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Proposed amendments in IND AS 21 by ICAI!

Announcement
ICAI issues Exposure Draft on Lack of Exchangeability – Amendments to Ind AS 21, The Effects of
changes in Foreign Exchange Rates, to help entities assess:

  • whether a currency is exchangeable,
  • estimate the spot exchange rate when a currency is not exchangeable, and
  • to provide for disclosures to be made when a currency is not exchangeable;

Background
Ind AS 21 is an Indian Accounting Standard that deals with the effects of changes in foreign exchange rates on the financial statements of an entity. It covers how to account for transactions and balances in foreign currencies, how to translate the results and financial position of foreign operations, and how to translate the financial statements into a presentation currency. Ind AS 21 applies to transactions and balances in foreign currencies, as well as to the translation of financial statements of foreign operations. The standard uses the following terms to describe different currencies:

Foreign currency: a currency other than the functional currency of the entity.

  • Functional currency: the currency of the primary economic environment in which the entity operates. It is the currency that mainly influences the sales prices, costs, and financing of the entity. The functional currency is used to measure the financial performance of an entity.

Proposed Amendment

  • Adds definition of the term ‘exchangeable’ in Ind AS 21, which states that “A currency is exchangeable into another currency when an entity is able to obtain the other currency within a time frame that allows for a normal administrative delay and through a market or exchange mechanism in which an exchange transaction would create enforceable rights and obligations”;
  • Requires the entity to assess whether a currency is exchangeable into another currency: (a) at a
    measurement date, and (b) for a specified purpose, and if the entity is able to obtain no more than an insignificant amount of the other currency, the currency is not exchangeable into the other currency;
  • Requires the entity to estimate the spot exchange rate at a measurement date when a currency is not exchangeable;
  • Requires specific disclosures viz. the nature and financial effects of the currency not being
    exchangeable, (b) the spot exchange rate(s) used, (c) the estimation process, and (d) the risks to which the entity is exposed because of the currency not being exchangeable;
  • Lays down transition requirements, while specifically stating that an entity shall not restate comparative information in applying Lack of Exchangeability
  • Includes an Application Guidance to assist entities in assessing currency exchangeability and estimating the spot exchange rate.
  • Proposes consequential amendments to Ind AS 101 (Complete amendment regarding IND AS 101 will be subsequently informed through SW Insights).

SW REMARKS:ICAI has invited public comments by December 1, 2023 on these proposed amendments. This amendment shall be applicable for annual reporting periods beginning on or after April 1, 2025.

Deepak Pandey, Audit Associate, SW India

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