[Practical Insights] Ind AS 101 Relief for Long-Term Foreign Currency Items

Editorial Team – [2026] 188 taxmann.com 101 (Article)

Background

Applicability of Ind AS extends beyond merely identifying whether an entity is required to adopt the Indian Accounting Standards. Equally important is understanding the transition framework prescribed under Ind AS 101, which governs how entities migrate from previous GAAP to Ind AS.
In the previous editions of this series, we explored the overall transition framework, including the distinction between mandatory exceptions and optional exemptions, transition provisions relating to financial instruments, share-based payment transactions, and deemed cost options for various classes of assets. Together, these provisions demonstrate how Ind AS 101 seeks to facilitate a balanced transition by ensuring compliance with Ind AS while reducing the operational complexities associated with retrospective application.
This edition explores the transition relief available under Ind AS 101 for long-term foreign currency monetary items. It explains why retrospective application of Ind AS 21 may be impracticable for entities that had adopted the previous GAAP accounting policy, examines the conditions for continuing that policy on transition, and analyses the accounting implications of the relief through practical illustrations.

Introduction

Foreign currency borrowings have traditionally been an important source of finance for Indian companies, particularly for funding infrastructure projects, manufacturing facilities and other long-term capital investments. Exchange rate movements on such borrowings can significantly affect an entity’s financial performance and financial position.
While Ind AS 21 requires exchange differences arising on foreign currency monetary items to be recognised in profit or loss as they occur, the previous GAAP permitted entities to defer or capitalise certain exchange differences relating to long-term foreign currency monetary items. Since many Indian companies had irrevocably adopted this accounting policy before transitioning to Ind AS, retrospective application of Ind AS 21 would have required extensive restatement of historical financial information. To address this practical difficulty, Ind AS 101 permits eligible first-time adopters to continue their previous GAAP accounting policy for qualifying long-term foreign currency monetary items.

1. Understanding Long-term Foreign Currency Monetary Items

A monetary item represents money held or assets and liabilities that are receivable or payable in a fixed or determinable number of currency units. Typical examples include:

a) Foreign currency term loans;
b) Foreign currency debentures;
c) Foreign currency bonds;
d) Long-term foreign currency trade receivables and payables; and
e) Other contractual monetary balances denominated in foreign currency.

Since settlement takes place in foreign currency, the value of these monetary items changes whenever exchange rates fluctuate. Accordingly, exchange differences arise even though the amount payable in foreign currency remains unchanged.

Illustration– Exchange Difference under Ind AS 21

Suppose Alpha Ltd. borrows USD 5 million on 1st April 2024 when the exchange rate is ₹82 per USD. Thus, the loan is initially recognised at: USD 5 million × ₹82 = ₹410 million.
On 31st March 2025, assume the closing exchange rate becomes ₹86 per USD. The outstanding liability is re-measured at USD 5 million × ₹86 = ₹430 million.
Accordingly, Alpha Ltd. recognises: Increase in loan liability of ₹20 million. Further, the Exchange loss of ₹20 million is recognised in the Statement of Profit and Loss. Thus, irrespective of whether the loan is actually repaid during the year, the exchange fluctuation is recognised immediately in profit or loss.

2. Position under Previous GAAP

The accounting framework under AS 11 was different. Recognising the significant volatility that exchange fluctuations could create for long-term borrowings, Paragraphs 46 and 46A of AS 11 permitted entities to adopt an alternative accounting policy.

Where the prescribed conditions were satisfied, exchange differences arising on qualifying long-term foreign currency monetary items could be:
a) accumulated in the Foreign Currency Monetary Item Translation Difference Account (FCMITDA) and amortised over the balance tenure of the loan; or
b) adjusted to the cost of the related depreciable asset, depending upon the nature of the borrowing and the applicable provisions.
However, it is important to note that once this accounting policy was adopted, the choice was irrevocable. Many Indian companies exercised this option because it reduced volatility in reported profits.

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