Ind AS 21 Foreign Currency Transactions for Indian Companies
Reviewed by Ravi Sisodia · Last reviewed 13 August 2026
A transaction-to-close workflow for functional currency, retranslation and exchange differences.
Finin2min 2-Minute Summary
- Functional currency follows the primary economic environment; it is not chosen for presentation convenience.
- Foreign-currency transactions are initially recorded using the spot exchange rate at the transaction date; a practical average is acceptable only when it reasonably approximates actual rates.
- Foreign-currency monetary items are retranslated at the closing rate at each reporting date.
- Historical-cost non-monetary items stay translated using the rate at the transaction date; non-monetary items measured at fair value use the rate when fair value was measured.
- Exchange differences on ordinary monetary items generally go to profit or loss, subject to specified exceptions such as qualifying net-investment and hedge accounting situations.
Functional currency comes before exchange-rate mechanics
An Indian-incorporated company may transact in several currencies and even present its financial statements in a currency different from its functional currency. The accounting file should first determine the currency of the primary economic environment using the standard's indicators. Board preference, group reporting currency or loan denomination alone does not decide functional currency.
Once functional currency is set, every foreign-currency transaction enters the ledger through that lens. Use the transaction-date spot rate, or a rate that reasonably approximates it. During significant exchange-rate volatility, a monthly average can become an unreliable shortcut.
Separate monetary and non-monetary balances at close
Cash, trade receivables, trade payables and many loans are monetary because they involve a fixed or determinable number of currency units. They are retranslated at the closing rate, with exchange differences generally recognised in profit or loss unless a specific exception applies. Historical-cost inventory, prepayments and PPE are not retranslated simply because the exchange rate moved.
Where a non-monetary item is measured at fair value, the exchange rate on the fair-value measurement date is used. Advance consideration also requires care because a non-monetary advance can establish the exchange rate for the related portion of a later asset, expense or income item under the applicable guidance.
Worked example: USD receivable
An Indian exporter records a USD 100,000 receivable when the spot rate is Rs 84 per USD, creating an initial receivable of Rs 84 lakh. If the receivable remains outstanding at year-end when the closing rate is Rs 86, the monetary receivable is retranslated to Rs 86 lakh. The Rs 2 lakh exchange difference is generally recognised in profit or loss, subject to any different treatment required by another applicable Ind AS.
Foreign-currency close controls
- Document functional-currency indicators and changes in underlying economics.
- Classify every foreign-currency balance as monetary or non-monetary.
- Lock transaction, fair-value and closing-rate sources with dates.
- Reconcile realised and unrealised exchange differences.
- Separate net-investment and hedge-accounting items from ordinary trade balances.
- Check the current lack-of-exchangeability requirements when currency cannot be exchanged in an orderly manner.
Questions finance teams commonly ask
Can an Indian company choose USD as functional currency?
It can have a non-INR functional currency if the Ind AS 21 economic indicators support that conclusion; it is not a free choice.
Are foreign-currency receivables retranslated at year-end?
Yes. Monetary items are translated using the closing rate.
Do historical-cost PPE and inventory use the closing rate?
No. Historical-cost non-monetary items use the rate at the date of the transaction that resulted in recognition.
Are all exchange differences taken to profit or loss?
Ordinary monetary-item differences generally are, but Ind AS 21 and other standards contain specified exceptions.
Official sources
- ICAI - Ind AS 21 Effects of Changes in Foreign Exchange Rates - Paras 16, 20-37: monetary items, initial recognition, retranslation and functional-currency changes
- ICAI - Compendium 2025-26 - Includes the 2025 amendments in the current compendium
- ICAI - Notified Ind AS Rules - Current amendment/rules gateway
- Finin2min Ind AS hub - use the standard-level page for broader paragraph-by-paragraph learning.
Disclaimer
Professional-use caution: Foreign-currency caution: determine functional currency and item classification from the entity's economics before applying exchange-rate mechanics or presentation choices. Educational and professional reference only; confirm the current notified text and the facts of your case before relying on this page.