Educational Material on Ind AS 21 The Effects of Changes in Foreign Exchange Rates

Ind AS 21 The Effects of Changes in Foreign Exchange Rates : Ind AS 21 The Effects of Changes in Foreign Exchange Rates outlines how to account for foreign currency transactions and operations in financial statements, and also how to translate financial statements into a presentation currency. An entity is required to determine a functional currency (for each of its operations if necessary) based on the primary economic environment in which it operates and generally records foreign currency transactions using the spot conversion rate to that functional currency on the date of the transaction. Ind AS 21 was reissued in December 2003 and applies to annual periods beginning on or after 1 January 2005.

History of Ind AS 21

December 1977	Exposure Draft E11 Accounting for Foreign Transactions and Translation of Foreign Financial Statements
March 1982	E11 was modified and re-exposed as Exposure Draft E23 Accounting for the Effects of Changes in Foreign Exchange Rates
July 1983	Ind AS 21 Accounting for the Effects of Changes in Foreign Exchange Rates
1 January 1985	Effective date of Ind AS 21 (1983)
1993	Ind AS 21 (1983) was revised as part of the comparability of financial statements project
May 1992	Exposure Draft E44 The Effects of Changes in Foreign Exchange Rates
December 1993	Ind AS 21 (1993) The Effects of Changes in Foreign Exchange Rates (revised as part of the ‘Comparability of Financial Statements’ project)
1 January 1995	Effective date of Ind AS 21 (1993)
18 December 2003	Revised version of Ind AS 21 issued by the Ind AS Business
1 January 2005	Effective date of Ind AS 21 (Revised 2003)
December 2005	Minor Amendment to Ind AS 21 relating to net investment in a foreign operation
1 January 2006	Effective date of the December 2005 amendments
10 January 2008	Some revisions of Ind AS 21 as a result of the Business Combinations Phase II Project relating to disposals of foreign operations
1 July 2009	Effective date of the January 2008 amendments

Educational Material on Ind AS 21 The Effects of Changes in Foreign Exchange Rates

Ind AS 21 The Effects of Changes in Foreign Exchange Rates : Ind AS 21 The Effects of Changes in Foreign Exchange Rates prescribes the accounting treatment for foreign currency transactions and foreign operations in the financial statements. An entity is required to determine a functional currency (for each of its operations if necessary) based on the primary economic environment in which it operates and generally records foreign currency transactions using the spot conversion rate to that functional currency on the date of the transaction.

Key definitions [Ind AS 21.8]

Functional currency: the currency of the primary economic environment in which the entity operates. (The term ‘functional currency’ was used in the 2003 revision of Ind AS 21 in place of ‘measurement currency’ but with essentially the same meaning.)

Presentation currency: the currency in which financial statements are presented.

Exchange difference: the difference resulting from translating a given number of units of one currency into another currency at different exchange rates.

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.

OBJECTIVE

1.1 This Standard prescribes the methodologies of translating an entity’s foreign currency transactions, inclusion of financial elements of the entity’s foreign operations, and the translation of financial statements into a presentation currency.

SYNOPSIS OF THE STANDARD

The provisions of this Standard, which aims at providing guidance on the translation method and on determining the functional and presentation currencies, are summarised here.

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