Under Ind AS 21,ÌýThe Effects of Changes in Foreign Exchange Rates, a company on initial recognition, uses a spot exchange rate when translating a foreign currency transaction at the date of the transaction. Additionally, Ind AS 21 requires the use of a spot exchange rate when an entity reports foreign operation’s results and financial position in its financial statements. A spot exchange rate is the exchange rate for immediate delivery.
However, in rare circumstances, it is possible that one currency cannot be exchanged into another. This lack of exchangeability may occur when a government imposes controls on capital imports and exports, or when it limits the volume of foreign currency transactions at an official exchange rate. In some cases, severe economic instability or hyperinflation can disrupt normal currency exchange mechanisms, leading to a lack of exchangeability. Consequently, market participants are unable to buy and sell currency to meet their needs at the official exchange rate and turn instead to unofficial, parallel markets.
Although circumstances in which a currency is not exchangeable might arise relatively lower or only few jurisdictions may be affected by this, it can have a significant accounting impact over affected companies.
Ind AS 21 specifies the exchange rate to use in reporting foreign currency transactions when exchangeability between two currencies is temporarily lacking. However, Ind AS 21 does not specify what an entity is required to do when a lack of exchangeability is not temporary.Ìý
