Ind AS 21 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 sets out how to account for foreign currency transactions and foreign operations, and how to translate financial statements into a presentation currency. It builds on the functional currency concept, using the closing rate for monetary items and recognising exchange differences in profit or loss or OCI.
Overview
Ind AS 21, notified under the Companies (Indian Accounting Standards) Rules, 2015, addresses which exchange rates to use and how to report the effects of changes in exchange rates. Its central idea is the functional currency — each entity measures its results in the currency of its primary economic environment, then translates into a presentation currency if different.
Functional Currency
The functional currency is the currency that mainly influences the entity's sales prices and the costs of providing goods and services. Secondary indicators include the currency in which financing is raised and receipts from operations are retained. Once determined, the functional currency is not changed unless there is a change in the underlying transactions and conditions. Presentation currency, by contrast, may be any currency the entity chooses (Indian entities typically present in ₹).
Foreign Currency Transactions
A foreign currency transaction is recorded on initial recognition by applying the spot exchange rate at the transaction date. At each reporting date: monetary items (cash, receivables, payables, loans) are translated at the closing rate; non-monetary items at historical cost use the transaction-date rate; and non-monetary items at fair value use the rate when fair value was measured. Exchange differences on monetary items are recognised in profit or loss in the period they arise.
Translation of Foreign Operations
When consolidating a foreign operation whose functional currency differs from the group's presentation currency: assets and liabilities are translated at the closing rate; income and expenses at the rates at the dates of the transactions (average rates are a practical approximation); and all resulting exchange differences are recognised in other comprehensive income and accumulated in a separate component of equity — the Foreign Currency Translation Reserve (FCTR). On disposal of the foreign operation, the cumulative FCTR is reclassified from equity to profit or loss.
Worked Example
An Indian company (functional currency ₹) imports machinery on 1 January for USD 1,00,000 when the rate is ₹82/USD, recording a payable of ₹82,00,000. It pays on 31 March when the rate is ₹84/USD, paying ₹84,00,000. The exchange difference of ₹2,00,000 is a loss recognised in profit or loss. The machinery itself, a non-monetary asset, stays at its historical ₹82,00,000 and is not retranslated.
Policy Option for Long-Term Monetary Items
The Companies (Ind AS) Rules include a limited transitional option permitting an entity that had opted, under the previous GAAP, to accumulate or capitalise exchange differences on long-term foreign currency monetary items, to continue that treatment for items existing on the date of transition, subject to the conditions specified. New items generally follow the profit-or-loss rule.
Disclosures
Entities disclose the amount of exchange differences recognised in profit or loss, net exchange differences recognised in OCI and accumulated in a separate equity component (with a reconciliation), and, where the presentation currency differs from the functional currency, that fact and the reason.
Key Differences from AS 11
Ind AS 21 introduces the functional currency concept and the FCTR mechanism for consolidating foreign operations, and restricts the capitalisation of exchange differences that AS 11 (with the Companies' para 46/46A relaxation) more broadly allowed.