The Ministry of Corporate Affairs (MCA), in consultation with the National Financial Reporting Authority (NFRA), has introduced amendments to Ind AS 21 – The Effects of Changes in Foreign Exchange Rates, through the Companies (Indian Accounting Standards) Amendment Rules, 2025. These changes are effective from April 1, 2025, and address the challenges companies face when dealing with non-exchangeable currencies.
The core amendment is the inclusion of guidance on how to assess currency exchangeability and how to estimate the spot exchange rate when actual exchange is not possible. This is particularly relevant for companies operating in countries with currency restrictions, hyperinflation, or unstable monetary regimes.
Revised Criteria for Exchangeability
The amendments to Ind AS 21 clarify when a currency is considered exchangeable into another. A currency is treated as exchangeable if it can be obtained within a reasonable time (allowing for normal administrative delays), through a market or official mechanism, and the transaction results in legally enforceable rights and obligations.
If these conditions are not met—and the entity cannot obtain more than an insignificant amount of the required currency for a specific purpose at the measurement date—the currency is considered not exchangeable.
In such cases, the entity must estimate the spot exchange rate. This can be done using an observable rate that meets the objective, or a reasonable estimation method that reflects the rate at which an orderly exchange transaction would occur under current economic conditions.
The purpose for which the currency is required plays an important role in assessing exchangeability. For foreign currency transactions, the purpose is assumed to be the settlement of individual items. When using a presentation currency different from the functional currency, the purpose is settling net assets or liabilities. In the case of foreign operations, the purpose is settling the net investment in that operation.
Applicability
The new rules apply to all companies following Ind AS for annual reporting periods beginning on or after April 1, 2025.
Transition Provisions:
- Comparative figures need not be restated.
- On the date of initial application, companies must:
- Use estimated spot rates for foreign currency monetary items and fair value items.
- Adjust the impact through retained earnings or translation reserves, depending on the situation.
Consequential changes have also been made to Ind AS 101, requiring additional disclosures for entities transitioning due to severe hyperinflation and clarifying how to assess exchangeability in first-time adoption.
The updated Ind AS 21 framework provides much-needed clarity on how to account for non-exchangeable currencies, significantly improving the accuracy and comparability of financial reporting. These amendments will enable companies to report their foreign currency exposures more transparently, thereby enhancing investor understanding of currency-related risks. By offering clearer and more reliable financial information, the revised standard strengthens the credibility of financial statements, especially in complex currency environments. Ultimately, these changes are expected to foster greater trust among global investors and support more informed decision-making for entities with international operations.
