Discussions about Ind AS 21 usually start in the wrong place. They start with which exchange rate to enter on an invoice, when the questions that actually determine the shape of the accounts were settled long before that invoice was raised: what currency does this entity really operate in, and what happens when the group has to pull a foreign subsidiary into a rupee balance sheet.
Those two questions decide whether a movement lands in profit or in a reserve, whether it will ever come back, and how much of your reported equity is really currency rather than performance. A third question joined them last year, when the standard was amended to deal with currencies that cannot readily be exchanged at all. This guide takes those three in turn.
What this guide covers — at a glance
- Ind AS 21 has two halves. One deals with individual transactions in a foreign currency. The other deals with translating an entire foreign operation into the reporting currency. The second half is where the larger numbers live.
- Functional currency is a matter of fact, not preference. It is the currency of the primary economic environment in which an entity operates, and the standard sets out which indicators dominate when they conflict.
- An entity may choose any presentation currency, but it cannot choose its functional currency. Confusing the two is the most consequential error in this area.
- Translating a foreign subsidiary uses three different rates — closing rate for assets and liabilities, transaction-date rate for income and expenses, and historical rates for equity — with the difference parked in a translation reserve.
- That reserve recycles. On disposal of the foreign operation, the accumulated translation reserve is reclassified to profit or loss, which can produce a sizeable gain or loss in the year of exit.
- A 2025 amendment added rules for currencies that cannot be exchanged. Notified on 7 May 2025 and applying from financial years beginning 1 April 2025, it first affects the FY 2025-26 accounts being finalised now.
01Functional Currency: The Decision Everything Rests On
Functional currency is the currency of the primary economic environment in which an entity operates — normally the environment in which it mainly generates and spends cash. It is determined from facts, and once determined it governs how every transaction is recorded.
The standard ranks the evidence. Some indicators carry more weight than others, and the ranking matters precisely in the cases where the indicators disagree.
| Indicator | Weight | What to look at |
|---|---|---|
| Sales prices | Primary | The currency that mainly influences the selling price of goods and services, and the currency in which prices are denominated and settled |
| Competitive forces and regulation | Primary | The country whose market forces and regulations mainly determine the selling price |
| Costs | Primary | The currency that mainly influences labour, material and other costs of providing goods and services |
| Financing | Secondary | The currency in which funds from financing activities are generated — debt and equity issued |
| Operating receipts | Secondary | The currency in which receipts from operating activities are usually retained |
| Autonomy of a foreign operation | Additional | Whether the operation runs as an extension of the parent or with significant autonomy |
| Proportion of parent transactions | Additional | Whether dealings with the parent are a high or low proportion of the operation’s activities |
| Cash flow effect on the parent | Additional | Whether the operation’s cash flows directly affect the parent’s and are readily remitted |
| Debt service capacity | Additional | Whether the operation can service its debt from its own cash flows without parent support |
Source: the functional currency indicators in Ind AS 21. Where the primary indicators point clearly in one direction, they govern. The secondary and additional factors are used to resolve doubt, not to override clear primary evidence.
An Indian company that invoices almost entirely in dollars, prices against a global market and holds its receipts in an EEFC account may well have a functional currency that is not the rupee — even though it is registered in India and reports in rupees. Being incorporated here does not settle the question.
02Functional Currency and Presentation Currency Are Not the Same Thing
This distinction sounds academic and is anything but. Getting it wrong produces financial statements that are internally inconsistent in a way an experienced reviewer notices immediately.
- Functional currency is determined, not selected. It follows from the facts about how the entity earns and spends. Management does not get to pick it for convenience.
- Presentation currency is selected. An entity may present its financial statements in any currency it chooses — in India, ordinarily the rupee for statutory purposes, but a different currency for a group reporting pack.
- If the two differ, a translation step is required. The results and position are translated from functional into presentation currency using the method described in the next section.
- Functional currency changes only when the underlying facts change. When it does, the change is applied prospectively from the date of the change — there is no restatement of prior periods.
- A change cannot be made to smooth reported results. It requires a genuine shift in the economic environment, and it should be documented at the time with the evidence that drove it.
03Translating a Foreign Operation Into Rupees
Where a group has a subsidiary, branch, associate or joint arrangement whose functional currency differs from the presentation currency, its results and position must be translated on consolidation. Three different rates apply, and using one rate throughout is the error we correct most often.
| Item | Rate used | Where the difference goes |
|---|---|---|
| Assets and liabilities | Closing rate at the reporting date | Other comprehensive income, accumulated in the translation reserve |
| Income and expenses | Rate at the dates of the transactions; an average rate is a common approximation where rates have been reasonably stable | Other comprehensive income, accumulated in the translation reserve |
| Share capital and pre-acquisition reserves | Historical rate at the date of the transaction | Not remeasured |
| Goodwill and fair value adjustments on acquisition | Treated as assets of the foreign operation and translated at the closing rate | Other comprehensive income |
| Monetary item forming part of the net investment | Closing rate | Other comprehensive income in the consolidated statements; profit or loss in the separate statements of the entity concerned |
| Disposal of the foreign operation | — | Accumulated translation reserve reclassified from equity to profit or loss |
Source: the translation requirements of Ind AS 21. The average-rate approximation is not available where exchange rates have fluctuated significantly during the period.
The last row is the one that surprises boards. A translation reserve that has quietly accumulated over a decade is not a permanent equity item. When the foreign operation is sold, the whole accumulated balance is lifted out of equity and recognised in profit — which can materially change the reported gain on a disposal that was priced without reference to it.
Chart 1 — Translation reserve movement on a USD 1 million net investmentAmount added to the translation reserve, by closing rate
Illustrative, measured against an opening rate of ₹82.00. The subsidiary is identical in every row — same trading, same assets. The entire movement is translation, taken to other comprehensive income and held in the reserve until the operation is sold.
Nothing happened to the business across those five rows. Yet at ₹90 the rupee value of that investment is ₹80 lakh higher than at ₹82, roughly a tenth of its carrying amount — and every net-worth-based ratio and covenant moves with it, without a single entry touching profit.
04What Changed in 2025: Currencies That Cannot Be Exchanged
Ind AS 21 always assumed a spot rate exists. In a small number of jurisdictions that assumption fails — capital controls, restricted volumes at an official rate, severe instability, or an official rate that no market participant can actually transact at. Until recently the standard addressed only temporary shortages and said nothing useful about a lack of exchangeability that persists.
Following the corresponding international amendment of August 2023, the Ministry of Corporate Affairs notified an amendment to Ind AS 21 on 7 May 2025 through G.S.R. 291(E), as part of the Companies (Indian Accounting Standards) Amendment Rules, 2025. It applies to annual reporting periods beginning on or after 1 April 2025.
1. Assess whether the currency is exchangeable. A currency is exchangeable into another if the entity can obtain that other currency within a normal administrative delay, through a market or exchange mechanism that creates enforceable rights and obligations. The assessment is made at the measurement date, for a specified purpose, and considering only the amount the entity actually needs.
2. If it is not exchangeable, estimate the spot rate. The objective is the rate that would have applied at the measurement date in an orderly exchange transaction between market participants under prevailing economic conditions. An observable rate may be used unadjusted, or another estimation technique applied.
The practical consequences
- The purpose matters. Assessing exchangeability for settling individual transactions is a different question from assessing it for translating a foreign operation, and the two can reach different answers.
- Comparatives are not restated. The amendment is applied without reworking prior periods.
- The transition effect goes to opening retained earnings, or to the translation reserve where a foreign operation is involved.
- Disclosure is substantial. Users must be able to understand the nature and financial effects of the currency not being exchangeable, the estimation technique used, and the risks the entity is exposed to as a result.
- Consequential changes were made to Ind AS 101 for first-time adopters and to related guidance, so the treatment is consistent on transition.
The amendment first applies to years beginning 1 April 2025 — meaning FY 2025-26, the accounts many groups are finalising right now. Any Indian company with a subsidiary, branch, receivable or investment in a jurisdiction with currency controls should be documenting its exchangeability assessment as part of this year-end, not discovering the requirement during the audit.
05The Long-Term Intra-Group Loan That Is Not Really a Loan
One provision catches groups repeatedly. Where a monetary item receivable from or payable to a foreign operation is neither planned nor likely to be settled in the foreseeable future, it forms part of the net investment in that operation.
- In the consolidated financial statements, exchange differences on such an item go to other comprehensive income and sit in the translation reserve rather than hitting consolidated profit.
- In the separate financial statements of the lender or borrower, the same differences continue to go through profit or loss.
- The test is settlement intention, not documentation. A loan formally repayable on demand can still qualify if settlement is neither planned nor probable in the foreseeable future.
- Trade receivables and payables do not qualify, because they are expected to be settled in the ordinary course.
- Getting this wrong pushes real volatility into consolidated profit that the standard intended to keep out of it.
06A Working Sequence for Year-End
Run these in order. Each step depends on the one before it, which is why starting at the invoice level so often produces the wrong answer.
- 1Document the functional currency of every entity in the group, with the evidence. Do this once properly and revisit it only when the facts move.
- 2Confirm the presentation currency for each reporting purpose — statutory accounts, group pack, lender reporting — and note where it differs from functional currency.
- 3Identify every foreign operation requiring translation, and confirm which rate applies to each category of balance.
- 4Review intra-group monetary balances and decide, with reasons recorded, which form part of the net investment.
- 5Assess exchangeability for any currency subject to controls or instability, separately for transaction settlement and for translation.
- 6Reconcile the movement in the translation reserve for the year and be able to explain each component.
- 7Draft the disclosures — functional currency and any change in it, the rates used, and, where relevant, the exchangeability assessment and estimation technique.
07Where Groups Get This Wrong
Assuming an Indian entity must have a rupee functional currency
Incorporation is not one of the indicators. Some Indian exporters and IFSC entities genuinely operate in another currency.
Using the closing rate for everything on consolidation
Income and expenses take transaction-date rates, and equity takes historical rates. A single rate throughout will not balance.
Treating the translation reserve as permanent
It reclassifies to profit on disposal of the foreign operation, and the amount is often material to the reported gain.
Misclassifying an intra-group balance
Treating a long-term funding balance as an ordinary receivable pushes exchange volatility into consolidated profit unnecessarily.
Applying an average rate through a volatile period
The approximation is only available where rates have not fluctuated significantly.
Ignoring the exchangeability amendment because it sounds exotic
It applies from FY 2025-26 and reaches any group with exposure to a controlled or unstable currency.
How Casela Advisors helps
Currency questions rarely arrive on their own — they come attached to a subsidiary being set up, a disposal being negotiated, or an auditor asking why a reserve moved. We work on them alongside the transaction rather than after the year has closed.
Functional currency assessments, translation methodology and reserve reconciliations form part of our Ind AS implementation work.
Where a foreign parent or lender sets the reporting language, our IFRS implementation services cover the second reporting basis and the reconciliation between them.
Groups building outbound or inbound structures get the reporting consequence mapped before the entity exists — through Indian subsidiary setup and setting up a company outside India.
Cross-border payments bring their own compliance trail, which our Form 15CA and 15CB and FDI filing with RBI teams handle in parallel.
Both the amended standard and the notification that brought it in can be downloaded from the Ministry of Corporate Affairs. Nothing here substitutes for the notified wording — check it against the year you are reporting on.
08Frequently Asked Questions
How do I decide my company’s functional currency?
Start with the primary indicators — the currency that mainly influences your selling prices, the country whose market forces and regulations determine those prices, and the currency that mainly drives your costs. If those point clearly one way, that is your functional currency. Only where they conflict do the secondary factors, such as financing and retained receipts, come into play.
Can a company change its functional currency?
Only when the underlying facts change — for example, a fundamental shift in the markets that determine pricing or costs. A change is applied prospectively from the date it occurs, using the exchange rate at that date, and prior periods are not restated. It cannot be made simply because a different currency would produce a more favourable result.
What is the difference between functional and presentation currency?
Functional currency is determined by facts about where the entity primarily operates and cannot be chosen. Presentation currency is the currency in which the financial statements are presented, and an entity may select any currency for that purpose. Where the two differ, results and position are translated from one to the other.
Where do translation differences on a foreign subsidiary go?
Into other comprehensive income, accumulated in a separate foreign currency translation reserve within equity. They do not affect profit while the operation is held. On disposal of the foreign operation, the accumulated balance is reclassified from that reserve into profit or loss.
What happens if a currency cannot be exchanged into rupees?
Under the amendment notified on 7 May 2025 and effective for years beginning 1 April 2025, the entity first assesses whether exchangeability exists at the measurement date for the relevant purpose. If it does not, the entity estimates the spot rate that would have applied in an orderly transaction between market participants, and discloses the estimation technique used together with the resulting financial effects.
09The Bottom Line
Ind AS 21 rewards getting the order right. Fix the functional currency of each entity on evidence, be clear about where presentation currency differs from it, apply the correct rate to each category of balance on translation, and know what sits in the translation reserve and when it will come out. Do that, and the transaction-level entries mostly look after themselves. Skip it, and no amount of care at invoice level will produce accounts that hold together.
Foreign Subsidiary, Export Revenue or a Currency You Cannot Convert?
Functional Currency Assessments • Consolidation & Translation • Ind AS and IFRS Reporting • Statutory Audit
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