Understanding the Connection Between Foreign Exchange Rate Change and PPE Impairment

Para 25 of Ind AS 21, The Effects of Changes in Foreign Exchange Rates, states that the carrying amount of some items is determined by comparing two or more amounts. For example, the carrying amount of inventories is the lower of cost and net realizable value in accordance with Ind AS 2, Inventories. Similarly, in accordance with Ind AS 36, Impairment of Assets, the carrying amount of an asset for which there is an indication of impairment is the lower of its carrying amount before considering possible impairment losses and its recoverable amount. When such an asset is non-monetary and is measured in a foreign currency, the carrying amount is determined by comparing:

(a) the cost or carrying amount, as appropriate, translated at the exchange rate at the date when that amount was determined (i.e., the rate at the date of the transaction for an item measured in terms of historical cost); and

(b) the net realisable value or recoverable amount, as appropriate, translated at the exchange rate at the date when that value was determined (e.g., the closing rate at the end of the reporting period).

In order to better understand this provision and related provisions of Ind AS 21 related to the subsequent measurement of non-monetary assets and impairment loss, this story covers a practical case study on the connection between the foreign exchange rate and PPE impairment.

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