date; Applies under Ind AS 110 and the equity method under Ind AS 28.

How to solve Translation to Presentation Currency and Foreign Operations questions

Use this order for any question on translating a foreign operation or presenting in another currency.

1Identify the functional currency of the foreign operation and the presentation currency. Check whether the functional currency is that of a hyperinflationary economy.
2If it is hyperinflationary, restate under Ind AS 29 first and translate everything at the latest closing rate. Stop there.
3Otherwise, translate each asset and liability at the closing rate. Include goodwill and fair value adjustments as assets of the foreign operation.
4Translate income and expenses at transaction-date rates, or an average rate if the question allows it as an approximation.
5Translate opening equity at the rates the question gives. Share capital and pre-acquisition reserves are normally at historical rates.
6Add up the translated profit and other equity items. Find the exchange difference as the balancing figure and take it to OCI (FCTR).
7For consolidation, split the FCTR between parent and NCI. Eliminate intragroup items, keeping any exchange difference on monetary items as para 45 requires.
8Write a one-line conclusion: closing FCTR balance, NCI share, and where each difference is recognised.

Quickest way: Net-assets proof for the FCTR

When to use it: Use when the question asks only for the exchange difference or the closing FCTR, not the full translated statements.

Translate closing net assets at the closing rate.
Translate opening net assets at the opening rate. Add profit for the year at the average or transaction rate. Deduct dividends at the rate on payment date.
Subtract the second figure from the first. The result is the exchange difference for the year.
Add the opening FCTR to get the closing FCTR. Split by NCI percentage if the subsidiary is not wholly owned.
Check the sign: net assets rising in value with a strengthening foreign currency gives a gain in OCI.

Common mistakes in Translation to Presentation Currency and Foreign Operations

Taking the translation difference to profit or loss.
Students mix this up with exchange differences on foreign currency transactions under Ind AS 21 monetary item rules.
Fix: For translation to presentation currency, differences go to OCI (para 39(c)) and accumulate in equity until disposal. Only the intragroup monetary item difference in para 45 goes to profit or loss, unless it forms part of the net investment.
Translating all items at the closing rate for a normal (non-hyperinflationary) entity.
The hyperinflation rule in para 42 is remembered and applied everywhere.
Fix: Closing rate for all items is only for hyperinflationary functional currencies. Otherwise income and expenses use transaction-date rates.
Carrying goodwill in the parent's currency at the acquisition-date rate.
Goodwill appears in the parent's consolidation workings, so it looks like a parent item.
Fix: Under para 47, goodwill and fair value adjustments belong to the foreign operation. Express them in its functional currency and translate at the closing rate each year.
Eliminating an intragroup foreign currency loan fully without showing the exchange difference.
Students apply the usual rule that intragroup balances cancel out.
Fix: Para 45 says a monetary item cannot be eliminated without showing currency effects. Recognise the difference in consolidated profit or loss, or in OCI if it arises from the para 32 circumstances.
Restating comparatives when translating a hyperinflationary entity into a non-hyperinflationary presentation currency.
Students assume comparatives are always retranslated at the new closing rate.
Fix: Under para 42(b), comparatives are the amounts presented as current year amounts in the prior year statements, with no adjustment for later price or rate changes.
Giving the whole FCTR to the parent when the subsidiary is partly owned.
The NCI step is forgotten once the translation is done.
Fix: Allocate the NCI share of accumulated exchange differences to NCI, as para 41 requires.

Worked examples

Example 1

Indian parent P Ltd (presentation currency ₹) holds 100% of a US subsidiary S Inc, whose functional currency is the US dollar (not hyperinflationary). At the start of the year S Inc had net assets of $1,00,000 (opening rate $1 = ₹80). Profit for the year was $20,000, earned evenly, with an average rate of $1 = ₹82. No dividends. Closing rate is $1 = ₹85. Compute the exchange difference for the year taken to OCI.

Show the solution

Closing net assets = $1,20,000 (1,00,000 + 20,000).
Closing net assets at closing rate = 1,20,000 × 85 = ₹1,02,00,000.
Opening net assets at opening rate = 1,00,000 × 80 = ₹80,00,000.
Profit at average rate = 20,000 × 82 = ₹16,40,000.
Expected closing without exchange difference = 80,00,000 + 16,40,000 = ₹96,40,000.
Exchange difference = 1,02,00,000 − 96,40,000 = ₹5,60,000.
Check: opening net assets gain = 1,00,000 × (85 − 80) = ₹5,00,000. Profit gain = 20,000 × (85 − 82) = ₹60,000. Total ₹5,60,000.

Answer: Exchange gain of ₹5,60,000 is recognised in other comprehensive income and accumulated in the foreign currency translation reserve.

Example 2

On 1 April, H Ltd acquired 80% of F Ltd, a foreign subsidiary with the functional currency FC. Goodwill on acquisition (full-goodwill basis not used; only the parent's share) was FC 50,000. The rate on 1 April was FC 1 = ₹2. The closing rate on 31 March is FC 1 = ₹2.20. Show how goodwill is stated in the consolidated balance sheet and the exchange difference on it.

Show the solution

Under para 47, goodwill is an asset of the foreign operation, expressed in FC.
At acquisition: 50,000 × 2 = ₹1,00,000.
At the reporting date, translate at the closing rate: 50,000 × 2.20 = ₹1,10,000.
Exchange difference = 1,10,000 − 1,00,000 = ₹10,000 gain.
Recognise the difference in OCI under para 39(c). Because goodwill here is only the parent's share, the full ₹10,000 is attributable to the owners of H Ltd and goes to FCTR, with none to NCI.

Answer: Goodwill is shown at ₹1,10,000. The ₹10,000 exchange gain goes to OCI and the FCTR (attributable to the parent).

Exam tips

Write the para 39 rule in one line before computing. It shows the examiner your method and earns marks even if arithmetic slips.
Always show the FCTR as a balancing figure with a proof. Opening net assets × change in closing rate plus profit × (closing − average rate) is a quick cross-check.
In MCQs, watch for the words hyperinflationary, goodwill, intragroup loan and non-controlling interest. Each points to a specific paragraph (42, 47, 45, 41).
State where each difference goes: OCI/FCTR for translation, profit or loss for intragroup monetary items, unless para 32 applies.
If a question gives only closing and opening rates and an average rate, use the average as the practical approximation for income and expenses and say so.

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

Translation to 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 Presentation Currency and Foreign Operations: frequently asked questions

What is the difference between functional currency and presentation currency?

Functional currency is the currency of the primary economic environment in which the entity operates. Presentation currency is the currency in which the financial statements are shown. Under para 38, an entity may present in any currency, and if it differs from the functional currency, results and financial position are translated.

Where does the exchange difference on translation go?

It goes to other comprehensive income and accumulates in a separate component of equity, the FCTR. It is not recognised in profit or loss because rate changes have little or no direct effect on present and future cash flows from operations. The accumulated amount stays in equity until the foreign operation is disposed of.

How is a hyperinflationary economy handled?

The entity first restates its financial statements under Ind AS 29. Then all amounts, including comparatives, are translated at the closing rate of the most recent balance sheet. An exception applies to comparatives when translating into the currency of a non-hyperinflationary economy.

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

Goodwill and fair value adjustments are treated as assets and liabilities of the foreign operation. They are expressed in its functional currency and translated at the closing rate, so they produce exchange differences each year.