ind as 21 forex

IND AS 21

The Effects of Changes in

Foreign Exchange Rates

CA. Nirmal Ghorawat

B. Com(Hons), ACA

OBJECTIVE

To prescribe

◦ How to Include

� Foreign Currency Transactions and

� Foreign Operations

in the Financial Statements of the entity

and

◦ How to Translate Financial Statements

into a presentation currency.

2

SCOPE

• Accounting for Transactions andBalances in Foreign Currencies.

• Exception: Derivative Transactions andBalances (including Hedge Accounting)within the Scope of IND AS 39

Foreign Currency

Transactions

• Translating the Financial Statements ofFOREIGN OPERATIONS included inthe FS of entity by Consolidation,Proportionate Consolidation or theEquity Method.

Foreign Operations

• Translating an Entity’s FS into aPresentation Currency

Presentation of FS in Foreign Currency

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FUNCTIONAL CURRENCYCurrency of the‘PRIMARY ECONOMICENVIRONMENT’ inwhich the Entityoperates.

Primary EconomicEnvironment isnormally the one inwhich the EntityPRIMARILYGENERATES ANDEXPENDS CASH.

4

FUNCTIONAL CURRENCY

� PRIMARY INDICATORS◦ The Currency that determines the Sales prices of

its goods and services and Operating Costs.

Sales Prices of its Goods and Services

Operating Costs

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EXAMPLE 1

Q What is the Functional Currency?

Facts Entity A is incorporated in UAE (Dinar). (Capital)

It has a Branch in Singapore (Singapore Dollar)

from where it sells Computers.

� All Sales are denominated in CHD (100%).

� Goods sold are imported from China (Yuan) (50%)

� Labour & Operating Cost in CHD (40%)

� Head Office & Corporate Expenses (Dinar) (5%)

� Borrowing Costs & Profits (Dinar) (5%)

A SINGAPORE DOLLAR (CHD)

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FUNCTIONAL CURRENCY

� SECONDARY INDICATORS◦ Currency of Generation of Funds from Financing

Activities – Issue of Debt and Equity Instruments.

◦ Currency of Retention of Receipts from

Operating Activities

Financing Activities

Retention of Receipts from Operating Activities

• Equity

• Debt

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EXAMPLE 2


Facts Entity A is incorporated in UAE (Dinar). (Capital)

It has a Branch in Singapore (Singapore Dollar) & in Malaysia (Malaysian Rupiah) from where it sells

Computers.

� Sales - CHD (40%), MRU (20%), Exports-USD (40%)

� Goods sold are imported from China (Yuan) (30%) & India (INR) (20%)

� Operating Cost in CHD (32%), MRU (08%)

� Head Office & Corporate Expenses (Dinar) (5%)

� Borrowing Costs & Profits (Dinar) (5%)

A UAE DINAR

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FUNCTIONAL CURRENCY OF

FOREIGN OPERATIONS� ADDITIONAL INDICATORS◦ Autonomy – Activities of Foreign Operation are

Extension of the Reporting Entity or carried with

a Significant Degree of Autonomy.

◦ Volume of Transactions with the Reporting Entity

◦ Impact of Cash Flows of Foreign Operation on

the Reporting Entity.

◦ Ability to service Debt Obligations without resort

to Reporting Entity.

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EXAMPLE 3


Treasury – Invests surplus money received from Subsidiaries in European Bond Markets & is a PE in Mauritius.

A USD (UNITED STATES DOLLAR)

10

Holding Company (USD)

(Operating Company)

Subsidiary 1

(INR)

TREASURY Department

Subsidiary 2

(Yuan)

Subsidiary

(JPY)

Subsidiary 3

(AUD)

EXAMPLE 4


A USD (UNITED STATES DOLLAR)

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Holding Company (USD)

(Operating Company)

IHC – 1

(Mauritius)

Subsidairy 1

(INR)

Subsidiary 2

(Yuan)

Subsidiary (JPY)

(Operating Company)

Subsidiary 3

(AUD)

FUNCTIONAL CURRENCY

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ENTITY

Primary Economic

Environment

Sales

PRIMARY

SECONDARY

ADDITIONAL INDICATORS (IN CASE OF FOREIGN OPERATION)

FUNCTIONAL CURRENCY

When Indicators are mixed and Functional

Currency is not obvious, MANAGEMENT

uses its JUDGEMENT.

PRIMARY

SECONDARY

ADDITIONAL

(ONLY FOR FOREIGN OPERATIONS)

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CHANGE IN FUNCTIONAL

CURRENCYFUNCTIONAL CURRENCY is

� Used CONSISTENTLY

� NOT Changed unless there is a

Change in Underlying Transactions,

Events and Conditions (primary

economic environment)

� If Changed, then apply

TRANSLATION procedures

PROSPECTIVELY.

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DEFINITIONS

15

Foreign

Currency

Currency other than ‘functional currency’.

Spot Exchange

Rate

The ‘exchange rate’ for immediate delivery.

Monetary items units of currency held and

assets and liabilities to be received or paid in a fixed or

determinable number of units of currency

INITIAL RECOGNITION

�Of FOREIGN CURRENCY TRANSACTION

� In FUNCTIONAL CURRENCY

� By applying SPOT EXCHANGE RATE

(b/w Functional Currency & Foreign Currency)

� At the Date of Transaction

� Average Rate is permitted, if the exchange

rates don’t fluctuate significantly.

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SUBSEQUENT

MEASUREMENTItems Translation Rate Recognition of

Exchange Differences

on Settlement or

Translation

Monetary Items Closing Rate on

Balance Sheet Date

To Profit or Loss #

Non-Monetary Items at

Historical Cost

Rate as at Date of

Transaction

Equity : If Gain or Loss

is recognized in Equity.

PL : If Gain or Loss is

recognized in PL.Non-Monetary Items at

Fair Value

Rate as at Date of Fair

Value Determination

# Exchange differences arising on monetary items that form part of a reporting

entity’s net investment in foreign operation shall be recognized, in consolidated

financial statements initially as a separate component of equity and recognized in

profit or loss on Disposal of the net investment.

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EXAMPLE 5 - TRANSLATION

Items of BS Monetary or

Non-Monetary

P&L, Equity or

None

Rate

Loans &

Receivable

M P & L Closing Rate

Available for Sale

(AFS) Equity

Investment

NM at FV Equity (OCI) Rate as at Date

of Determination

of Fair Value

PPE (Fixed

Assets)

NM at Cost Equity Rate as at Date

of Purchase

Investment

Property at FV

NM at FV P & L Rate as at Date

of Determination

of Fair Value

Prepaid

Expenses

NM NA Rate as at Date

of Transaction

Deferred

Revenue

NM NA Rate as at Date

of Transaction

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TRANSLATION TO

PRESENTATION CURRENCY *

Items Translation Rate Recognition of Exchange

Difference

Assets and Liabilities

(including Comparatives)

Closing Rate on Balance

Sheet Date

As a Separate Component

of Equity.

Income and Expenses


Exchange Rate at the date

of the transaction #

Equity


Historic Rate or Closing

Rate (Management Policy)

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* Except that of an entity whose functional currency is the currency of

a hyperinflationary economy.

# Average Rate is permitted, if the exchange rates don’t fluctuate

significantly.

SUMMARY

1• Determine Functional Currency

2

• Re-measurement of Foreign Currency Items into Functional Currency.

3

• Translation of Functional Currency to Presentation Currency

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DISCLOSURES

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1. The amount of Exchange

Differences recognised in P&L

except for those arising on

Financial Instruments measured at

Fair Value through P & L (IAS 39);

2. Net exchange differences classified

as a separate component of equity,

and a reconciliation of the amount

of such exchange differences at the

beginning and end of the period.

DISCLOSURES

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3. Presentation Currency is Not

Functional Currency – the said

Fact, disclosure of Functional

Currency, reason for using a

different presentation currency.

4. Change in the Functional Currency

of the Reporting Entity or a

Significant foreign operation – the

said Fact and the reason for the

change in the Functional Currency.

ind as 21 forex

Economy & Finance