FAQs – Effects of changes in FX Rates

Difference between FX translation and FX revaluation What is the difference between FX translation and FX revaluation? Foreign currency translations are first recorded initially in the units of the foreign currency. Foreign currency is a currency other than the functional currency of the entity. Each and every foreign currency translation is revalued in the functional currency based on the official exchange rate at the end of the day. Therefore, for each transaction in foreign currency, there will be a corresponding transaction in the functional currency of the entity. This process is known as effects revaluation. The standard permits the revaluation…

Carrying amount of a monetary item How is the carrying amount of a monetary item determined on a valuation date for a foreign currency transaction? The carrying amount of an item is determined in conjunction with other relevant Standards. For example, property, plant and equipment may be measured in terms of fair value or historical cost in accordance with Ind AS 16 ‘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…

Carrying amount of a non-monetary item How is the carrying amount of a non-monetary item determined on a valuation date for a foreign currency transaction? The carrying amount is determined by comparing the cost or carrying amount, as appropriate, translated at the exchange rate at the date when that amount was determined (ie, the rate at the date of the transaction for an item measured in terms of historical cost); and 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…

Exchange differences on monetary items How are the exchange differences on monetary items dealt with?  Exchange differences arise from: the settlement of monetary items at a subsequent date to initial recognition; remeasuring an entity’s monetary items at rates different from those at which they were initially recorded (either during the reporting period or at the previous reporting periods); Such exchange differences must be recognised as income or expenses in the period in which they arise; and If the transaction is settled in a different accounting period to that of the initial recognition of the transaction, the exchange difference to be…

Exchange differences from non-monetary items How are the exchange differences arising from non-monetary items dealt with? Non-monetary items When a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss is also recognised in profit or loss. When a gain or loss on a non-monetary item is recognised directly in other comprehensive income, any exchange component of that gain or loss is recognised directly in other comprehensive income (for example, gain or loss on equity securities measured at FVOCI). Other comprehensive income Other Ind ASs require some gains and…

Exchange differences from the presentation currency How are the exchange differences arising from the presentation currency dealt with? Exchange differences are recognised in other comprehensive income. These exchange differences are not recognised as income or expenses for the period because the changes in exchange rates have little or no direct effect on the present and future cash flows from the entity’s operations. The cumulative amount of the exchange differences is presented 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…

Difference between AS 11 and Ind AS 21? Conceptually, is there any difference between AS 11 and Ind AS 21? In AS 11, there is no concept of functional currency. Foreign currency is a currency other than the reporting currency. Also, there is no concept of presentation currency in AS 11. As per Ind AS 21, functional currency is the currency of the primary economic environment in which an entity operates. Foreign currency is a currency other than the functional currency. Presentation currency is the currency in which the financial statements are prepared. AS 11 is applicable to exchange differences…

Transaction are covered by Ind AS 21 What type of transaction are covered by Ind AS 21? Accounting for transactions and balances in foreign currencies Translating the results and financial position of foreign operations, included in the financial statements of the entity by consolidation or the equity method Translating an entity’s results and financial position into a presentation currency 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…

Transaction are outside the scope of Ind AS 21 What type of transaction are outside the scope of Ind AS 21? Derivative transactions and balances that are within the scope of Ind AS 109 ‘Financial Instruments’. 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…

Importance of functional currency? What is the importance of functional currency? The determination of functional currency is extremely important as incorrectly determining the same will affect the financial statements in a big way, causing the transactions in the functional currency to be treated as, though they were foreign currency transactions. Exchange differences will be recognised on transactions for which no foreign exchange difference should have arisen. Similarly, transactions that should have led to recognition of foreign exchange differences, will not be provided for. This may have a significant impact on both the statement of comprehensive income and the statement of…

Financial statements presented in any currency Can an entity present its financial statements in any currency of its choice? Yes, an entity can present its financial statements in any currency of its choice which is known as presentation currency. Needless to say that these statements would be in addition to the financial statements prepared in the functional currency of the entity. While the application of certain factors are necessary to determine the functional currency based on a set of facts and circumstances, presentation currency is a currency which the entity can chose on its own. Such selected presentation currency has…

Difference between monetary and non-monetary items What is the difference between monetary and non-monetary items? Monetary items are those assets and liabilities that are cash or readily convertible into cash. However, the essential feature is the existence of a right to receive or obligation to deliver a fixed or determinable number of units of a currency. For example, provisions to be settled in cash or cash dividends which are already recognised as liability or liabilities such as employee benefits to be paid in cash are examples of monetary items that are liabilities. Investments in debt securities held solely with the…