A Ltd., whose functional currency is LC, has the following foreign currency liabilities denominated in FC as at 31 March 20X2: Particulars FC…

CA Final · Financial Reporting · RTP · November 2026
A Ltd., whose functional currency is LC, has the following foreign currency liabilities denominated in FC as at 31 March 20X2: Particulars FC Long-term foreign currency borrowing 10,00,000 Trade payables relating to import of electronic goods 10,000 During the year ended 31 March 20X2, A Ltd. imported electronic goods having a total value of FC 70,000. The following additional information is available: The relevant authority in A Ltd.'s jurisdiction permits A Ltd. to obtain FC up to 1,00,000 per year for payment for imports of electronic goods. For repayment of long-term foreign currency borrowings, the relevant authority permits A Ltd. to obtain FC only up to 50,000 per year. The restrictions are applicable at the level of the specified purpose for which FC is required. The authority does not permit A Ltd. to use the FC obtained under the import quota for repayment of its long-term borrowing. As at 31 March 20X2, the following exchange rates are observable: LC 1.20 = FC 1. This is the rate at which A Ltd. is permitted to obtain FC for payment for imported electronic goods. LC 1.32 = FC 1. This is the rate quoted in an unofficial / parallel market. However, transactions in this market do not create enforceable rights and obligations and therefore cannot be considered when assessing whether FC is exchangeable for the purpose of the borrowing. The rate of LC 1.20 per FC is an observable exchange rate for a purpose other than repayment of the borrowing and, based on the facts and circumstances, A Ltd. concludes that this rate meets the objective of estimating the spot exchange rate at 31 March 20X2. Assume that there are no other changes in the foreign currency liabilities during the year and ignore interest and transaction costs. Required: (a) Determine whether FC is exchangeable into LC at 31 March 20X2 separately for each of the two liabilities, giving reasons. (b) Determine the exchange rate to be used for translating each liability into LC at 31 March 20X2 in accordance with the amended Ind AS 21. (c) Calculate the amount of each liability to be recognised in LC in the financial statements of A Ltd. as at 31 March 20X2. (d) Explain whether the LC 1.32 per FC unofficial market rate can be used in determining the exchangeability of FC and, if FC is determined to be non-exchangeable, whether such a rate can nevertheless be considered in estimating the spot exchange rate.

Suggested Answer and Working Notes:

(a) Assessment of exchangeability: The amendment in Ind AS 21 requires exchangeability to be assessed at the measurement date and for a specified purpose. Therefore, the fact that A Ltd. can obtain FC for one purpose does not automatically establish that it can obtain FC for another purpose. Consequently, the same currency may be exchangeable for settling trade payables but not exchangeable for repayment of a long-term borrowing. Trade payables: A Ltd. is required to assess exchangeability for the specified purpose of settling trade payables arising from imports. The total imports during 20X1-20X2 are FC 70,000, which are within the annual permitted limit of FC 1,00,000. Accordingly, A Ltd. is able to obtain sufficient FC to settle the trade payables. Therefore, FC is exchangeable into LC for the purpose of settling the trade payables. Long-term borrowing: For repayment of the long-term borrowing, A Ltd. can obtain only FC 50,000 in a year against the outstanding borrowing of FC 10,00,000. FC 50,000 is only 5% of the outstanding liability and is considered no more than an insignificant amount in relation to the amount required to settle the borrowing. Accordingly, FC is not exchangeable into LC for the purpose of settling the long-term borrowing. Thus, the exchangeability assessment is made separately for the specified purposes rather than for FC as a currency generally. (b) Exchange rates to be applied: For the trade payables, since FC is exchangeable for the specified purpose, A Ltd. applies the applicable requirements of Ind AS 21. Accordingly, the exchange rate is LC1.20 per FC. For the long-term borrowing, FC is not exchangeable for the specified purpose. Therefore, A Ltd. is required to estimate the spot exchange rate at 31 March 20X2. Since the observable rate of LC 1.20 per FC for another purpose meets the objective of the amended Ind AS 21, A Ltd. may use that observable exchange rate without adjustment. Therefore: Trade payables: LC 1.20 per FC Long-term borrowing: LC 1.20 per FC (estimated spot rate) (c) Translation into LC Liability FC Rate (LC/FC) LC amount Long-term borrowing 10,00,000 1.20 12,00,000 Trade payables 10,000 1.20 12,000 Total 10,10,000 12,12,000 (d) Treatment of the unofficial market rate: The LC 1.32 per FC rate cannot be considered when determining whether FC is exchangeable because the unofficial/parallel market does not result in enforceable rights and obligations. However, once A Ltd. has determined that FC is not exchangeable for the purpose of the borrowing, observable exchange rates from unofficial or parallel markets may be considered as an input in estimating the spot exchange rate, subject to appropriate adjustments where necessary to meet the objective of paragraph 19A. The amendment in Ind AS 21 does not prescribe a hierarchy of observable exchange rates for this purpose.

Topics: Ind AS 21, Ind AS 12

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