Practical situations on Ind AS 21 and ITFG

Case 1: P Limited, an Indian entity, engaged in providing IT services worldwide. Following are the key points of the IT business:

• Generates 60% revenue in USD and 40% in rest of the currencies.
• 50% operating costs are incurred in INR, 40% in USD and 10% in rest of the currencies.
• Raises 80% finance in INR
• USD receipts from its customers are converted into INR and retained in INR

Analysis:

Primary indicators: significant revenue is generated in USD, however significant cost incurred is in INR. Therefore, primary indicators does not give the clear picture of functional currency, hence, need to go to secondary indicators arises here.

Secondary indicators: significant funds are generated in INR and receipts are being retained in INR.

Hence, functional currency is INR.

Case 2: P Limited is an Indian company whose functional currency is INR, entity has its non-integral foreign operation in US which is being conducted in the name of S Ltd, a subsidiary company.

P Ltd has receivable from S Ltd. While consolidating the financial accounts, intra group balances will be eliminated and exchange difference will be recognised in Profit/Loss.

Also, P Ltd has given loan to its subsidiary company, which is repayable in 25 years. Since there is a specified payback period, the settlement is planned. Therefore, this loan won’t be treated as Net investment in foreign operation and exchange difference arising on the same will be booked in Profit/Loss.

However, if loan will be replaced by issuing equity, in this case, it will be considered as Net investment in foreign operation.

Accounting treatment for the loan treated as net investment in non-integral foreign operation:

AS 11:

Exchange difference will be accumulated in FCTR (same treatment in standalone financial statement and consolidated financial statement).

Ind AS 21:

Exchange difference will be recognised in Profit / Loss in Standalone financial statements.

Exchange difference will be recognised in OCI in Consolidated financial statements and will be reclassified from OCI to Profit/Loss on disposal of the net investment.

Case 3 (on issue covered under Appendix B):

Entity ABC Ltd entered into a contract with a customer to provide services and the contract is non-cancellable. Contract value is USD 12 Lakhs. Following are the key points as per the contracts:

• Customer has to pay advance of USD 6 Lakhs on 01-02-2019;
• Service will be completely provided upto 31-01-2020 and invoice will be raised;
• Remaining amount will be received after the provision of services i.e., 15-02-2020.

Spot exchange rates:

01-02-2019: 1 USD = INR 65

31-03-2019: 1 USD = INR 66

31-01-2020: 1 USD = INR 69

15-02-2020: 1 USD = INR 70

Analysis:

Journal entries:

01-02-2019

Bank                                        Dr.     INR 390 Lakhs (USD 6 Lakhs X INR 65)

Contract liability                     Cr.     INR 390 Lakhs (USD 6 Lakhs X INR 65)

31-03-2019: No entry of restatement of receivable in foreign currency will be passed as this is non-monetary foreign currency item (Refer note below).

31-01-2020

Contract liability                      Dr.     INR 390 Lakhs (USD 6 Lakhs X INR 65)

Debtor receivable                     Dr.     INR 414 Lakhs (USD 6 Lakhs X INR 69)

Revenue                                  Cr.     INR 390 Lakhs (USD 6 Lakhs X INR 65)

Revenue                                  Cr.     INR 414 Lakhs (USD 6 Lakhs X INR 69)

15-02-2020

Bank                                        Dr.     INR 420 Lakhs (USD 6 Lakhs X INR 70)

Debtor receivable                     Cr.     INR 414 Lakhs (USD 6 Lakhs X INR 69)

Exchange fluctuation gain       Cr.     INR 6 Lakhs

Note:-

Monetary item as defined under Ind AS 21: Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency. Examples include: amounts prepaid for goods and services (eg prepaid rent); goodwill; intangible assets; inventories; property, plant and equipment; and provisions that are to be settled by the delivery of a non-monetary asset.

Advance received for providing service – practically, advances are treated as non-monetary items because it discharges supply of services and not fixed or determinable number of units of currency. Therefore it is not restated.

ITFG Clarification Bulletin 7, Issue 2

Company S, incorporated in India, is a wholly owned subsidiary of company P. As per Ind AS 21, functional currency of Company S to be USD. Company S has subsidiaries and JVs outside India and prepares both consolidated and standalone financial statements. Functional currency of Parent company P to be INR. Company S has to prepare consolidated financial statements in INR for the purpose of consolidation at ultimate parent level.

Whether company S would present its annual financial statements as per Ind AS in its functional currency (i.e., USD) or in the functional currency of parent company (i.e., INR)?

Whether statutory auditors of company S will provide their audit report on financial statements prepared in USD or in INR?

Response:

Entities within a group may have different functional currencies and Ind AS 21 does not prohibit the use of any currency as its presentation currency. Accordingly, in the given case, if Company S is statutorily required to present its financial statements in INR which is different from its functional currency, it may do so by choosing the INR as its presentation currency and prepare and present its financial statements in accordance with Ind AS 21.

As company S is statutorily required to present its financial statements in INR, auditor of company S will be required to give audit report on financial statements prepared in INR.

ITFG Clarification Bulletin 3, Issue 3

XY Ltd has two businesses, Business A and Business B. As per accounting standards, the financial statements of the company are prepared in INR and thereby all transactions are recorded in INR. Under Ind AS, functional currency of Business A is concluded to be USD while functional currency of Business B is concluded to be INR.

In which currency, company XY will prepare its financial statements as per Ind AS?

Response:

As per Ind AS 21, functional currency is the currency of the primary economic environment in which the entity operates. “In preparing financial statements, each entity determines its functional currency.”

Functional currency needs to be identified at the entity level, considering the economic environment in which the entity operates, and not at the level of a business or a division. Accordingly, in the given case, if XY Ltd after applying Ind AS 21, concludes that its functional currency is USD at the entity level, then it shall prepare its financial statements as per USD.