Foreign currency explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Ind AS 21 answers two different questions. The first is how a company records and carries its own foreign currency transactions, and where the exchange differences go. The second is how it converts the results of an overseas subsidiary or branch into its reporting currency, where the differences go to other comprehensive income. This guide covers both and works an import payable, a foreign loan and a subsidiary's translation.
First fix the functional currency, the currency of the primary economic environment (paragraph 9). Record each foreign currency transaction at the spot rate on the transaction date (paragraph 21), retranslate monetary items at the closing rate with the difference in profit or loss (paragraphs 23 and 28), and keep non-monetary items at historical cost at the transaction-date rate. A foreign operation is translated at closing rate for assets and liabilities and transaction-date rates for income and expenses, with the difference in OCI (paragraph 39).
Ind AS as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015). This article also reflects the lack of exchangeability amendment made to Ind AS 21 by Notification No. G.S.R. 291(E) dated 7 May 2025, as printed in that compendium; other amendments notified after 1 April 2025 are not reflected in this article and should be checked on mca.gov.in. Rate decisions, hedging policies and treasury controls are part of the finance function that virtual CFO services support. FEMA rules on foreign borrowing and remittances are outside the scope of this article.
What the paragraphs require
| Paragraph | Requirement | What it means in practice |
|---|---|---|
| 9-12 | Functional currency: mainly the currency of sales prices and of costs; then financing and retained receipts; extra factors for a foreign operation; judgement if mixed | Primary indicators come first (paragraph 12) |
| 13, 35-37 | Not changed unless the underlying conditions change; a change is applied prospectively | Do not switch to suit the parent's reporting |
| 15, 32-33 | A monetary item not planned to be settled is part of the net investment | Trade balances are excluded (paragraph 15) |
| 16 | Monetary item = right to receive or obligation to pay a fixed or determinable number of currency units | Lease liabilities and cash-settled provisions are monetary; prepayments, goodwill, inventories and fixed assets are not |
| 21-22 | Initial recording at the spot rate on the transaction date; an average rate may approximate it | Not suitable if rates fluctuate significantly |
| 23 | Closing rate for monetary items; historical rate for non-monetary items at cost; rate at the date of fair value for fair-valued items | Inventory at cost stays at the original rate |
| 28-29 | Exchange differences on settlement or retranslation go to profit or loss | Each period carries its own difference |
| 38-41 | Translating to a presentation currency: assets and liabilities at closing rate, income and expenses at transaction-date or average rates, differences in OCI and a separate equity component | Non-controlling interests take their share |
| 45, 47 | Intragroup monetary balances are not eliminated without showing the difference; goodwill and fair value adjustments are treated as assets of the foreign operation | Translate them at the closing rate |
| 48 | On disposal, the accumulated differences are reclassified to profit or loss | Partial disposals follow paragraphs 48A to 48D |
| Appendix B | For advance consideration, the transaction date is when the non-monetary asset or liability is first recognised | Revenue is booked at the advance-receipt rate |
Companies that apply AS use a different method for foreign branches, described in our post on foreign branch accounts under AS 11. The standard is outlined in Ind AS 21 Effects of Changes in Foreign Exchange Rates.
When a currency cannot be exchanged. Notification No. G.S.R. 291(E) dated 7 May 2025 amended paragraphs 8 and 26 and added paragraphs 8A, 8B, 19A, 57A, 57B and Appendix A (lack of exchangeability). A currency is exchangeable into another when the entity can obtain the other currency within a time frame that allows for a normal administrative delay, through a market or exchange mechanism in which the transaction creates enforceable rights and obligations (paragraph 8); the assessment is made at a measurement date and for a specified purpose, and a currency is not exchangeable if no more than an insignificant amount of the other currency can be obtained (paragraphs 8A and 8B). In that case the entity estimates the spot rate, aiming at the rate of an orderly exchange transaction between market participants at the measurement date under prevailing economic conditions (paragraph 19A; Appendix A, paragraphs A11 to A17, on the techniques), and discloses the nature and financial effects, the rates used, the estimation process and the risks (paragraph 57A). Paragraph 60L applies the amendment to annual reporting periods beginning on or after 1 April 2025, and paragraph 60M says comparatives are not restated. All currencies in the worked example below are exchangeable.
The method
- Decide each entity's functional currency from paragraphs 9 to 12.
- Record each foreign currency transaction at the transaction-date spot rate.
- At each reporting date, retranslate monetary items at the closing rate and take the difference to profit or loss, unless it relates to a net investment (paragraph 32) or a qualifying hedge (paragraph 27).
- For a foreign operation, translate the trial balance: closing rate for assets and liabilities, transaction-date or average rate for income and expenses, historical rate for equity items.
- The balancing figure is the exchange difference in OCI and in the foreign currency translation reserve (paragraphs 39(c) and 41).
Worked example
The entity and all figures in this example are invented for illustration. All exchange rates are assumed, for arithmetic only.
Gomti Engineering Limited is an Indian company with the rupee as its functional and presentation currency.
Part A: an import payable (paragraphs 21, 23 and 28). On 1 February of Year 2 it buys goods for USD 50,000 at Rs 82.00, a payable of Rs 41,00,000 and inventory of the same amount. At 31 March the closing rate is Rs 83.50; on 30 April the payable is settled at Rs 84.00.
| Date | Rate (Rs/USD) | Payable (Rs) | Exchange loss (Rs) | Where |
|---|---|---|---|---|
| 1 February | 82.00 | 41,00,000 | Inventory 41,00,000 at historical rate (paragraph 23(b)) | |
| 31 March | 83.50 | 41,75,000 | 75,000 | Profit or loss, Year 2 |
| 30 April | 84.00 | 42,00,000 | 25,000 | Profit or loss, Year 3 |
Check: total loss 75,000 + 25,000 = 1,00,000 = USD 50,000 x (84.00 - 82.00). The inventory stays at Rs 41,00,000 throughout.
Foreign currency loan. A loan of USD 1,00,000 raised on 1 October at Rs 81.00 (Rs 81,00,000) is a monetary item. At 31 March the closing rate gives Rs 83,50,000, so the exchange loss is Rs 2,50,000 in profit or loss. The treatment where the loan finances a qualifying asset is covered in our article on borrowing costs under Ind AS 23.
| Particulars | Debit (Rs) | Credit (Rs) |
|---|---|---|
| Exchange loss (profit or loss) | 75,000 | |
| To Trade payable (USD) | 75,000 | |
| Exchange loss (profit or loss) | 2,50,000 | |
| To Foreign currency loan | 2,50,000 |
Part B: translating a foreign subsidiary (paragraphs 39 to 41 and 47). Gomti Engineering has a wholly owned subsidiary whose functional currency is the US dollar, set up on 1 April of Year 2 with share capital of USD 2,00,000 when the rate was Rs 80.00. For Year 2 the average rate (which approximates transaction-date rates, paragraph 40) is Rs 82.00 and the closing rate is Rs 83.50. The subsidiary's statements for Year 2 are:
| Item | USD | Rate | Rupees |
|---|---|---|---|
| Revenue | 5,00,000 | 82.00 average | 4,10,00,000 |
| Expenses | 4,40,000 | 82.00 average | 3,60,80,000 |
| Profit | 60,000 | 49,20,000 | |
| Assets | 4,20,000 | 83.50 closing | 3,50,70,000 |
| Liabilities | 1,60,000 | 83.50 closing | 1,33,60,000 |
| Net assets | 2,60,000 | 2,17,10,000 | |
| Share capital | 2,00,000 | 80.00 historical | 1,60,00,000 |
| Retained profit | 60,000 | per profit above | 49,20,000 |
| Foreign currency translation reserve | balancing | 7,90,000 |
Check on the balancing figure (paragraph 41). The reserve should arise from two sources. On the profit: USD 60,000 x (83.50 - 82.00) = Rs 90,000. On the opening net assets: USD 2,00,000 x (83.50 - 80.00) = Rs 7,00,000. Total Rs 7,90,000. Equity: 1,60,00,000 + 49,20,000 + 7,90,000 = Rs 2,17,10,000, equal to the translated net assets. The Rs 7,90,000 goes to other comprehensive income and stays in the reserve until disposal (paragraphs 39(c) and 48). If the subsidiary were not wholly owned, the share belonging to non-controlling interests would be allocated to them (paragraph 41).
Related items. If the parent had lent the subsidiary money with no plan to repay it, the exchange difference on that loan would go to OCI in the consolidated statements (paragraph 32). Goodwill from buying the subsidiary would be a dollar asset translated at the closing rate (paragraph 47). Where a customer pays USD in advance on 1 January at Rs 82.00 and the entity later supplies the goods, revenue is recorded at Rs 82.00, the date the contract liability was recognised (Appendix B, paragraph 8).
Presentation and disclosure
Paragraph 52 requires disclosure of the exchange differences recognised in profit or loss (other than on instruments at fair value through profit or loss) and of the net exchange differences in OCI accumulated in a separate component of equity, with a reconciliation of the opening and closing amounts. Paragraphs 53 and 54 add the functional currency, the reason for a different presentation currency and any change in functional currency. Where a hedge applies, see hedge accounting under Ind AS 109. Consolidation mechanics are in consolidation procedure under Ind AS 110.
Common mistakes
- Retranslating inventory or fixed assets at the closing rate (paragraph 23(b)).
- Using the parent's currency as the subsidiary's functional currency by default, rather than testing paragraphs 9 to 12.
- Putting translation differences on a foreign operation through profit or loss (paragraph 39(c)).
- Eliminating an intragroup loan in consolidation and losing the exchange difference (paragraph 45).
- Using the closing rate for the foreign subsidiary's income statement.
- Forgetting to reclassify the translation reserve on disposal (paragraph 48).
Need help with foreign currency accounting?
Choosing the functional currency, mapping monetary and non-monetary balances and building the translation workings for each foreign entity is easier with a template that auditors can follow. Our team can set this up as part of virtual CFO services for companies with overseas operations.
Key takeaways
- Functional currency comes first, and it is determined from facts, not chosen at will.
- Monetary items are retranslated at the closing rate; non-monetary items at cost keep the historical rate.
- Differences on the company's own transactions go to profit or loss.
- A foreign operation's translation differences go to OCI and the translation reserve until disposal.
- The reserve is a balancing figure that must reconcile to the rate movements.
Read next
- Hedge accounting under Ind AS 109: fair value and cash flow hedges
- Consolidation procedure under Ind AS 110: goodwill, NCI and intra-group eliminations
- ITFG clarifications on Ind AS 12, 16, 23 and 38
- Foreign branch accounts under AS 11
Disclaimer: Based on the Indian Accounting Standards as on 1 April 2025 (ICAI Compendium of Ind AS 2025-26, the standards notified under the Companies (Indian Accounting Standards) Rules, 2015) and, where named, the ITFG clarification bulletins of ICAI, as consulted on 4 October 2026. The worked example uses invented figures. Amendments notified after 1 April 2025 should be checked on mca.gov.in. This article is general information, not legal advice; check the official text before acting.