Treatment of exchange differences – Ind AS 21

Monetary Items
Functional Currency Inr 1
Functional Currency Inr 2
Functional Currency Inr 3

Executive  summary of treatment of exchange differences

Let us examine the treatment of exchange differences in the books of accounts with a practical example.

Let us analyse the treatment of foreign exchange differences arising on account of translating the foreign currency balances to the presentation currency in respect of monetary items.

The exchange differences arise either on settlement or on remeasurement at the reporting date.

In both these cases, the exchange differences are recognised in the profit and loss account. 

Let us briefly understand the difference between the FX revaluation entry and the FX translation entry. 

The FX revaluation is converting every transaction in foreign currency into functional currency at the exchange rate on the date of transaction. 

This means that there will be an entry in functional currency for each and every transaction in foreign currency. 

FX translation on the other hand is performed at the account level. 

There will be one journal entry for each account at the valuation date or at the settlement date based on the exchange rate on the date of valuation or settlement, as the case may be. 

Let us take an example of accounting for the exchange differences arising on account of purchase of equity shares designated in foreign currency.

Let us assume that the functional currency is INR.

Bought 100 shares at USD 59 per share.  Initial recognition is in USD and the entry is shown here.  The entry in foreign currency should be revalued in functional currency based on the foreign exchange rate on the date of transactions which is Rs.63/-.  The FX revaluation entered is shown here.  The liability to the broker should be settled on the date of settlement, which is T+3.  The entry would be in foreign currency as shown here.  The entry in foreign currency should be revalued based on the FX rate on the date of settlement which is Rs.63.22.  The revaluation entry is shown here.

On settlement of the liability to the broker, there would be either profit or loss due to the fluctuation in the foreign exchange rate between the date of purchase and the date of settlement.  Here in this case, the currency has moved against the entity resulting in a loss on settlement of the liability to the broker. 

So, FX translation entry needs to be passed on the date of settlement as shown here.  The gain or loss on settlement is computed as shown here. 

  1. When a monetary item is settled at a date subsequent to the date on which it is recognised initially, this may result in exchange difference.
  2. Exchange difference can also arise when the monetary items are remeasured at the reporting date.
  3. Such exchange differences are recognised in the profit and loss account during the period in which it arises.
  4. If the transaction is settled in a different accounting period than that of the period in which it was initially recognised, the exchange differences should be recognised in each period as per the exchange rate at those respective periods.  This is explained by the example given below:

Example – 1

On 5-Jan-X1, ABC Limited bought 100 shares of Zenith Inc @ $59 per share.  The exchange rate INR/USD was Rs.63 on 5-Jan-X1.  The settlement date for this transaction was 8-Jan-X1 and on that date, the exchange rate was 63.23.  Compute the currency gains or losses on the settlement date and pass necessary journal entry for the same.

On purchase of shares (Foreign Currency)

Journal 1

Revaluation – purchase of shares – Functional Currency

Journal 2

Settlement to broker (Foreign Currency)

Journal 3

Revaluation – settlement to broker (Functional Currency)

Journal 4

FX translation on payment to broker

Journal 5
Currency Gains 1

Example – 2

On 24-Dec-X0, ABC Limited bought 100 shares of Zenith Inc @ $59 per share.  The exchange rate INR/USD was Rs.63 on 4-Jan-X1.  The settlement date for this transaction was 4-Jan-X1 and on that date, the exchange rate was 63.45.  At the year end, the exchange rate was 63.17.  Compute the currency gains or losses on the settlement date and pass necessary journal entry for the same.

On purchase of shares (Foreign Currency)

Journal 6

Revaluation – purchase of shares – Functional Currency

Journal 7

FX translation on amount payable to broker

Journal 8
Currency Gains 2

Settlement to broker (Foreign Currency)

Journal 9

Revaluation – settlement to broker (Functional Currency)

Journal 10

FX translation on payment to broker

Journal 11
Currency Gains 3

Treatment in consolidated financial statements

  • Exchange differences arising on account of a monetary item forming part of a reporting entity’s net investment in foreign operation denominated in the functional currency of either the parent or the foreign operations are recognised directly in the other comprehensive income in the consolidated financial statements
  • Such exchange differences are first recognised in other comprehensive income and are classified from equity to profit and loss account on the disposal of the net investment

Exchange difference on non-monetary items

  • For gain or loss on non-monetary items that is recognised in the profit and loss account, the exchange component of such gain or loss is also recognised in profit and loss account
  • Similarly, when a gain or loss on a non-monetary item is recognised in other comprehensive income, the exchange component of such gain or loss is also recognised in other comprehensive income
  • For example, gains or losses on equity investments that are classified as FVOCI are recognised in other comprehensive income
  • Gain or loss on such equity investments are also recognised in other comprehensive income

Requirements of other standards

  • Certain Ind ASs mandates some gains or losses to be recognised in other comprehensive income
  • Typical examples would be gains or losses arising on account of revaluation of property, plant and equipment, which should be recognised in other comprehensive income as per Ind AS 16
  • Ind AS 21 requires the exchange difference arising on account of such revaluation to be recognised in other comprehensive income where the property, plant and equipment is measured at foreign currency and close for devaluation

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