Ind AS 21
Ind AS 21
Ind AS 21
Translation Approach
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Objectives, Scope and Key
Definitions
Objective
• An entity may carry on foreign activities in two ways. It may have transactions in
foreign currencies or it may have foreign operations. In addition, an entity may
present its financial statements in a foreign currency.
• The principal issues are which exchange rate(s) to use and how to report the
effects of changes in exchange rates in the financial statements.
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Scope
(a) in accounting for transactions and balances in foreign currencies, except for
those derivative transactions and balances that are within the scope of Ind AS
109, Financial Instruments;
(b) in translating the results and financial position of foreign operations that are
included in the financial statements of the entity by consolidation or the equity
method; and
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Scope (Cont’d)
This Standard does not apply to:
(a) hedge accounting for foreign currency items, including the hedging of a net
investment in a foreign operation. Ind AS 109 applies to hedge accounting.
(b) the presentation in a statement of cash flows of the cash flows arising from
transactions in a foreign currency, or to the translation of cash flows of a
foreign operation.
(c) long-term foreign currency monetary items for which an entity has opted for
the exemption given in paragraph D13AA of Appendix D to Ind AS 101. Such
an entity may continue to apply the accounting policy so opted for such long-
term foreign currency monetary items
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Key Definitions
Foreign currency is a currency other than the functional currency of the entity.
Monetary items are units of currency held and assets and liabilities to be received
or paid in a fixed or determinable number of units of currency.
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Functional and Presentation
Currency
Functional Currency
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Functional Currency (contd.)
b) the currency that mainly influences labour, material and other cost of
providing goods and services
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Functional Currency (contd.)
Example - Facts
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Functional Currency (contd.)
Example - Conclusion
• The functional currency of entity A is US dollars. The crude oil sales prices
are influenced by global demand and supply.
• Crude oil is globally traded in US dollars around the world. The revenue analysis
points to US dollars.
• Cost analysis is mixed. Depreciation (or any other noncash expenses) is not
considered.
• Operating cash expenses are influenced by the riyal(55%) and the US dollar (45
%). Management is able to determine the functional currency as US dollars, as
revenue is clearly influenced by US dollars and expenses are mixed.
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Functional Currency (contd.)
Example - Facts
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Functional Currency (contd.)
Example - Conclusion
• The functional currency of the structured entity is US dollars, as the entity has no
operations and does not provide any services.
• The primary indicators, therefore, do not apply. The ‘financing’ indicator supports the euro,
as all financing is in euros.
• However, all the financing is intercompany and entity A could denominate the financing in
any currency it wanted.
• Considering the ‘autonomy’ indicator, it is clear the structured entity is not autonomous. It
is a shell entity, has no independent activities and no active management of its own.
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Functional Currency (contd.)
• When the above indicators are mixed and the functional currency is not obvious,
management uses its judgement to determine the functional currency that
most faithfully represents the economic effects of the underlying transactions,
events and conditions
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Functional Currency (contd.)
a. whether the activities of the foreign operation are carried out as an extension
of the reporting entity, rather than being carried out with a significant degree of
autonomy.
An example of the former is when the foreign operation only sells goods
imported from the reporting entity and remits the proceeds to it.
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Functional Currency (contd.)
b. whether transactions with the reporting entity are a high or a low proportion of
the foreign operation's activities.
c. whether cash flows from the activities of the foreign operation directly affect
the cash flows of the reporting entity and are readily available for remittance
to it.
d. whether cash flows from the activities of the foreign operation are sufficient to
service existing and normally expected debt obligations without funds being
made available by the reporting entity.
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Functional Currency (contd.)
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Case Study 1
Facts:
Holding Company H Ltd has a business of supplying raw Iron Ore to major Steel
Makers abroad. For this purpose it engages its subsidiary S Ltd in India.
S Ltd which takes orders from Indian customers and receives goods from the
holding. It also collects proceeds which is always in Indian INR & remits it to the
parent company.
Whole of the funding of the subsidiary is being managed by the parent company
including administration and other expenses. There is no other role being played by
S Ltd.
Issue :
Determine whether the functional currency of H Ltd. (i.e. USD) can be considered
as that of the subsidiary S Ltd?
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Case Study 1 (contd.)
Solution:
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Case Study 2
Facts:
The functional currency of company M (M) is INR. M establishes 2 companies, P
and Q. Company P is incorporated in the US and Q in the UK.
M loaned ₤2 million to each company, Q also borrowed an additional ₤ 3 million
from an unrelated third party. P guaranteed this loan.
Q used ₤ 5 million to build a manufacturing facility to serve the UK market .
Q intends to repay the loan to the third party through the profit generated though its
manufacturing operations.
P used the loan to invest in marketable securities in international markets.
Issue:
What are the functional currencies of P and of Q?
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Case Study 2 (contd.)
Solution:
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Case Study 3
Facts:
Sparkle is an Indian diamond mining company and a joint venture.
• 50% owned by Shine (USA-based company, functional currency U.S. dollar)
• 50% owned by Brighten (UK-based company, functional currency GBP)
American laws govern diamond trade worldwide and all sales are made in U.S.
dollars.
Issue:
Determine the functional currency of Sparkle in 2014 and 2015.
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Case Study 3 (Cont’d)
• Above factors are primary indicators that U.S. dollar is the functional currency
of Sparkle.
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Case Study 3 (Cont’d)
• If Sparkle were less autonomous, the situation may well have been a change
in functional currency due to its dependency on Brighten and the currency that
influences the sales may have changed
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Functional Currency (contd.)
Functional currency
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Case Study 4
Facts:
ABC, located in India, is a wholly owned subsidiary of Company K (K).
• The U.S. dollar is K’s functional currency and ABC has identified INR as its functional
currency.
• The functional currency was identified because ABC’s sales and purchases were
denominated primarily in INR, as were all of ABC’s labour costs.
Issue:
Do these circumstances justify a change in ABC’s functional currency from INR to the U.S. dollar?
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Case Study 4 (Cont’d)
Solution:
Yes. Paragraph 36 of Ind AS 21 states that a change in the currency that mainly influences the
sales prices of goods and services may lead to a change in functional currency.
The U.S. dollar appears to become the currency that would be influencing the sales price going
forward.
Additionally, the changes in activities of ABC result in the foreign operation essentially being an
extension of the reporting entity consistent with paragraph 11(a) of Ind AS 21.
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Functional vs presentation currency
• Presentation currency:
− choice of any currency
− no change in underlying measurement of items, merely expressing these in
different currency
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Net investment in Foreign
Operations
Net Investment in Foreign operations
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Foreseeable Future
• Therefore, the term "foreseeable future" is not meant to imply a specific time
period.
• A parent may qualify for the exception under Ind AS 21.15 if:
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Case Study 5
Background
Entity A (A), whose functional currency is pound sterling, has a foreign operation in
the form of a wholly owned subsidiary, Entity B (B), with a euro functional currency.
Entity B issues to A perpetual debt (i.e. it has no maturity) denominated in euros
with an annual interest rate of 6 per cent.
The perpetual debt has no issuer call option or holder put option.
Thus, contractually it is just an infinite stream of interest payments in euros.
Question
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Case Study 5 (Cont’d)
Answer
Yes.
Through the origination of the perpetual debt, A has made a permanent investment
in B.
The interest payments are treated as interest receivable by A and interest payable
by B, not as repayment of the principal debt.
Hence, the fact that the interest payments are perpetual does not mean that
settlement is planned or likely to occur.
The perpetual debt can, given the lack of specific guidance to the contrary, be
considered part of A's net investment in B.
In accordance with Ind AS 21.15, the foreign exchange gains and losses should be
recorded in equity at the consolidated level because settlement of that perpetual
debt is neither planned nor likely to occur.
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Translation Approach
Translation Approach
• Functional currency
− Determine the Functional Currency
− Translate foreign currency items in to functional currency
− Report the differences on translation according to the standard
• Presentation currency
− The standard permits presentation of accounts in any currency
− If Presentation Currency is different from functional currency then translate
the results and financial position in accordance with this standard
• In a group (with subsidiaries/ associates/ JVs)
− Reporting entity (Parent company) presents the group account in any
currency (called as Presentation Currency)
− Translate other individual entity’s accounts into presentation currency of
parent (if different)
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Translation Approach (contd.)
Initially at spot exchange rate between foreign currency and functional currency at date of
transaction
• Non-monetary items measured at fair value — translated using spot exchange rate at
date when fair value was determined
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Translation Approach (contd.)
• Monetary items — Income statement (subject to Ind AS 109 and limited exception in Ind AS 21
relating to items forming part of the net investment in a foreign operation)
− Ind AS 21 requires any foreign exchange gains and losses on monetary assets and monetary
liabilities to be recognised in profit or loss.
− An exception is a monetary item that is designated as a hedging instrument in a cash flow
hedge, a hedge of a net investment or a fair value hedge of an equity instrument for which an
entity has elected to present changes in fair value in other comprehensive income
• Foreign exchange rate gains and losses on intragroup monetary items are not fully eliminated on
consolidation when intragroup monetary item is transacted between two group entities that have
different functional currencies.
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Translation Approach (contd.)
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Translation Approach (contd.)
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Translation Approach (contd.)
• Ind AS 21 permits an option to recognise exchange differences arising on translation of certain long-
term monetary items from foreign currency to functional currency directly in equity.
• In this situation, Ind AS 21 requires the accumulated exchange differences to be transferred to profit
or loss in an appropriate manner.
• This Standard does not apply to hedge accounting for foreign currency items, including the hedging
of a net investment in a foreign operation. Ind AS 109 applies to hedge accounting.
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Translation Approach (contd.)
Example
On 1 November 20X1, Company A (sterling functional currency) buys a building for US$50,000,000,
with full payment being made on that date. The exchange rate is US$1.68:£1. At the end of Company
A's reporting period, 31 December 20X1, the building is not depreciated because it is not yet available
for use. The exchange rate is US$1.71:£1 and the fair value of the building is US$60,000,000 at that
date.
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Translation Approach (contd.)
Example
Depending on whether Company A accounts for its buildings at cost less accumulated depreciation
and impairment losses, or at a revalued amount, subsequent accounting entries are as follows:
31 December 20X1
The building is a non-monetary item and held at historical cost. It continues to be measured at
£29,761,905 (i.e. at the transaction rate).
At revalued amount
31 December 20X1
The building is a non-monetary item and held at fair value. It is retranslated at the rate of exchange at
the date of valuation.
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Translation Approach (contd.)
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:
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Translation Approach (contd.)
• Cumulative amount of exchange differences recognised in equity will be included in profit or loss
on disposal of foreign operation
• Need to track cumulative translation adjustments in respect of foreign operations for recycling to
income statement on disposal
• Disposal means sale, liquidation, repayment of share capital, or abandonment
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Presentation and Disclosure
Disclosures
• 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 109; and
• When the presentation currency is different from the functional currency, that fact
shall be stated, together with disclosure of the functional currency and the reason
for using a different presentation currency.
• When there is a change in the functional currency of either the reporting entity or
a significant foreign operation, that fact and the reason for the change in
functional currency shall be disclosed.
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Comparison with Indian GAAP
and Ind AS 21
GAAP Comparison
Topic Indian GAAP IAS 21 Ind AS 21
Functional & Foreign currency is a currency Functional currency is the Similar to IAS 21
Presentation other than the reporting currency of the primary
Currency currency which is the currency economic environment in
in which financial statements which the entity operates.
are presented. Foreign currency is a
currency other than the
There is no concept of functional currency.
functional currency.
Presentation currency is
the currency in which the
financial statements are
presented.
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GAAP Comparison
Topic Indian GAAP IAS 21 Ind AS 21
Exchange Similar to IAS 21, except that Exchange differences Same as IAS 21 except
Differences exchange differences on arising on translation or that Ind AS 21 permits an
translation of certain monetary settlement of foreign option to recognise
foreign currency items can be currency monetary items exchange differences
capitalised in the carrying are recognised in profit or arising on translation of
amount of assets or otherwise loss in the period in which certain long-term monetary
deferred in a Foreign Currency they arise. items from foreign currency
Monetary Item Translation to functional currency
Difference Account Exchange differences on directly in equity. In this
(FCMITDA) which is then monetary items, that in situation, Ind AS 21
recognised in Profit or Loss substance, form part of requires the accumulated
over the balance period of the net investment in a foreign exchange differences to be
related foreign currency item. operation, are recognised transferred to profit or loss
in profit or loss in the in an appropriate manner.
Exchange differences on period in which they arise
monetary items, that in in the separate financial
substance, form part of net statements and in
investment in a foreign other comprehensive
operation, are recognised in income in the consolidated
‘Foreign Currency Translation financial statements.
Reserve’ both in the separate
and consolidated financial
statements.
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GAAP Comparison
Topic Indian GAAP IAS 21 Ind AS 21
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GAAP Comparison
Topic Indian GAAP IAS 21 Ind AS 21
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Thanks