Ind AS 21
The Effects of Changes in Foreign Exchange Rates

Updated analysis: Ind AS 21 Foreign Currency Accounting: Closing Rates, Advances and Translation

Added and reviewed on 9 October 2026. This section adds worked examples and current-year controls to the guide above; where the two differ, follow the standard text and the latest notification.

Finin2min two-minute summary

• First decide the functional currency, not simply the currency used on the invoice or the presentation currency shown in financial statements.
• A foreign-currency monetary asset or liability normally moves to the closing rate; a historical-cost non-monetary item generally retains the transaction-date rate.
• An advance paid for equipment requires separate analysis from an unpaid trade payable. Importing both at the same closing rate can distort asset cost and foreign-exchange profit.
• Currency translation for a foreign operation is not the same exercise as revaluing the parent company's dollar trade receivable.
• The 2025 lack-of-exchangeability changes are part of the official Ind AS 21 text and require a purpose-specific assessment and disclosures.

At-a-glance reference table

Begin with the currency map

Consider an Indian manufacturing subsidiary which buys machinery in dollars, sells goods mainly to Indian customers in rupees, pays most staff in rupees and borrows in rupees. Its functional currency is likely INR despite a large imported machinery programme. A group's preference to consolidate in USD does not override the entity's own primary economic environment. Keep a signed functional-currency assessment documenting sales prices, labour and input costs, financing, and the autonomy of any foreign operation. Only then identify each foreign-currency monetary and non-monetary line in the trial balance.

The accounting file needs four dates: transaction recognition, payment or settlement, reporting date, and any advance consideration date. Each date may produce a different exchange rate and different journal result. Do not mechanically use the bank's remittance rate for every recognition event. The appropriate spot or approximating rate depends on the applicable transaction date; an average is useful only when it reasonably approximates actual rates.

Initial recognition and year-end measurement

Suppose goods are purchased for USD 20,000 on 1 December when the spot rate is ₹83.50. The initial liability and inventory cost are ₹16,70,000, ignoring other directly attributable costs. At 31 March the supplier remains unpaid and the closing rate is ₹85.10. The monetary payable becomes ₹17,02,000. The ₹32,000 exchange loss goes through profit or loss in an ordinary trade-payable fact pattern; the inventory recorded at historical cost is not increased merely because the unpaid dollar liability moved. When the payable is settled, calculate the further exchange difference against the carrying amount at the last reporting date.

Contrast this with imported machinery where USD 8,000 was prepaid at ₹83 and USD 12,000 became payable on delivery at ₹86. If the advance met the conditions for a non-monetary prepayment, the relevant foreign-currency cost is locked at the advance-date exchange rate for that portion: ₹6,64,000 plus ₹10,32,000 for the unpaid portion, before other capitalisable charges. Do not assume that an advance is always monetary: read its settlement terms and what the payer is entitled to receive.

Separate financial statements versus translation of a foreign operation

A foreign subsidiary with a different functional currency creates a second accounting layer. Translate assets and liabilities at the closing rate, and income and expenses at dates of the underlying transactions (or properly justified averages). The resulting translation difference is generally recognised in other comprehensive income and accumulated in equity, subject to the specific standard requirements. It is not the same as the rupee exchange gain on an Indian company's overseas debtor.

Where an intercompany long-term monetary item forms part of a net investment in a foreign operation, settlement plans and foreseeable likelihood of settlement matter. Do not label routine intercompany payables as net investments merely because repayment is delayed. Examine whether disposal or change in control triggers translation reserve treatment rather than assuming every sale recycles the entire amount.

What changes when a currency is not exchangeable?

A published official rate alone does not establish that an entity can obtain the currency for the intended purpose and amount. The amended standard addresses the assessment of exchangeability and estimation of a spot exchange rate when exchangeability is absent. The purpose, amount and measurement date are crucial. A currency may be exchangeable for purchases of essential imports but effectively unavailable for dividend remittances. The estimation method must seek the rate that reflects the measurement objective, supported by observable evidence where possible.

Disclosures should help users understand how lack of exchangeability affects the entity's financial position, performance and cash flows. Document restricted remittance channels, regulatory notices, observable transactions, estimates and estimation uncertainty. A rate scraped from an unauthorised marketplace is not by itself acceptable audit evidence.

Suggested month-end accounting controls

Prepare an open-item listing of currency, original amount, transaction rate, settlement status, carrying amount and closing rate. Tie that list to AP, AR, treasury confirmations and the general ledger. Separate advances, inventory, PPE, loans, derivatives, intercompany balances and foreign subsidiary translation. If hedges exist, evaluate their accounting under Ind AS 109 instead of forcing all hedge movements through ordinary Ind AS 21 remeasurement.

Record the journal bridge explicitly: original payable ₹16,70,000; period-end payable ₹17,02,000; increase ₹32,000; expense ₹32,000. Keep source exchange rate evidence and a reviewer sign-off. Explain material differences between GST customs valuation, income-tax treatment and books rather than assuming the three use the same reference rate. A clean bridge prevents apparent FX gains from arising solely because an advance was reversed at the wrong rate.

Common errors worth correcting

A closing-rate translation should not revalue historical-cost furniture or an item of inventory merely because it was purchased overseas. An average rate should not substitute for transaction rates during extreme volatility. Net-investment treatment cannot be chosen for desired OCI presentation. Finally, the group's presentation currency does not automatically become every subsidiary's functional currency. Each error changes the story the financial statements tell and requires its own evidence trail.

Questions readers ask

Can INR be functional currency when the company has dollar sales?

Yes, depending on the whole primary economic environment. Assess primary and secondary factors; sales currency alone may be insufficient.

Are foreign-exchange differences always in profit or loss?

No. Translation of foreign operations and certain net-investment situations can affect OCI under the applicable requirements.

What happens to a prepaid machinery instalment?

Analyse whether the advance is non-monetary. If so, it normally retains the advance-date rate for the covered portion.

Can the bank rate be used automatically?

A bank transaction rate may be evidence for actual settlements. It is not an automatic substitute for the appropriate recognition or reporting-date spot rate.

Does a published central-bank exchange rate prove exchangeability?

Not necessarily. Assess practical access for the relevant purpose, amount and measurement date.

Which files should an auditor request?

A functional-currency memo, transactions ledger, outstanding foreign-currency balances, rate evidence, translations, management assumptions and a signed reconciliation.

Official sources for this update

• ICAI Ind AS 2025-26, Volume II
• ICAI educational material on Ind AS 21

Related reading on Finin2min

• Foreign-Currency Monetary Item Uses Wrong Closing Rate
• Ind AS 21 Foreign Currency Transactions for Indian Companies
• Natural Hedge vs Financial Hedge for Foreign-Currency Debt
• Intercompany Foreign-Currency Balance Left Outstanding
• Companies Act, 2013 study guide hub