Introduction

The Ministry of Corporate Affairs (MCA) has introduced crucial amendments to Ind AS 21 – The Effects of Changes in Foreign Exchange Rates, through the Companies (Indian Accounting Standards) Amendment Rules, 2025. These amendments are aimed at strengthening clarity and consistency in accounting for foreign currency exchangeability, particularly in jurisdictions with currency controls or economic instability. The changes, notified via G.S.R. 291(E) in the Gazette of India, have been formulated in consultation with the National Financial Reporting Authority (NFRA). They will come into force from April 1, 2025, and are applicable prospectively for financial periods beginning on or after this date.

Why This Matters

These amendments are expected to significantly impact entities that:

• Operate in jurisdictions with restricted or hyperinflationary currencies,
• Engage in foreign operations, or
• Have cross-border transactions involving limited currency exchangeability.

The revised Ind AS 21 enhances comparability, transparency, and compliance in financial reporting.

Key Highlights of the Ind AS 21 Amendments

1. Definition of “Exchangeability” Introduced

A new explanatory paragraph has been inserted to clarify when a currency is considered exchangeable. A currency is deemed exchangeable when it:

• Can be obtained within a reasonable timeframe,
• Through a market or mechanism with enforceable rights and obligations,
• Without needing exceptional actions like black-market dealings.

2. Assessment of Exchangeability (New Paras 8A and 8B)

Entities must now assess exchangeability:

• At the measurement date, and
• For a specific purpose.

If more than an insignificant amount of currency cannot be obtained for that purpose, it is deemed non-exchangeable.

3. Estimating the Spot Exchange Rate (New Para 19A)

If a currency is found to be non-exchangeable, entities must estimate the spot rate reflecting:

• The rate for an orderly transaction between market participants,
• Assuming the currency could be exchanged under standard business conditions.

4. Use of a Single Exchange Rate (Revised Para 26)

When multiple exchange rates are available, entities must:

• Use only one rate per transaction,
• Preferably, the one reflecting expected cash flows on the measurement date.

5. Enhanced Disclosure Requirements (New Paras 57A and 57B)

Entities estimating exchange rates must disclose:

• The nature and financial effects of non-exchangeability,
• Spot exchange rates used and the methods of estimation,
• Risks from currency restrictions,
• Assumptions and inputs used in estimation.

6. New Application Guidance (Appendix A)

The new appendix outlines a two-step process:

• Step I: Determine if the currency is exchangeable.
• Step II: Estimate the spot rate if it’s not exchangeable.

7. Transitional Provisions (New Paras 60L and 60M)

Key transitional provisions include:

• No need to restate comparative periods.
• Adjustments are made to opening retained earnings or the foreign currency translation reserve.

8. Alignment with Other Ind AS Standards

Changes have been made to:

• Ind AS 101 – First-time Adoption of Ind AS
• Ind AS 109 – Financial Instruments

These ensure consistent treatment for hyperinflationary environments and net investment in foreign operations.

Practical Implications for Businesses

Who Should Pay Attention?

• Multinational corporations in high-risk currency zones
• Exporters/importers managing foreign currency
• NBFCs and financial institutions with foreign exposures
• Entities in oil, IT, pharma, and similar sectors

How Should Businesses Prepare?

• Update accounting policies to reflect the new guidance
• Identify areas of non-exchangeability risk
• Enhance systems for estimating and documenting exchange rates
• Provide training for finance and reporting teams

Regulatory Context: A Move Toward Global Convergence

These amendments align with recent updates made to IAS 21 by the International Accounting Standards Board (IASB), bringing Indian standards closer to global financial reporting norms.

Conclusion

The MCA’s amendments to Ind AS 21 are a significant step toward improving financial reporting in volatile or regulated currency markets. Key benefits include:

• Clarity in determining exchangeability
• Consistency in exchange rate estimation
• Transparency through robust disclosures

With the changes effective from April 1, 2025, companies should begin their internal assessments and prepare for timely compliance. To detailed artcile please click here