CA Anuj Agrawal
CA Anuj Agrawal

As you all might be aware about the meaning and significance of functional currency for an entity whose financial statements are being prepared under Ind-As/ IFRS. For detailed discussion and to understand what exactly the Functional Currency means and how it is being identified, please refer


Let’s take an example from one of our regular reader who actually wanted to know some facts/ issues related to Functional Currency while using Functional Currency concepts by him in some real practical situations.


An Entity whose financial statements are currently being prepared under INR (as currently there is no concept of Functional Currency) and after the applicability of  Ind-As for the entity it has been found/ concluded by the management that due to some of its primary economic environment and some other primary indicators , its functional currency would be EURO. Now, below queries have been raised –

1-There is a Share capital which was issued in INR by the entity and now the functional currency has been changed to EURO, so what rate of exchange should be used (at the time of transition as well as going forward) ?

2- What would be the impact of change in Functional Currency in case of First time adoption under Ind-As 101?

3- How frequent Functional currency can be changed? and what would be the implications each time when such change happens?

4- How to deal with comparative amounts in financial statements in case such change happens within Functional currency?

Suggested Approach –

We will first summaries some relevant extracts from Ind-As about these concepts and then one by one we can discuss about suggested approaches-

Ind-As 21– “The Effect of Changes in Foreign  Exchange Rates”

Para – 37“The effect of a change in functional currency is accounted for prospectively. In other words, an entity translates all items into the new functional currency using the exchange rate at the date of the change. The resulting translated amounts for non-monetary items are treated as their historical cost………”

Ind-As 101“First Time Adoption”

Para D 7AAWhere there is no change in its functional currency on the date of transition to Ind ASs, a first-time adopter to Ind ASs may elect to continue with the carrying value for all of its property, plant and equipment as recognised in the financial statements as at the date of transition to Ind ASs, measured as per the previous GAAP and use that as its deemed cost as at the date of transition after making necessary adjustments in accordance with paragraphD21 and D21A, of this Ind AS…………………….”

  1. Answering to First bullet point, When an entity has got changed its Functional Currency then issued Share capital will be converted by using the exchange rate that was applicable at the DATE of SUCH change (date of change of functional currency) and that converted amount will become historical cost of exchange rate for such share capital. Because as we all know about the conversion methodology for all non-monetary items (i.e. share capital) by using historical exchange rate and for monetary (e.g. receivables etc) items it will be converted using closing exchange rates. Hence going forward, all monetary items will be converted using closing exchange rate and non- monetary items will be converted by using these rates i.e. historical (rates that were used while transiting to new functional currency).
  2. Answering to Second bullet point, As per the para D 7 AA of Ind-As 101 (mentioned above) if there is a change in functional currency then an entity who has opted for Deemed Cost exemption (i.e. exemption to re-value assets which were lying at the date of transition to Ind-As and by using this exemption , an entity can straightaway carry over the amounts as it- is using book values shown at the time of transition) will NOT be allowed and an entity has to re-value / fair value all classes of these assets or to apply some other alternatives as relevant accounting standards suggests.
  3. Answering to Third bullet point, Once a Functional Currency has been determined and documented its compliance, then it can only be changed when there is a significant change in economic environment, factors and some other indicators which may suggest its significance change in overall environment comparing to existing one, hence it is not very common to change functional currency frequently. Now, as mentioned in para- 37 of Ind-As- 21, any change in Functional Currency will not be treated a change in accounting policy and any such changes will be applicable PROSPECTIVELY only, the rate of exchange to convert existing currency into the functional currency will be the rate of the date of such change happens, Hence there would be NO impact in PL at the time of transition/ new functional currency changes.
  4. Answering to Fourth bullet point, There is nothing specific mentioned in the standards about the approach or guidance on how to treat comparative numbers in case functional currency changes, One can take a choice by using SAME exchange rates that is being used for current period numbers in order to satisfy PROSPECTIVE approach or can identify/ derive exchange rates of previous years (relevant to this comparative period i.e. closing & average rates) and convert these comparatives, both practices are being followed by various industries.

A reader will appreciate about the main objective of the standard and an approach which one can follow while keeping in mind the basis of origin of such requirements. There could possibly be some specific situations or circumstances where the interpretation of any standard will be different as we should always keep in mind that IND-AS is principle based standards and lot more areas need management judgment in line with the standards relevant interpretation and best practices.

One has to look into all related facts and patterns before concluding this type of assessment based on this concept. Readers are requested not to take this article as any kind of advice (it is not exhaustive in nature) and should evaluate all relevant factors of each individual cases separately.

(Author of this article is an experienced chartered accountant who has specialization on various GAAP conversions assignments covering different industries around different part of the world including acting as an Independent IFRS Advisor & Corporate Trainer. He can be reached via email at [email protected] or Whatsapp +91-9634706933)

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September 2021