[Opinion] Ind AS 21 Amendments Clarify Currency Exchangeability

Ajay Kumar Maggidi – [2025] 174 taxmann.com 402 (Article)

The MCA, through its notification dated 7th May 2025, has introduced amendments to Ind AS 21, The Effects of Changes in Foreign Exchange Rates, effective from FY 2025-2026.

These changes provide clarity on assessing exchangeability between currencies, estimating spot exchange rates when exchangeability is lacking, and enhancing disclosure requirements to improve transparency.

The amendments align Ind AS with global IFRS standards, addressing scenarios where currency volatility or regulatory restrictions complicate financial reporting. By requiring entities to use orderly transaction based estimates and disclose risks.

1. Understanding the Concept of Exchangeability

Defining Exchangeability under Ind AS 21

A currency is deemed exchangeable into another if an entity can obtain the target currency within a normal administrative delay through enforceable market mechanisms.

For example, if a company needs to convert INR to USD, exchangeability exists if the transaction can be completed within 5 to 7 days through a regulated forex market. The amendments introduce explicit criteria:

1. Time Frame: The transaction must align with “normal administrative delays,” which vary by jurisdiction but typically range from 2–7 days.
2. Enforceable Rights: The exchange must occur through a mechanism that legally binds both parties, such as a central bank or licensed forex dealer.

If an entity can obtain only an insignificant amount of the target currency for instance, limited to 5% of the transaction value due to capital controls the currency is classified as non-exchangeable.

2. Estimating Spot Exchange Rates in Non-Exchangeable Scenarios

When and How to Estimate

When exchangeability is absent, entities must estimate the spot rate using orderly transaction principles reflective of market participant behaviour. For example, during Argentina’s 2023 currency crisis, businesses could not access USD at official rates due to central bank restrictions. Under the amended Ind AS 21, companies would estimate the rate based on parallel market data or third-party broker quotes, ensuring it faithfully represents economic conditions.

Key Considerations in Estimation:

• Purpose-Specific Assessment: The rate must align with the transaction’s purpose, such as settling payables or valuing assets.
• Avoiding Distressed Rates: Entities must exclude fire sale or forced liquidation rates, prioritising rates from voluntary, informed parties.

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