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The Effects of Changes in Foreign Exchange Rates

Ind AS - 021 - B. Indian Accounting Standards (Ind AS) - Companies Law - Ind AS - 021 - Indian Accounting Standard (Ind AS) 21 (This Indian Accounting Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles.) Objective 1 An entity may carry on foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. In addition, an entity may present its financial statem .....

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currencies, 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 .....

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ment 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 out requirements for the resulting financial statements to be described as complying with Indian Accounting Standards (Ind ASs). For translations of financial information into a foreign currency that do not meet these requirements, this Standard specifies information to be disclosed. 7 This Standard does not apply to t .....

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monetary items. Definitions 8 The following terms are used in this Standard with the meanings specified: Closing rate is the spot exchange rate at the end of the reporting period. Exchange difference is the difference resulting from translating a given number of units of one currency into another currency at different exchange rates. Exchange rate is the ratio of exchange for two currencies. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an or .....

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ich the entity operates. A group is a parent and all its subsidiaries. Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency. Net investment in a foreign operation is the amount of the reporting entity s interest in the net assets of that operation. Presentation currency is the currency in which the financial statements are presented. Spot exchange rate is the exchange rate for immediate delivery. Elabor .....

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s 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 receipt .....

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rather than being carried out with a significant degree of autonomy. An example of the former is when the foreign operation only sells goods imported from the reporting entity and remits the proceeds to it. An example of the latter is when the operation accumulates cash and other monetary items, incurs expenses, generates income and arranges borrowings, all substantially in its local currency. (b) whether transactions with the reporting entity are a high or a low proportion of the foreign opera .....

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ent to determine the functional currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. As part of this approach, management gives priority to the primary indicators in paragraph 9 before considering the indicators in paragraphs 10 and 11, which are designed to provide additional supporting evidence to determine an entity s functional currency. 13 An entity s functional currency reflects the underlying transactions, events and conditio .....

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cy a currency other 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 paragr .....

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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. Monetary items 16 The essential feature of a monetary item is a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency. Examples include: pensions and other employee benefits to be paid in cash; provisions that are to be settled in cash; and cash dividends .....

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ounts prepaid for goods and services (eg prepaid rent); goodwill; intangible assets; inventories; property, plant and equipment; and provisions that are to be settled by the delivery of a nonmonetary asset. Summary of the approach required by this Standard 17 In preparing financial statements, each entity-whether a stand-alone entity, an entity with foreign operations (such as a parent) or a foreign operation (such as a subsidiary or branch)-determines its functional currency in accordance with .....

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and financial position of each individual entity included in the reporting entity to be translated into the currency in which the reporting entity presents its financial statements. This Standard permits the presentation currency of a reporting entity to be any currency (or currencies). The results and financial position of any individual entity within the reporting entity whose functional currency differs from the presentation currency are translated in accordance with paragraphs 38- 50. 19 Thi .....

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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 .....

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often used, for example, an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. However, if exchange rates fluctuate significantly, the use of the average rate for a period is inappropriate. Reporting at the ends of subsequent reporting periods 23 At the end of each reporting period: (a) foreign currency monetary items shall be translated using the closing rate; (b) non-monetary items that are measured in terms of historic .....

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6, Property, Plant and Equipment. Whether the carrying amount is determined on the basis of historical cost or on the basis of fair value, if the amount is determined in a foreign currency it is then translated into the functional currency in accordance with this Standard. 25 The carrying amount of some items is determined by comparing two or more amounts. For example, the carrying amount of inventories is the lower of cost and net realisable value in accordance with Ind AS 2, Inventories. Simil .....

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e rate at the date of the transaction for an item measured in terms of historical 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 a .....

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unting 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 instruments in a cash flow hedge are recognised initially in other comprehensive income to the extent that the hedge is effective. 28 Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different .....

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in which it occurred, all the exchange difference is recognised in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognised in each period up to the date of settlement is determined by the change in exchange rates during each period. 30 When a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange component of that gain or loss shall be recognised in other comprehensive income. Conversely, w .....

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requires the revalued amount to be translated using the rate at the date the value is determined, resulting in an exchange difference that is also recognised in other comprehensive income. 32 Exchange differences arising on a monetary item that forms part of a reporting entity s net investment in a foreign operation (see paragraph 15) shall be recognised in profit or loss in the separate financial statements of the reporting entity or the individual financial statements of the foreign operation, .....

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ted 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 f .....

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s books and records in a currency other than its functional currency, at the time the entity prepares its financial statements all amounts are translated into the functional currency in accordance with paragraphs 20-26. This produces the same amounts in the functional currency as would have occurred had the items been recorded initially in the functional currency. For example, monetary items are translated into the functional currency using the closing rate, and non-monetary items that are measu .....

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elevant to the entity. Accordingly, once the functional currency is determined, it can be changed only if there is a change to those underlying transactions, events and conditions. For example, a change in the currency that mainly influences the sales prices of goods and services may lead to a change in an entity s functional currency. 37 The effect of a change in functional currency is accounted for prospectively. In other words, an entity translates all items into the new functional currency u .....

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rrency 38 An entity may present its financial statements in any currency (or currencies). If the presentation currency differs from the entity s functional currency, it translates its results and 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 .....

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ates 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 fluctuate significantly, the use of the average rate for a period is inappropriate. 41 The exchange differences referred to in paragraph 39 .....

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resented in a separate component of equity until disposal of the foreign operation. When the exchange differences relate to a foreign operation that is consolidated but not wholly-owned, accumulated exchange differences arising from translation and attributable to non-controlling interests are allocated to, and recognised as part of, non-controlling interests in the consolidated balance sheet. 42 The results and financial position of an entity whose functional currency is the currency of a hyper .....

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financial statements (ie not adjusted for subsequent changes in the price level or subsequent changes in exchange rates). 43 When an entity s functional currency is the currency of a hyperinflationary economy, the entity shall restate its financial statements in accordance with Ind AS 29 before applying the translation method set out in paragraph 42, except for comparative amounts that are translated into a currency of a nonhyperinflationary economy (see paragraph 42(b)). When the economy cease .....

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rrency 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), .....

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nised in profit or loss or, if it arises from the circumstances described in paragraph 32, it is recognised in other comprehensive income and accumulated in a separate component of equity until the disposal of the foreign operation. 46 When the financial statements of a foreign operation are as of a date different from that of the reporting entity, the foreign operation often prepares additional statements as of the same date as the reporting entity s financial statements. When this is not done, .....

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od of the reporting entity in accordance with Ind AS 110. The same approach is used in applying the equity method to associates and joint ventures in accordance with Ind AS 28. 47 Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of that foreign operation shall be treated as assets and liabilities of the foreign operation. Thus they shall be expressed in the functional currenc .....

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isposal is recognised (see Ind AS 1, Presentation of Financial Statements). 48A In addition to the disposal of an entity s entire interest in a foreign operation, the following partial disposals are accounted for as disposals: (a) when the partial disposal involves the loss of control of a subsidiary 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 th .....

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l 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 comprehensive income. 48D A p .....

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ecause of an impairment recognised by the investor, does not constitute a partial disposal. Accordingly, no part of the foreign exchange gain or loss recognised in other comprehensive income is reclassified to profit or loss at the time of a write-down. Tax effects of all exchange differences 50 Gains and losses on foreign currency transactions and exchange differences arising on translating the results and financial position of an entity (including a foreign operation) into a different currency .....

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er comprehensive income and accumulated in a separate component of equity, and a reconciliation of the amount of such exchange differences at the beginning and end of the period. 53 When the presentation currency is different from the functional currency, that fact shall be stated, together with disclosure of the functional currency and the reason for using a different presentation currency. 54 When there is a change in the functional currency of either the reporting entity or a significant fore .....

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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 acco .....

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ary information is displayed; and (c) disclose the entity s functional currency and the method of translation used to determine the supplementary information. Appendix A References to matters contained in other Indian Accounting Standards This Appendix is an integral part of the Ind AS. This appendix lists the appendix which is a part of another Indian Accounting Standard and makes reference to Ind AS 21, . 1. Appendix C, Hedges of a Net Investment in a Foreign Operation, contained in Ind AS 109 .....

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