Any Indian company that buys, sells, borrows or invests in a foreign currency — or owns a subsidiary abroad — has to apply Ind AS 21, "The Effects of Changes in Foreign Exchange Rates." It decides which currency each entity reports in, how foreign transactions are recorded, and how overseas results flow into the group accounts. Since the 2025 amendment, it also says what to do when a currency cannot be exchanged.
Casela Advisors is a Chartered Accountant firm in Andheri East, Mumbai. This guide walks through the standard in the order you apply it: functional currency, transactions, translation, the new exchangeability rules, and disclosures.
What this guide covers — at a glance
- Functional currency is a fact, not a choice. It is the currency of the primary economic environment in which the entity operates — decided by where prices, costs and cash flows really sit, not by convenience or where the books are kept.
- Transactions are recorded at the spot rate and remeasured at the reporting date. Monetary items move to the closing rate; non-monetary items stay at the rate on the date they were measured.
- Translation is a separate step. Converting a foreign operation into the group's presentation currency sends differences to other comprehensive income and the foreign currency translation reserve, not to profit or loss.
- The exchangeability amendment is new. Ind AS 21 now says how to assess whether a currency can be exchanged and how to estimate a spot rate when it cannot.
- Advances need their own rate. For prepayments and advance receipts, the transaction date is when the advance is first recognised — not when the goods or services arrive.
- Disclosure is where audits bite. Net exchange differences, the translation-reserve reconciliation and judgements about functional currency must all be supportable.
01What Ind AS 21 Covers — and the Order You Apply It
Ind AS 21 deals with three things: accounting for transactions and balances in foreign currencies, translating the results and financial position of foreign operations into a presentation currency, and translating an entity's results into a presentation currency different from its functional one. It does not cover hedge accounting or most derivatives, which sit with Ind AS 109, and cash-flow presentation is dealt with in Ind AS 7.
The practical sequence matters. First fix the functional currency of every entity. Then record and remeasure each entity's foreign currency transactions. Only then translate foreign operations into the group's presentation currency. Doing these out of order is the root of most errors.
02Determining Functional Currency
Functional currency is the currency of the primary economic environment in which the entity operates. The standard gives indicators rather than a formula.
Primary indicators
- The currency that mainly influences sales prices for goods and services — usually the one in which prices are denominated and settled.
- The currency of the country whose competitive forces and regulations mainly determine sales prices.
- The currency that mainly influences labour, material and other costs of providing goods or services.
Secondary indicators
- The currency in which funds from financing activities, such as debt and equity, are generated.
- The currency in which receipts from operating activities are usually retained.
Extra factors for a foreign operation
For a subsidiary, branch or associate abroad, consider whether it operates as an extension of the parent or with a significant degree of autonomy, how much of its business is with the parent, whether its cash flows directly affect the parent's, and whether it can service its debt from its own cash flows.
Where indicators point in different directions, management applies judgement and gives priority to the primary indicators. Record the reasoning, because it is a disclosure and an audit test. A change of functional currency is made only when the underlying facts change, and it is applied prospectively from the date of change.
03Foreign Currency Transactions
A foreign currency transaction is initially recorded in the functional currency at the spot rate on the transaction date. A rate that approximates the spot rate, such as a weekly or monthly average, can be used when rates do not fluctuate significantly. At each reporting date, what happens next depends on the type of item.
| Item | Initial recognition | Reporting date | Exchange difference goes to |
|---|---|---|---|
| Foreign currency monetary items (cash, receivables, payables, borrowings) | Spot rate on the transaction date | Closing rate at each reporting date | Profit or loss (unless part of a net investment) |
| Non-monetary items at historical cost (inventory, fixed assets, prepayments) | Spot rate on the transaction date | Not remeasured — stay at the original rate | None |
| Non-monetary items at fair value (certain investments, revalued assets) | Rate on the date fair value was measured | Rate on the date fair value was measured | Same place as the fair value gain or loss — profit or loss or OCI |
| Net investment in a foreign operation (monetary item forming part of it) | Spot rate on the transaction date | Closing rate | Profit or loss in separate statements; OCI in consolidated statements |
Advance consideration
When an entity pays or receives consideration in advance in a foreign currency, the date of the transaction for the related asset, expense or income is the date the non-monetary prepayment asset or deferred income liability is first recognised (Appendix B to Ind AS 21). With several advances, each payment or receipt has its own transaction date.
A simple worked example
The rates below are hypothetical and used only to show the mechanics. An Indian exporter invoices a customer USD 100,000.
| Date | Event | Rate (USD 1) | Result |
|---|---|---|---|
| 1 March | Export invoice of USD 100,000 booked | ₹82.00 | ₹82,00,000 revenue and receivable |
| 31 March | Reporting date — receivable remeasured | ₹83.50 | ₹83,50,000; exchange gain ₹1,50,000 in profit or loss |
| 15 April | Customer pays; settlement | ₹84.00 | ₹84,00,000 received; further gain ₹50,000 in the next period |
04Translating Financial Statements of Foreign Operations
Where a foreign operation's functional currency differs from the group's presentation currency, its results are translated for consolidation. The method is the same for subsidiaries, associates, joint ventures and branches:
- 1Confirm the functional currency of each entity. Document the primary and secondary indicators for every foreign operation, and the conclusion reached.
- 2Remeasure the foreign operation's books into its functional currency. If transactions are in other currencies, apply the transaction rules first.
- 3Translate assets and liabilities at the closing rate. This includes goodwill and fair value adjustments arising on acquiring the operation, which are treated as the operation's own assets.
- 4Translate income and expenses at transaction-date rates. An average rate for the period is usually acceptable if rates have not fluctuated significantly.
- 5Take the differences to OCI. Record them in the foreign currency translation reserve and keep a running reconciliation by entity.
- 6Reclassify on disposal. When the foreign operation is disposed of, the accumulated translation reserve moves to profit or loss; for partial disposals, the proportionate share does.
- 7Check for hyperinflation. If a functional currency is hyperinflationary, Ind AS 29 applies before translation.
05The New Exchangeability Rules
The Ministry of Corporate Affairs amended Ind AS 21 through the Companies (Indian Accounting Standards) Amendment Rules, 2025, notified on 7 May 2025. The change mirrors the IASB's 2023 amendment to IAS 21 and is effective from 1 April 2025. It fills a gap: the earlier standard did not say what to do when a currency cannot be converted into another.
Step 1 — Assess exchangeability
A currency is exchangeable into another when an entity can obtain the other currency within a time frame that allows for a normal administrative delay, and through a market or exchange mechanism in which the transaction would create enforceable rights and obligations. The assessment is made for a specific purpose and at a specific measurement date.
Step 2 — If it is not exchangeable, estimate the spot rate
The estimated rate is the one that would have applied to an orderly transaction between market participants at the measurement date, reflecting prevailing economic conditions. An observable rate can be used where appropriate, or another estimation technique, as long as the objective is met.
Step 3 — Disclose
Where a currency is not exchangeable, disclose the nature and financial effects of the lack of exchangeability, the spot rate or rates used, the estimation process, and the risks to which the entity is exposed.
As a general rule the amendment is not applied retrospectively to comparatives; the effect on first application is recognised in opening retained earnings or, for translation into a different presentation currency, in the translation reserve. Read the notified text and your auditor's view before finalising numbers, particularly for subsidiaries in restricted-currency jurisdictions.
06Disclosure Requirements
- Exchange differences in profit or loss, other than those arising on financial instruments measured at fair value through profit or loss.
- Net exchange differences in OCI, with a reconciliation of the translation reserve at the start and end of the period.
- Presentation currency different from functional currency: state the fact, the functional currency and the reason.
- Change in functional currency: disclose the fact and the reason for the change.
- Exchangeability disclosures where the currency of a foreign operation or transaction is not exchangeable, as described above.
07Six Common Mistakes
These are the points where we most often see foreign currency accounting go wrong.
Defaulting to rupees for every entity.
INR is the group's presentation currency in most cases, but a subsidiary's functional currency may well be the dollar, euro or dirham. Assess each entity on the indicators.
Revaluing advances as if they were monetary.
Advances paid or received for goods and services are generally non-monetary. Fix the rate at the date the advance is recognised and do not remeasure it.
Using the closing rate for non-monetary items at cost.
Inventory and fixed assets bought in foreign currency stay at the historical rate. Only monetary items are retranslated.
Sending net investment differences to profit or loss in consolidated accounts.
On consolidation, exchange differences on monetary items that form part of the net investment go to OCI and the translation reserve.
Skipping the exchangeability check for restricted currencies.
A subsidiary in a jurisdiction with capital controls or severe shortages needs a documented assessment, even if the official rate looks usable.
An incomplete translation-reserve reconciliation.
Auditors expect opening balance, movement and closing balance, and reclassifications on disposal, entity by entity.
Working through Ind AS 21 with us
Foreign currency accounting is only as good as the underlying ledgers and the documentation behind each judgement. We work alongside your finance team from rate tables to disclosure note.
Group reporting, translation workings and reserve reconciliations sit within our virtual CFO and accounting tax compliance practice.
Clean foreign-currency ledgers — correct rates, advances and settlements — start with outsourced bookkeeping.
Month-end remeasurement and exposure tracking feed into MIS and budgeting.
Exports and imports also carry GST and TDS consequences that should line up with the books.
Unsure whether your subsidiaries need a fresh functional-currency or exchangeability assessment? Start through the contact page.
08Frequently Asked Questions on Ind AS 21
What is functional currency under Ind AS 21?
It is the currency of the primary economic environment in which an entity operates — usually the one in which it mainly generates and spends cash. It is decided from indicators such as the currency that drives sales prices and the main costs, with financing and cash retention as supporting evidence.
Can a company choose its functional currency?
No. It is determined by facts and circumstances. Where indicators are mixed, management uses judgement and gives priority to the primary indicators. A change is allowed only when the underlying circumstances change, and it is applied prospectively.
Where do exchange differences go — profit or loss or OCI?
Differences on settling or remeasuring foreign currency monetary items go to profit or loss. Differences arising on translating a foreign operation into the presentation currency go to OCI and accumulate in the foreign currency translation reserve, as do qualifying net-investment differences in consolidated statements.
What does the new exchangeability amendment require?
An entity assesses whether one currency can be exchanged for another at the measurement date. If it cannot, the entity estimates the spot rate that would apply in an orderly transaction between market participants and discloses the nature and effect, the rate used, the estimation process and the risks. The amendment was notified by the MCA on 7 May 2025.
Do the amendments change comparatives?
Generally no. On first application the amendment is not applied retrospectively to comparatives; the cumulative effect is recognised in opening retained earnings or, where relevant, the translation reserve. Confirm the exact transition wording in the notified text for your case.
09The Bottom Line
Ind AS 21 works when you apply it in sequence: decide the functional currency, account for transactions at the right rates, translate foreign operations consistently, and test for exchangeability where a currency is restricted. Keep the judgements documented and the translation-reserve reconciliation current, and the disclosure note largely writes itself.
Need Expert Help with Ind AS 21?
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