3. INTRODUCTION AND SCOPE
IAS 21 outlines how to account foreign currency transactions & operations in
financial statements and how to translate them into present currency. The entity
first determines functional currency and then converts it using exchange rates.
1. This Standard shall be applied :
(a) in accounting for transactions and balances in foreign currencies, except for
derivative transactions and balances that are within the scope.
(b) in translating results and financial position of foreign operations included in the
financial statements of the entity.
(c) in translating entity's results and financial position into a presentation currency.
2. This Standard applies to presentation of an entity's financial statements in a
foreign currency and sets out requirements for the resulting financial statements to
be described as per Indian Accounting Standards.
3. It does not apply to the presentation in a statement of cash flows arising from
transactions in a foreign currency, or to the translation of cash flows of a foreign
operation.
4. KEY DEFINITIONS(IAS 21)
1. Functional currency: the currency of the primary economic environment in
which the entity operates is known as functional currency.
2. Presentation currency: the currency in which financial statements are
presented are known as presentation currency.
3. Exchange difference: the difference resulting from translating a given
number of units of one currency into another currency at different exchange
rates.
4. Foreign operation: a subsidiary, associate, joint venture, or branch whose
activities are based in a country or currency other than that of the reporting
entity.
6. REPORTING FOREIGN CURRENCY TRANSACTIONS
IN THE FUNCTIONAL CURRENCY
A foreign currency transaction is a transaction that is
denominated or requires settlement in a foreign currency,
including transactions arising when an entity:
(a) Buys /sells goods/services whose price is denominated
in foreign currency
(b) Borrows/lends funds when amounts payable/receivable
are denominated in a foreign currency
(c) Otherwise acquires/disposes assets, or incurs or settles
liabilities, denominated in a foreign currency.
7. USE OF A PRESENTATION CURRENCY OTHER THAN
THE FUNCTIONAL CURRENCY
The results and financial position of an entity whose functional currency
is
not the currency of a hyperinflationary economy shall be translated into
a different presentation currency using the following procedures:
• Assets and liabilities for each balance sheet presented shall
be translated at the closing rate at the date of that balance
sheet.
• Income and expenses for each statement of profit and loss
presented shall be translated at exchange rates at the dates
of the transactions.
• All resulting exchange differences shall be recognised in
other comprehensive income.
8. TRANSLATION TO THE PRESENTATION CURRENCY
An entity may present its financial statements in any currency. If the presentation currency
differs from the entity’s functional currency, it translates its results and financial position into the
presentation currency. For example, when a group contains individual entities with different
functional currencies, the results and financial position of each entity are expressed in a common
currency so that consolidated financial statements may be present.
10. TAX EFFECTS OF ALL EXCHANGE DIFFERENCES
Gains and losses on foreign currency transactions and exchange differences arising
on translating the results and financial position of an entity (including a foreign
operation) into a different currency may have tax effects. Ind AS 12 Income Taxes
applies to these tax effects.
11. DISCLOSURE
An entity shall disclose:
(a) The amount of exchange differences recognised in profit or loss except for those arising
on financial instruments measured at fair value through profit or loss in accordance with Ind
AS 39
(b) Net exchange differences recognised in other comprehensive income and accumulated in
a separate component of equity, and a reconciliation of the amount of such exchange
differences at the beginning and end of the period
(c) Net exchange differences recognised directly in equity and accumulated in a separate
component of equity in accordance with paragraph 29A, and a reconciliation of the amount of
such exchange differences at the beginning and end of the period.
12. 1. An entity does not have a free choice of functional currency.
2. Translation of foreign currency assets and liabilities:
• monetary items at the reporting date ;
• non-monetary items at the date of transaction or revaluation;
• unrealised &realised exchange gains/losses recognised by P/L.
3. Monetary items forming part of net investment in foreign operation. Exchange differences recognised
in equity in the consolidated financial statements.
4. Translation into presentation/functional currency
• Assets & liabilities at the reporting date ;
• Incomes, expenses & capital transactions at transaction dates;
• Translation gain/loss recognised in equity.
CONCLUSION
