Ind AS 21 requires foreign currency transactions to be recorded initially at the spot exchange rate on the transaction date, and then distinguishes between monetary and non-monetary items for subsequent measurement. Monetary items — cash, receivables, payables, borrowings denominated in a foreign currency — are retranslated at the closing rate at every reporting date, with the resulting exchange difference recognised in profit or loss. Non-monetary items carried at historical cost — most property, plant and equipment, most inventory — are not retranslated at all; they remain at the rate in effect on the original transaction date.
The distinction that drives everything else
| Monetary items | Non-monetary items | |
|---|---|---|
| Definition | Units of currency held, and assets/liabilities to be received or paid in a fixed or determinable number of currency units | Everything else — items whose value isn't fixed in currency units |
| Examples | Foreign currency cash, trade receivables/payables, foreign currency loans | Inventory, property, plant and equipment, most prepayments |
| Subsequent measurement | Retranslated at the closing rate each reporting date | Non-monetary items at historical cost: remain at the transaction-date rate. Non-monetary items at fair value: translated at the rate on the date fair value was determined |
| Exchange difference | Recognised in profit or loss, generally | No separate exchange difference arises for cost-based items, since they're never retranslated |
Retranslating foreign-currency-denominated inventory or a fixed asset at the closing rate, rather than leaving it at the historical transaction-date rate, is a direct misapplication of the standard — the common error comes from applying the monetary-item translation logic to an item that is, by Ind AS 21's own definition, non-monetary.
Where exchange differences actually land
For an entity's own standalone financial statements, exchange differences on monetary items are generally recognised in profit or loss in the period they arise. The treatment changes for consolidated financial statements translating an entire foreign operation — exchange differences arising on that translation are recognised in other comprehensive income and accumulated in a separate component of equity, reclassified to profit or loss only on disposal of the foreign operation. Confusing the standalone-entity rule with the foreign-operation-translation rule is a common source of misclassification.
Common practice, not a requirement
A long-term intercompany loan that is, in substance, part of the net investment in a foreign operation (not expected to be settled in the foreseeable future) follows the net-investment translation treatment — exchange differences in other comprehensive income — rather than the ordinary monetary-item rule of recognising the difference in profit or loss.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Bank, cash & treasuryAuditing foreign currency bank accounts and EEFC balancesRestating EEFC and other foreign currency balances at year end, testing the exchange gain or loss, and the documentation worth sighting.
- Revenue, receivables & cut-offInd AS 109: financial instruments and the expected credit loss modelThe old model waited for a loss to be incurred before providing for it. ECL is built the opposite way — provide for the loss you expect, before it happens.
- Bank, cash & treasuryBank reconciliation audit procedure for statutory auditWhat a BRS must reconcile, the red flags that separate a timing difference from a cover-up, and how many months you actually need to review.
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