Ind AS 21 deals with the effects of changes in exchange rates.

So, what are the issues that are involved here?

An entity may have foreign currency transactions and/or it may have foreign operations.

So, first we need to determine what is foreign currency.

Assume that an entity based in India purchases inventory from Denver in USD terms. The question arises as to in which currency the financial statements should be prepared. Should it be in INR or should it be in USD?

The financial statements should be prepared in the functional currency of the entity.  This leads us to the next important question viz., what is meant by a functional currency. This is covered by Ind AS 21.

Next, an entity may have foreign operations, in the form of say a subsidiary or a joint venture. In that case, first we need to understand what is meant by a foreign operation and how should the functional currency be determined in respect of such foreign operations.

The next question arises as to whether the financial statements can be prepared in any currency which leads us to the next topic viz., what is meant by presentation currency?

Ind AS 21 covers all of these and in addition, it also gives guidance as to how the account balances should be translated into the functional currency, which exchange rate should be used and how the exchange differences should be accounted for.

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