IND AS 21 – EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

COMPILER (PAST EXAM, RTP & MTP)

May Nov
Years
Past Exam RTP MTP Past Exam RTP MTP

2018 NO YES NO NO YES NO

2019 NO YES NO YES YES NO

2020 NO YES NO NO NO NO

1. On 30th January, 20X1, A Ltd. purchased a machinery for $5,000 from USA supplier on
credit basis. A’s Ltd. functional currency is the Rupee. The exchange rate on the date of
transaction is 1$= Rs.60. The fair value of the machinery determined on 31st March, 20X1
is $ 5,500. The exchange rate on 31st March, 20X1 is 1$= Rs.65. The payment to overseas
supplier done on 31st March 20X2 and the exchange rate on 31st March 20X2 is 1$= Rs.67.
The fair value of the machinery remain unchanged for the year ended on 31st March 20X2.
Prepare the Journal entries for the year ended on 31st March 20X1 and year 20X2
according to Ind AS 21.

Solution

Journal Entries

Purchase of Machinery on credit basis on 30th January 20X1:

Rs. Rs.

Machinery A/c (5,000 x $ 60) Dr. 3,00,000

To Creditors 3,00,000

(Initial transaction will be recorded at exchange rate on the date of

transaction)
 Exchange difference arising on translating monetary item on 31st March 20X1:

Rs. Rs.

Machinery A/c [(5,500 x $ 65) – (5,000 x $ 60)] Dr. 57,500

To Profit & loss a/c (Exchange Profit & Loss) 57,500

Profit & Loss A/c [(5,000 x $ 65) – (5,000 x $ 60)] Dr. 25,000

To Creditors 20,000

Exchange difference arising on translating monetary item and settlement of creditors on

31st March 20X2:

(May 2018 RTP)

2. On 1st January, 2018, P Ltd. purchased a machine for $ 2 lakhs. The functional currency
of P Ltd. is Rupees. At that date the exchange rate was $1= Rs.68. P Ltd. is not required to
pay for this purchase until 30th June, 2018. Rupees strengthened against the $ in the three
months following purchase and by 31st March, 2018 the exchange rate was $1 = Rs.65.
CFO of P Ltd. feels that these exchange fluctuations wouldn’t affect the financial
statements because P Ltd. has an asset and a liability denominated in rupees. Which was
initially the same amount. He also feels that P Ltd. depreciates this machine over four years
so the future year-end amounts won’t be the same.

Examine the impact of this transaction on the financial statements of P Ltd. for the year
ended 31st March, 2018 as per Ind AS.

Solution

As per Ind AS 21

01/01/2018 Asset A/c Dr. 1,36,00,000

To Creditor A/c 1,36,00,000
($2,00,000 x 68)
31/03/2018 Asset – Non Monetary Item
– Carried at Cost
Creditor – Monetary Item
Creditor A/c Dr. 6,00,000
To FC gain (P/L) 6,00,000
($2,00,000 x (68 – 65)
 31/03/2018 Depreciation A/c Dr. 8,50,000
To Asset 8,50,000
(1,36,00,000 x 1/4 x 3/12)

The closing Balance of PPE on 31/03/2018 1,27,50,000.

(Nov 2018 – RTP)

3. Supplier, A Ltd., enters into a contract with a customer, B Ltd., on 1st January, 2018 to
deliver goods in exchange for total consideration of USD 50 million and receives an
upfront payment of USD 20 million on this date. The functional currency of the supplier
is INR. The goods are delivered and revenue is recognised on 31st March, 2018. USD 30
million is received on 1st April, 2018 in full and final settlement of the purchase
consideration.

State the date of transaction for advance consideration and recognition of revenue. Also
state the amount of revenue in INR to be recognized on the date of recognition of
revenue. The exchange rates on 1st January, 2018 and 31st March, 2018 are Rs.72 per USD
and Rs.75 per USD respectively.

Solution

01/01/2018 Bank A/c Dr. 1,440

To Advance from Customer (20 X 72) 1,440
Note : Revenue will be recognised on
31/3/2018 as goods will be delivered
on 31/3/2018

31/03/2018 Advance from Customer (20 X 72) Dr. 1,440

Customer A/c (30 X 75) Dr. 2,250
To Sales A/c 3,690
Note : balance 30 USD will be booked at
exchange rate existing as 31/3/2018.
01/04/2018 Bank A/c Dr. 2,250
To Customer A/c 2,250
(May 2019 – RTP)
4. Global Limited, an Indian company acquired on 30th September, 20X1 70% of the share
capital of Mark Limited, an entity registered as company in Germany. The functional
currency of Global Limited is Rupees and its financial year end is 31st March, 20X2.

(i) The fair value of the net assets of Mark Limited was 23 million EURO and the
purchase consideration paid is 17.5 million EURO on 30th September, 20X1.

The exchange rates as at 30th September, 20X1 was Rs.82 / EURO and at 31st March,
20X2 was Rs.84 / EURO.

What is the value at which the goodwill has to be recognised in the financial statements
of Global Limited as on 31st March, 20X2?

(ii)Mark Limited sold goods costing 2.4 million EURO to Global Limited for 4.2 million
EURO during the year ended 31st March, 20X2. The exchange rate on the date of
purchase by Global Limited was Rs.83 / EURO and on 31st March, 20X2 was Rs.84 /
EURO. The entire goods purchased from Mark Limited are unsold as on 31st March,
20X2. Determine the unrealised profit to be eliminated in the preparation of
consolidated financial statements.

Solution

(i) Ind AS 21 requires that goodwill arose on business combination shall be expressed in
the functional currency of the foreign operation and shall be translated at the closing
rate. In this case the amount of goodwill will be as follows:

Net identifiable asset Dr. 23 million

Goodwill(bal. fig.) Dr. 1.4 million

To Bank 17.5 million

To NCI (23 x 30%) 6.9 million

Thus, goodwill on reporting date would be -

1.4 million EURO X Rs.84 = Rs.117.6 million

 (ii)

Particulars EURO in million

Sale price of Inventory 4.20

Unrealised Profit [a] 1.80

Exchange rate as on date of purchase of Inventory [b] Rs.83 / Euro

Unrealized profit to be eliminated [a x b] Rs.149.40 million

As per Ind AS 21 “income and expenses for each statement of profit and loss
presented (ie including comparatives) shall be translated at exchange rates at the dates
of the transactions”. In the given case, purchase of inventory is an expense item
shown in the statement profit and loss account. Hence, the exchange rate on the date
of purchase of inventory is taken for calculation of unrealized profit which is to be
eliminated on the event of consolidation.

(Nov 2019 – RTP)

5. What is the functional currency of an entity?

What are the primary and secondary factors that influence determination of functional
currency?

Solution

• An entity measures its assets, liabilities, equity, income and expenses in its functional
currency.

• All transactions in currencies other than the functional currency are foreign currency
transactions.

Ind AS 21 requires each entity to determine its functional currency.

• In determining its functional currency, an entity emphasises the currency that

determines the pricing of the transactions that it undertakes, rather than focusing on the
currency in which those transactions are denominated.

• The following are the factors that may be considered in determining an appropriate
functional currency:

(a) the currency that mainly influences sales prices for goods and services; this often will
 be the currency in which sales prices are denominated and settled;

(b) the currency of the country whose competitive forces and regulations mainly
determine the sales prices of its goods and services; and

(c) the currency that mainly influences labour, material and other costs of providing
goods and services; often this will be the currency in which these costs are
denominated and settled.

• Other factors that may provide supporting evidence to determine an entity’s functional
currency are:

(a) the currency in which funds from financing activities i.e., issuing debt and equity
instruments) are generated;

(b) the currency in which receipts from operating activities are usually retained.

(Nov 2019 Past Exam – 4 Marks)

6. On 1st April, 20X1, Makers Ltd. raised a long term loan from foreign investors. The
investors subscribed for 6 million Foreign Currency (FCY) loan notes at par. It incurred
incremental issue costs of FCY 2,00,000. Interest of FCY 6,00,000 is payable annually on
31st March, starting from 31st March, 20X2. The loan is repayable in FCY on 31st March,
20X7 at a premium and the effective annual interest rate implicit in the loan is 12%. The
appropriate measurement basis for this loan is amortised cost. Relevant exchange rates are
as follows:

– 1st April, 20X1 - FCY 1 = Rs.2.50.

– 31st March, 20X2 – FCY 1 = Rs.2.75.

– Average rate for the year ended 31st Match, 20X2 – FCY 1 = Rs.2.42. The functional
currency of the group is Indian Rupee.

What would be the appropriate accounting treatment for the foreign currency loan in the
books of Makers Ltd. for the FY 20X1-20X2? Calculate the initial measurement amount for
the loan, finance cost for the year, closing balance and exchange gain / loss.
Solution

Initial carrying amount of loan in books

Loan amount received = 60,00,000 FCY

Less: Incremental issue costs = 2,00,000 FCY

58,00,000 FCY

Ind AS 21, “The Effect of Changes in Foreign Exchange Rates” states that foreign
currency transactions are initially recorded at the rate of exchange in force when the
transaction was first recognized.

Loan to be converted in INR = 58,00,000 FCY x Rs.2.50/FCY

= Rs.1,45,00,000

Therefore, the loan would initially be recorded at Rs.1,45,00,000.

Calculation of amortized cost of loan (in FCY) at the year end:

Period Opening Financial Interest @ 12% Cash Flow Closing Financial

Liability (FCY) (FCY) (FCY) Liability (FCY)

A B C A+B–C

20X1-20X2 58,00,000 6,96,000 6,00,000 58,96,000

The finance cost in FCY is 6,96,000

The finance cost would be recorded at an average rate for the period since it accrues over
a period of time.

Hence, the finance cost for FY 20X1-20X2 in INR is Rs.16,84,320 (6,96,000 FCY x Rs.2.42 /
FCY) The actual payment of interest would be recorded at 6,00,000 x 2.75 = INR 16,50,000

The loan balance is a monetary item so it is translated at the rate of exchange at the
reporting date. So the closing loan balance in INR is 58,96,000 FCY x INR 2.75 / FCY =
Rs.1,62,14,000

The exchange differences that are created by this treatment are recognized in profit and
loss. In this case, the exchange difference is

Rs.[1,62,14,000 – (1,45,00,000 + 16,84,320 – 16,50,000)] = Rs.16,79,680.

This exchange difference is taken to profit and loss. (May 2020 – RTP)