Ind AS 21 (The Effects of Changes in Foreign Exchange Rates) is the Indian Accounting Standard that prescribes how to account for foreign currency transactions and translate financial statements of foreign operations.

The Ministry of Corporate Affairs notified Ind AS 21 under the Companies (Indian Accounting Standards) Rules, 2015. It became effective voluntarily from 1 April 2015 and mandatorily from Phase I of Ind AS implementation on 1 April 2016. This standard supersedes AS 11 for companies adopting Ind AS.

For FY 2026-27, IT services exporters face continued impact under Ind AS 21. Many Indian entities have significant USD-denominated revenue but INR cost bases. Determining the correct functional currency and accounting for translation reserves is a recurring challenge.

Ind AS 21 at a Glance

Ind AS 21 establishes the principle that foreign currency transactions and balances must be measured using the entity's functional currency. The standard primarily serves finance teams and auditors in companies with international transactions or foreign operations.

What is Ind AS 21: The Effects of Changes in Foreign Exchange Rates?

Ind AS 21 sets out how an entity must recognise and measure transactions denominated in foreign currencies and how to translate financial statements when consolidating foreign operations or presenting results in a different currency. Its core principle is that all amounts are measured using the functional currency determined by the primary economic environment.

The Institute of Chartered Accountants of India introduced this standard as part of India's convergence with International Financial Reporting Standards (IFRS). It replaced the earlier approach under Accounting Standard (AS) 11 by introducing stricter rules around functional currency determination and translation reserves consistent with IAS 21.

This standard is most relevant for Indian companies with cross-border transactions or subsidiaries abroad, as well as for statutory auditors reviewing such financial statements.

Objective of Ind AS 21

The objectives of Ind AS 21 are:

• Prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity.
• Specify how to translate financial statements into a presentation currency different from the functional currency.
• Establish guidance on the determination of an entity's functional currency.

By achieving these objectives, Ind AS 21 ensures that users receive a true and fair view as required by Section 129 of the Companies Act, 2013. Accurate translation and measurement prevent distortion from exchange rate movements across reporting periods.

Who Must Apply Ind AS 21?

Entities covered

Ind AS 21 applies to all companies required to follow Indian Accounting Standards as notified by the Ministry of Corporate Affairs. This includes:

Entities preparing consolidated financial statements must apply this standard when translating results and positions of foreign subsidiaries, associates, joint ventures or branches.

Scope exclusions

Ind AS 21 does not apply to:

• Derivatives within the scope of Ind AS 109
• Hedge accounting for FX items including net investment hedges (see Ind AS 109)
• Presentation requirements for cash flows in FX (see Ind AS 7)

When the standard does not apply

Where derivatives are involved, accounting falls under Ind AS 109 Financial Instruments. For hedge accounting related to FX risk management strategies, entities must apply hedge accounting rules under Ind AS 109 instead. Cash flow statement presentation involving FX cash flows is governed by Ind AS 7 Statement of Cash Flows.

Key Definitions under Ind AS 21

Recognition and Measurement under Ind AS 21

When to recognise

An entity recognises a foreign currency transaction when it first becomes a party to a contract resulting in assets or liabilities denominated in a foreign currency. At initial recognition, such transactions must be recorded using the spot exchange rate between the functional currency and the foreign currency at the transaction date (Para 9).

For example, if Sundaram Infotech Pvt Ltd purchases equipment from a US supplier on credit denominated in USD, it records both the equipment cost and payable at INR equivalent using that day’s spot rate.

Initial measurement

At initial recognition, every foreign currency transaction is translated into functional currency using the spot exchange rate at transaction date (Para 21). If exchange rates do not fluctuate significantly during a period, an average rate may be used as a practical expedient.

Amount recorded in INR = Amount in FCY × Spot exchange rate on transaction date

For instance:

Equipment purchased at USD 100,000 × Rs 84/USD = Rs 84 lakh

Non-monetary items measured at historical cost, such as inventory or property, are translated only once at initial recognition using this method.

Subsequent measurement

At each reporting date:

(a) Monetary items denominated in foreign currencies are translated using closing rates. Resulting exchange differences are recognised immediately in profit or loss (Para 28).

(b) Non-monetary items measured at historical cost remain translated at historical rates, no further revaluation or exchange difference arises.

(c) Non-monetary items measured at fair value are translated using rates prevailing when fair value was determined; any resulting exchange difference is recognised together with changes in fair value through P&L or OCI depending on classification (Para 30).

When translating results and positions from a foreign operation into group accounts:

• Assets/liabilities use closing rates.
• Income/expenses use average rates.
• All resulting exchange differences accumulate within equity as “Foreign Currency Translation Reserve” through OCI, not P&L, until disposal (Para 39).

On disposal or partial disposal leading to loss of control/significant influence/joint control over a foreign operation, accumulated translation reserve is reclassified from equity to P&L (Para 48).

Functional Currency Determination - The Primary Economic Environment Test

The functional currency reflects where an entity primarily generates and expends cash, its main economic environment (Para 8). Indicators include:

(a) Currency influencing sales prices;

(b) Currency whose competitive forces determine prices;

(c) Currency influencing costs such as labour/materials/services.

Secondary indicators per Para 10 include financing sources’ currencies and habitual receipt currencies.

For example:

• An Indian exporter invoicing globally but paying costs mostly in INR typically has INR as its functional currency.
• A wholly-owned Indian subsidiary trading almost exclusively in USD may have USD as its functional currency if pricing/costs are USD-driven.

Once determined based on facts/patterns underlying business activities, not management preference, the functional currency remains unchanged unless those facts change materially.

Worked Examples on Ind AS 21

Example 1: Foreign currency monetary item revaluation

Scenario: Krishna Steel Industries (functional currency INR) imports equipment on credit from a US supplier on January 1, 2026 for USD 1 million. Spot rate then is USD 1 = Rs 84; year-end March 31 spot rate is USD 1 = Rs 86; payable remains unsettled at year-end.

Computation Table

Journal Entry

On revaluation:

Dr Foreign Exchange Loss (P&L) Rs 0.20 crore

Cr Trade Payable Rs 0.20 crore

Equipment remains stated at historical cost; only monetary item revalued each period until settlement.

Example 2: Translation of foreign operation

Scenario: Maharashtra Holdings Ltd consolidates its US subsidiary having USD as its functional currency. At March 31, 2026:

• Net assets = USD 50 million
• Income FY 2025-26 = USD 8 million
• Opening rate = Rs 83/USD; closing = Rs 86/USD; average = Rs 84.5/USD
• Net assets opening INR equivalent = USD 50m × Rs 83 = Rs 415 crore

Computation Table

Exchange difference between opening net assets plus income less closing net assets accumulates within OCI as “Foreign Currency Translation Reserve”.

Journal Entry

On consolidation translation:

Dr/Cr Foreign Currency Translation Reserve

Exchange differences arising go directly into equity via OCI until disposal per Para 48; only then do they get recycled through profit or loss.

Disclosure Requirements under Ind AS 21

Disclosures under Ind AS 21 are critical for users of financial statements to understand the impact of foreign exchange rates and related translation differences, as mandated by Schedule III to the Companies Act, 2013. The standard prescribes specific disclosures to ensure transparency about exchange differences, functional currency decisions, and translation reserves.

Auditors must verify these disclosures for completeness and accuracy as part of their opinion under SA 700.

Common Mistakes & Industry-Specific Considerations

Common errors auditors flag

• Treating non-monetary items at historical cost as monetary and revaluing at closing rate (e.g., property, plant, and equipment).
• Failing to recognise functional currency translation reserve on consolidation of foreign operations.
• Using closing rate for income and expenses translation instead of average or actual rates.
• Reclassifying accumulated translation reserve to P&L without disposal of foreign operation.
• Misidentifying functional currency by defaulting to local or parent’s currency.
• Failing to disclose hedging of foreign exchange risk under Ind AS 109 hedge accounting.

Industry application notes

IT services exporters often generate USD-denominated revenue while incurring costs in INR. For some companies, USD is determined as the functional currency due to pricing pressure. Hedge accounting under Ind AS 109 is widely adopted for managing FX risk.

Importers in chemicals and electronics sectors typically face substantial USD/EUR exposures. Translation losses on payables are common during INR depreciation periods. Forward contracts are frequently used; proper hedge documentation is essential for Ind AS 109 compliance.

Multinational subsidiaries may have a functional currency different from their reporting currency. Translation reserves can be material. On repatriation or disposal, these reserves must be reclassified to profit or loss per Para 48.

Ind AS 21 vs AS 11 vs IFRS: Key Differences

The table below summarises key differences between Ind AS 21, its predecessor AS 11, and IFRS (IAS 21):

India’s carve-outs from IFRS mainly relate to transitional provisions around long-term foreign currency monetary items. While IAS 21 prohibits capitalisation of such exchange differences, Indian GAAP previously allowed it under specific conditions in AS 11. Ind AS 21 aligns closely with IFRS except where Indian law prescribes otherwise.

Latest Amendments to Ind AS 21 (FY 2026-27)

No amendments have been notified to Ind AS 21 for FY 2026-27 as of 2026-05-02. The standard continues to apply in its existing form.

Related Standards You Should Know

• [AS 11](/as-11-effects-of-changes-in-foreign-exchange-rates/), Equivalent FX standard for non-Ind AS companies; permits long-term capitalisation option.
• [Ind AS 109](/ind-as-109-financial-instruments/), Hedge accounting for foreign currency exposures.
• [Ind AS 29](/ind-as-29-financial-reporting-in-hyperinflationary-economies/), Hyperinflationary economies translation procedures.
• [Ind AS 27](/ind-as-27-separate-financial-statements/), Separate financial statements of foreign subsidiaries.
• [Ind AS 110](/ind-as-110-consolidated-financial-statements/), Consolidation of foreign subsidiaries requires translation per Ind AS 21.

Need Help with Ind AS 21 Compliance?

Patron Accounting LLP supports finance teams and auditors with end-to-end compliance on Ind AS 21 The Effects of Changes in Foreign Exchange Rates. Our team brings deep expertise across industries with complex cross-border operations.

Our services include:

• Statutory Audit
• Ind AS Advisory
• Financial Reporting & Schedule III
• Disclosure Review

Schedule a 30-minute consultation with our Ind AS team, Pune · Mumbai · Delhi · Gurugram.

About This Article

Reviewed by CA & CS Team · Patron Accounting LLP

Technical reviewer: CA Sundram Gupta, FCA

Last reviewed: 2026-05-02

Sources: ICAI Compendium of Accounting Standards · MCA Notification (Companies (Indian Accounting Standards) Rules, 2015, dated 16 February 2015) · IFRS Foundation