What is the amendment in Ind AS 21 all about?
On 07th May 2025, MCA issued notification amending Companies (Indian Accounting Standards) Rules. The Amendment focus mainly on Ind AS 21- Effects of Changes in Foreign Exchange Rates. The amendment gives guidance on how to account for foreign currency transactions when the currencies are not exchangeable. Summarised below are amendments (insertions/substitutions) to the existing standard.
Definition of Exchangeable currency:
Prior to this amendment : AS-21 Did not clearly define what makes a currency "exchangeable."
The 2025 Amendment adds new sub-paragraph to existing Para 8 of Ind AS 21, that explicitly defines Exchangeability of a currency.
Explanation: A currency is considered exchangeable into another when
- the entity is able to obtain the other currency within a reasonable time frame considering the normal administrative delay as well
- through a market or regulated exchange mechanism where there are clearly defined enforceable rights and obligations.
How is Exchangeability assessed?
Exchangeability is assessed at
- at a measurement date and
- for a specified purpose.
The currency cannot be considered exchangeable: If the entity which is in requirement of that currency for a specific purpose, is unable to obtain more than an insignificant amount, then it is deemed to be unexchangeable.
On what scenarios are currencies become unexchangeable ?
Currencies become unexchangeable when there are legal, economic, or political barriers that prevent conversion into another currency. Few Examples being:
- International sanctions imposed on a country can restrict its ability to exchange its currency with other countries.
- Governments may impose capital controls in an effort to stabilize their currency, which restrict the movement of money in and out of a country making it very difficult to exchange the currency for other currencies.
- When a central bank lacks foreign currency reserves, it can’t support currency exchange operations effectively.
- Political reasons like Regime Change or coup can disrupt the financial system.
Conditions like these make the currency non-exchangeable, even if demand exists.
Lets move on to the question of estimating the Spot exchange rate.
Where does Spot exchange rate come into picture? How is it estimated?
Previous version of AS-21: lacked inputs on what needs to be done when the currency is not exchangeable.
Amended AS-21 prescribes that when a currency is not exchangeable at a specific date, ie the entity cannot use an actual spot rate because it doesn’t exist or isn’t accessible.
Then, the entity shall “estimate” the spot exchange rate which ideally should represent what the currency would be worth/what the spot rate would be, if a normal orderly market transaction at that measured date, between typical buyers and sellers under the prevailing/current economic condition had been possible or could take place.
Rate selection in case of multiple exchange rates:
Before 2025 amendment, AS-21 did not have any clear rule on which rate to use when several are available.
Amended AS-21 made substitutions to Para 26: which states that when several exchange rates are available, the rate to be chosen must be the one that is closest to or best reflects the rate that could have been used to settle the cash flows, had they occurred at the measured date.
Disclosure requirements
Prior to this amendment: there was Minimal disclosure requirement on currency exchangeability.
Amended AS-21: paragraph 57A has been inserted which specifies disclosure requirements.
When an entity estimates uses spot exchange rate because the currency is not exchangeable, then entity has to disclose following information so as to enable the users of FS to understand the impact of it on the entity’s financial performance, financial position and cash flow.
The disclosures are :
- the nature and financial effects of the currency not being exchangeable into the other currency
- the spot exchange rate(s) used
- the estimation process and
- the risks to which the entity is exposed because of the currency not being exchangeable into the other currency.
Applicability of the amendment:
These amendments shall be applicable for Annual reporting periods beginning April 1, 2025. Transactions on or after 01 April 2025: entities have to use the new estimation method for all relevant foreign currency transactions. Any new or continuing transactions involving non-exchangeable currencies will follow the amended standard.
Impact on Comparative Information:
How does any of these amendments even affect comparative information?
Initial application:
If the new definition of exchangeability changes how a company accounts for certain existing foreign currency balance items in the balance sheet (ie.balances that are originally denominated in a currency other than the entity's functional currency),
the effect of that change is not applied to prior years. (entity does not revise last year’s financials). Instead, the impact is recognized as adjustment to opening balance of retained earnings or translation reserves, depending on the context, as a one-time effect.
When its Adjusted to Retained earnings?
Scenario:
- Entity reports foreign currency transactions in its functional currency, and
- Concludes that either its functional currency or the foreign currency is not exchangeable
Treatment:
Then, translate affected monetary and fair-valued non-monetary items using the estimated spot exchange rate at the date of initial application. Recognize the effect of applying the amendments as an adjustment to opening retained earnings.
When its Adjusted to translation reserves?
Scenario:
- Entity uses a presentation currency different from its functional currency, or Translates the results and financial position of a foreign operation, and
- Concludes that exchangeability is lacking between the relevant currencies:
Treatment:
Then, translate affected assets and liabilities using the estimated spot exchange rate and translate affected equity items using the estimated rate if the functional currency is hyperinflationary. Recognize the effect as an adjustment to cumulative translation differences in equity.
Appendix:
There are amendments made to Appendix as well, that are integral part of the Standard. Those amendments are summarised below:
Erstwhile appendix A, is replaced by new Appendix A titled “Application guidance” which provides a further detailed guidance on Assessing exchangeability of a currency, Estimating spot exchange rate and disclosures.
New Appendix C is inserted which deals with “References to matters contained in other Indian Accounting Standards”, which was earlier dealt by Old Appendix A. Appendix C provides cross reference to relevant paragraphs in Ind AS 101 and 109, that corresponds to the amendments made in ind AS 21.