TMI BlogThe Effects of Changes in Foreign Exchange RatesX X X X Extracts X X X X X X X X Extracts X X X X ..... ncies, except for those derivative transactions and balances that are within the scope of Ind AS 109, Financial Instruments; (b) in translating the results and financial position of foreign operations that are included in the financial statements of the entity by consolidation or the equity method; and (c) in translating an entity s results and financial position into a presentation currency. 4 Ind AS 109 applies to many foreign currency derivatives and, accordingly, these are excluded from the scope of this Standard. However, those foreign currency derivatives that are not within the scope of Ind AS 109 (eg some foreign currency derivatives that are embedded in other contracts) are within the scope of this Standard. In addition, this Standard applies when an entity translates amounts relating to derivatives from its functional currency to its presentation currency. 5 This Standard does not apply to hedge accounting for foreign currency items, including the hedging of a net investment in a foreign operation. Ind AS 109 applies to hedge accounting. 6 This Standard applies to the presentation of an entity s financial statements in a foreign currency and sets ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Elaboration on the definitions Functional currency 9 The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. An entity considers the following factors in determining its functional currency: (a) the currency: (i) that mainly influences sales prices for goods and services (this will often be the currency in which sales prices for its goods and services are denominated and settled); and (ii) of the country whose competitive forces and regulations mainly determine the sales prices of its goods and services. (b) the currency that mainly influences labour, material and other costs of providing goods or services (this will often be the currency in which such costs are denominated and settled). 10 The following factors may also provide evidence of an entity s functional currency: (a) the currency in which funds from financing activities (ie issuing debt and equity instruments) are generated. (b) the currency in which receipts from operating activities are usually retained. 11 The following additional factors are considered in determining the functional currency of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her than the functional currency determined in accordance with this Standard (such as the functional currency of its parent). Net investment in a foreign operation 15 An entity may have a monetary item that is receivable from or payable to a foreign operation. An item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, a part of the entity s net investment in that foreign operation, and is accounted for in accordance with paragraphs 32 and 33. Such monetary items may include long-term receivables or loans. They do not include trade receivables or trade payables. 15A The entity that has a monetary item receivable from or payable to a foreign operation described in paragraph 15 may be any subsidiary of the group. For example, an entity has two subsidiaries, A and B. Subsidiary B is a foreign operation. Subsidiary A grants a loan to Subsidiary B. Subsidiary A s loan receivable from Subsidiary B would be part of the entity s net investment in Subsidiary B if settlement of the loan is neither planned nor likely to occur in the foreseeable future. This would also be true if Subsidiary A were itself a foreign operation. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring financial statements or an entity preparing separate financial statements in accordance with Ind AS 27, Separate Financial Statements, to present its financial statements in any currency (or currencies). If the entity s presentation currency differs from its functional currency, its results and financial position are also translated into the presentation currency in accordance with paragraphs 38 50. Reporting foreign currency transactions in the functional currency Initial recognition 20 A foreign currency transaction is a transaction that is denominated or requires settlement in a foreign currency, including transactions arising when an entity: (a) buys or sells goods or services whose price is denominated in a foreign currency; (b) borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; or (c) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency. 21 A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical cost); and (b) the net realisable value or recoverable amount, as appropriate, translated at the exchange rate at the date when that value was determined (eg the closing rate at the end of the reporting period). The effect of this comparison may be that an impairment loss is recognised in the functional currency but would not be recognised in the foreign currency, or vice versa. 26 When several exchange rates are available, the rate used is that at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred at the measurement date. If exchangeability between two currencies is temporarily lacking, the rate used is the first subsequent rate at which exchanges could be made. Recognition of exchange differences 27 As noted in paragraph 3 (a) and 5, Ind AS 109 applies to hedge accounting for foreign currency items. The application of hedge accounting requires an entity to account for some exchange differences differently from the treatment of exchange differences required by this Standard. For example, Ind AS 109 requires that exchange differences on monetary items that qualify as hedging instrumen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments when the foreign operation is a subsidiary), such exchange differences shall be recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment in accordance with paragraph 48. 33 When a monetary item forms part of a reporting entity s net investment in a foreign operation and is denominated in the functional currency of the reporting entity, an exchange difference arises in the foreign operation s individual financial statements in accordance with paragraph 28. If such an item is denominated in the functional currency of the foreign operation, an exchange difference arises in the reporting entity s separate financial statements in accordance with paragraph 28. If such an item is denominated in a currency other than the functional currency of either the reporting entity or the foreign operation, an exchange difference arises in the reporting entity s separate financial statements and in the foreign operation s individual financial statements in accordance with paragraph 28. Such exchange differences are recognised in other comprehensive income in the financial statements that include the foreign operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial position into the presentation currency. For example, when a group contains individual entities with different functional currencies, the results and financial position of each entity are expressed in a common currency so that consolidated financial statements may be presented. 39 The results and financial position of an entity whose functional currency is not the currency of a hyperinflationary economy shall be translated into a different presentation currency using the following procedures: (a) assets and liabilities for each balance sheet presented (ie including comparatives) shall be translated at the closing rate at the date of that balance sheet; (b) income and expenses for each statement of profit and loss presented (ie including comparatives) shall be translated at exchange rates at the dates of the transactions; and (c) all resulting exchange differences shall be recognised in other comprehensive income. 40 For practical reasons, a rate that approximates the exchange rates at the dates of the transactions, for example an average rate for the period, is often used to translate income and expense items. However, if exchange rates fluctuat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... level at the date the entity ceased restating its financial statements. Translation of a foreign operation 44 Paragraphs 45 47, in addition to paragraphs 38 43, apply when the results and financial position of a foreign operation are translated into a presentation currency so that the foreign operation can be included in the financial statements of the reporting entity by consolidation or the equity method. 45 The incorporation of the results and financial position of a foreign operation with those of the reporting entity follows normal consolidation procedures, such as the elimination of intragroup balances and intragroup transactions of a subsidiary (see Ind AS 110, Consolidated Financial Statements ). However, an intragroup monetary asset (or liability), whether short-term or long-term, cannot be eliminated against the corresponding intragroup liability (or asset) without showing the results of currency fluctuations in the consolidated financial statements. This is because the monetary item represents a commitment to convert one currency into another and exposes the reporting entity to a gain or loss through currency fluctuations. Accordingly, in the consolidated f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidiary that includes a foreign operation, regardless of whether the entity retains a noncontrolling interest in its former subsidiary after the partial disposal; and (b) when the retained interest after the partial disposal of an interest in a joint arrangement or a partial disposal of an interest in an associate that includes a foreign operation is a financial asset that includes a foreign operation. 48B On disposal of a subsidiary that includes a foreign operation, the cumulative amount of the exchange differences relating to that foreign operation that have been attributed to the non-controlling interests shall be derecognised, but shall not be reclassified to profit or loss. 48C On the partial disposal of a subsidiary that includes a foreign operation, the entity shall re-attribute the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensive income to the non-controlling interests in that foreign operation. In any other partial disposal of a foreign operation the entity shall reclassify to profit or loss only the proportionate share of the cumulative amount of the exchange differences recognised in other comprehensi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd ASs only if they comply with all the requirements of each applicable Standard including the translation method set out in paragraphs 39 and 42. 56 An entity sometimes presents its financial statements or other financial information in a currency that is not its functional currency without meeting the requirements of paragraph 55. For example, an entity may convert into another currency only selected items from its financial statements. Or, an entity whose functional currency is not the currency of a hyperinflationary economy may convert the financial statements into another currency by translating all items at the most recent closing rate. Such conversions are not in accordance with Ind ASs and the disclosures set out in paragraph 57 are required. 57 When an entity displays its financial statements or other financial information in a currency that is different from either its functional currency or its presentation currency and the requirements of paragraph 55 are not met, it shall: (a) clearly identify the information as supplementary information to distinguish it from the information that complies with Ind ASs; (b) disclose the currency in which the supple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of advance consideration in a foreign currency is not restricted to revenue transactions. Accordingly, this appendix clarifies the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income when an entity has received or paid advance consideration in a foreign currency. Scope 4 This Appendix applies to a foreign currency transaction (or part of it) when an entity recognises a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration before the entity recognises the related asset, expense or income (or part of it). 5 This Appendix does not apply when an entity measures the related asset, expense or income on initial recognition: (a) at fair value; or (b) at the fair value of the consideration paid or received at a date other than the date of initial recognition of the non-monetary asset or non-monetary liability arising from advance consideration (for example, the measurement of goodwill applying Ind AS 103, Business Combinations ). 6 An entity is not required to apply this Appendix to: (a) income taxes; or (b) insurance c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endix is only to bring out the major differences, if any, between Indian Accounting Standard (Ind AS) 21 and the corresponding International Accounting Standard (IAS) 21, The Effects of Changes in Foreign Exchange Rates, 2 [ and IFRIC 22 Foreign Currency Transactions and Advance Consideration ] issued by the International Accounting Standards Board. Comparison with IAS 21, The Effects of Changes in Foreign Exchange Rates 3 [and IFRIC 22] 1 The transitional provisions given in IAS 21 have not been given in the Ind AS 21, since all transitional provisions related to Indian ASs, wherever considered appropriate, have been included in Ind AS 101, First-time Adoption of Indian Accounting Standards, corresponding to IFRS 1, First-time Adoption of International Financial Reporting Standards. 2 Paragraph 7AA has been inserted to scope out the long-term foreign currency monetary items for which an entity has opted for the exemption given in paragraph D13AA of Appendix D to Ind AS 101 allowing to continue the policy adopted for accounting for exchange differences arising from translation of such long-term foreign currency monetary items recognised in the financial statements fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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