Objectives, Scope & Benefits – Ind AS 21

Introduction to Ind AS 21

• The importance of international trade in any business entity cannot be over-emphasised
• With globalisation, several entities have started to operate in more than one country
• Even those entities that do not operate in other countries either buy or sell goods and/or services from their overseas parties or customers
• Several entities have their own overseas branches which could either be in the form subsidiary or an associate
• The result of this is that the entities deal with multiple currencies all the time
• There are also requirements for an entity to present its financial statements in a currency other than the currency in which the trade takes place

• Foreign currency denominated financial statements should be expressed in a single currency so as to enable the users of such financial statements to understand and analyse the financial results of the entity
• The entity may also have been incorporated / registered as per the country where it operates and may be statutorily required to prepare the financial statements in such currency
• Hence, foreign currency denominated transactions should be translated into the currency of the country where the entity is registered as per the requirements of the entity’s GAAP
• Ind AS 21 deals primarily with the question as to how to include foreign currency transaction and report the foreign operations in its financial statements and in order to compare with which exchange rate or rates should be used and how to report the effects of such changes in the financial statements

Necessity for this standard

• The entity carrying on foreign activities may have transactions in foreign currencies or it may have foreign operations
• Since the financial statements viz., profit and loss account and balance sheet should be prepared in local currency in which the entity is regulated, foreign currency transaction should be converted into the local currency
• Technically, the local currency is known as functional currency, the definition of which is given elaborately in a subsequent lesson along with illustrations

Translation to functional currency

• When such foreign currency transactions occur, the exchange rate at which such a transaction should be converted into the functional currency becomes challenging, as there could be several exchange rates viz., historical rates at which such transactions occur and also the exchange rate on the date of which the financial statements are prepared
• When such transactions are converted into the functional currency of the entity, how should the difference in foreign exchange rate be treated in the books is also addressed in this standard

Foreign operations

• Foreign operation of an entity may take the form of a branch or subsidiary and such a foreign operation may be maintaining the books in foreign currency
• These transactions cannot be summed up with the transactions of the parent entity when converting the same into the functional currency of the entity, as the question again remains as to how and when such conversion should be made and at what rate

Presentation in different currency

• Financial statements may be required to be presented in a currency other than the functional currency of the entity
• This is usually done to present the financial statements to the investors or prospective investors of the entity to enable them to understand the impact of financial statements in their currency
• The exchange rate at which the transactions should be converted into the presentation currency is also mentioned in this standard along with the way in which the exchange difference should be accounted for

Objectives of Ind AS 21

The objectives of this Standard are:

1. To prescribe how to include foreign currency transactions and foreign operation in the financial statements of an entity
2. To specify which exchange rates to use and how to report the effects of such changes in exchange rates in the financial statements
3. How to translate financial statements into a presentation currency

Scope of Ind AS 21  

1. Accounting for transactions and balances in foreign currencies
2. Translating the results and financial position of foreign operations, branches, divisions, subsidiaries and other investees included in the financial statements of the entity by consolidation, proportionate consolidation or the equity method of accounting
3. Translating an entity’s results and financial position into a presentation currency

Outside the scope of Ind AS 21

1. Derivative transactions in foreign currencies and balances that are within the scope of Ind AS 109
2. Hedge accounting including the hedging of a net investment in a foreign operation
3. Presentation of cash flows arising from transactions in a foreign currency, or with the translation of cash flows of a foreign operation

Benefits:

• Main benefit achieved by Ind AS 21 is that it reduces the risk of foreign activities being incorrectly accounted for and the functional currency being determined incorrectly
• If the functional currency is not determined as per the requirements of the standard, it would result in a major impact on the financial statements of the entity
• The standard also clearly specifies the methodology by which the financial statements should be translated into the presentation currency and how the exchange difference on such translation should be accounted for

Ind AS Accounting Standards