IAS 21 FX Accounting in Indian IT Exporters…

IAS 21 FX Accounting in Indian IT Exporters and Import-Heavy Manufacturers

By Sai Manikanta Pedamallu (ACCA, CMA US, CSCA US, CGMA, ACMA, Dip IFRS, M.Com, MBA, MA)

Lead Instructor, Global Fin X | www.globalfinx.in/manikanta

Two large segments of Indian industry sit on opposite sides of the same currency exposure. IT services earns almost entirely in foreign currency and spends almost entirely in rupees. Import-dependent manufacturing does the reverse: it buys in dollars and sells in rupees.

A rupee move that helps one hurts the other, in roughly symmetrical fashion. Both apply the same standard. The accounting mechanics are identical; what differs is which side of the income statement the exposure lands on.

Post 77 covered IAS 21's framework. Post 19 covered hedge accounting under IFRS 9, which sits alongside but separate from the translation mechanics discussed here. This post covers what IAS 21 actually produces in these two sectors.

Why Indian IT's Functional Currency Is the Rupee

This is the counterintuitive starting point, and it is worth working through properly because it is a genuinely instructive application of the IAS 21 indicators.

Infosys generates substantially all of its revenues in foreign currencies, particularly the US dollar, pound sterling, euro, and Australian dollar, while incurring a significant portion of its expenses in Indian rupees.

Despite that revenue profile, the functional currency of Infosys and its principal Indian entities is the Indian rupee.

The determination follows the primary indicators from Post 77. One indicator points to the currency that mainly influences sales prices. Another points to the currency that mainly influences labour, material and other costs of providing services. For an offshore delivery model, the cost indicator dominates decisively: the workforce is in India, salaries are paid in rupees, facilities are in India, and the overwhelming majority of the cost base is rupee-denominated.

The revenue currency does not determine functional currency on its own. Where the cost structure, the operating environment, the regulatory framework, and the retention of cash all point to one currency, that currency prevails even where billing occurs in another.

The consequence is that USD-denominated receivables, bank balances, and forward contracts held by the Indian entity are foreign currency items, retranslated at each reporting date with differences in profit or loss.

One Functional Currency, Two Presentation Currencies

Infosys presents its consolidated financial statements in US dollars in its Form 20-F filed with the SEC, expressly to facilitate comparability, while presenting in Indian rupees for Indian statutory reporting.

The functional currency structure is identical in both. The Indian entities measure in rupees, the foreign subsidiaries measure in their local currencies, and the group then translates to whichever presentation currency is being used.

This is exactly the distinction Post 77 established. Presentation currency is a free choice and affects only display. Functional currency is determined by facts and drives measurement. An Indian IT company reporting in dollars has not become a dollar-functional entity; it has translated rupee measurements for presentation.

Two Distinct Effects, Frequently Conflated

For a group like Infosys or Wipro, a rupee movement produces two entirely separate accounting effects, and analysts routinely merge them.

The transaction effect. The Indian entity holds USD receivables, USD bank balances, and USD-denominated intragroup balances. These are monetary items in a foreign currency, retranslated at the closing rate at each reporting date, with exchange differences recognised in profit or loss.

The translation effect. The group consolidates foreign subsidiaries whose functional currencies are their local currencies. Their assets and liabilities are translated at closing rate, their income and expenses at transaction date or average rates, and the resulting differences go to other comprehensive income and accumulate in a currency translation reserve.

The first hits profit. The second does not. A weakening rupee produces exchange gains in profit or loss on the parent's USD monetary assets, and simultaneously produces a movement in OCI from translating the foreign subsidiaries, and those are different numbers driven by different balances.

There is also a third effect that is not an exchange difference at all: because most revenue is billed in foreign currency and translated at transaction date rates into the rupee functional currency, a weaker rupee simply produces higher rupee revenue. That is not a gain on retranslation; it is the revenue itself measured at a different rate.

What the Numbers Look Like

The FY26 disclosures illustrate the scale.

Wipro translated its rupee figures into US dollars at the certified rate of US$1 = Rs. 93.83 published for 31 March 2026, while noting that the realised exchange rate in its IT Services segment for the quarter ended 31 March 2026 was US$1 = Rs. 90.60.

That gap between the closing rate and the realised rate is the hedging programme, covered in Post 19. From an IAS 21 perspective the point is narrower: revenue is recognised at rates prevailing when the transactions occurred, receivables are retranslated at the closing rate, and the two are not the same rate.

The translation effect on reported growth is visible in the constant currency reconciliations. In one recent quarter, TCS grew 0.6% quarter on quarter in USD terms while the same revenue translated into 3.7% quarter on quarter growth in INR. Infosys showed 2.7% reported growth against 2.2% constant currency growth, and separately attributed 60 basis points of margin to currency movement.

The gap between reported and constant currency growth is, in essence, the translation effect isolated and disclosed.

Constant Currency as a Management Performance Measure

Constant currency figures restate current period results using prior period exchange rates, stripping out the effect of rate movements to show underlying volume and pricing performance.

This is not an IFRS measure. It is a management-defined performance measure, and under IFRS 18 it falls within the disclosure requirements covered in Post 5: entities presenting such measures must explain them, reconcile them to the most directly comparable IFRS subtotal, and disclose how they are calculated.

For Indian IT companies, where constant currency growth is the headline metric in investor communication while reported growth is the IFRS figure, that reconciliation requirement is directly relevant as Ind AS adopts the IFRS 18 changes.

The Unbilled Revenue Question

A practical classification issue arises for IT companies with substantial unbilled balances, and it is a genuine application of the monetary and non-monetary test from Post 77.

A trade receivable is unambiguously monetary: an unconditional right to receive a determinable number of currency units.

A contract asset under IFRS 15, where the right to consideration is conditional on something other than the passage of time, is less obvious. Where the entity has performed and the amount is determinable but billing is contingent on a milestone certification or client acceptance, the classification requires judgment on whether the entity holds a right to receive a fixed or determinable number of currency units, or a right that is still conditional on future performance or approval.

The distinction matters because it determines whether the balance is retranslated at each reporting date with differences in profit or loss, or is carried at the historical rate. For a large IT services group with unbilled balances running into thousands of crores, applying the wrong classification produces a material error that recurs every period.

Entities need a documented policy applied consistently, and the position should be disclosed where the amounts are significant.

Foreign Subsidiaries and the Translation Reserve

Indian IT groups operate substantial overseas subsidiaries, and the functional currencies of those subsidiaries are their respective local currencies.

For consolidation, their assets and liabilities are translated at the exchange rate at the balance sheet date, and revenue, expense and cash flow items at the average exchange rate for the respective periods, with the resulting gains or losses included in currency translation reserves within other components of equity.

Two consequences follow.

The translation reserve accumulates and does not affect profit until the foreign operation is disposed of, at which point the cumulative amount relating to that operation is reclassified to profit or loss.

Intragroup balances with foreign subsidiaries require assessment. Where a balance forms part of the net investment in the foreign operation, because settlement is neither planned nor likely in the foreseeable future, exchange differences go to OCI on consolidation rather than to profit or loss, as covered in Post 77. Where it is an ordinary trading balance expected to be settled, they go to profit or loss. Groups need to classify these balances explicitly rather than defaulting to one treatment.

Import-Heavy Manufacturers: The Mirror Image

The exposure inverts for manufacturers with dollar-denominated input costs and rupee-denominated revenue.

The affected sectors are substantial: oil refining and marketing, where crude is priced in dollars; power generation dependent on imported coal; automotive and electronics manufacturing with imported components; specialty chemicals and pharmaceuticals with imported intermediates; edible oil processing; and fertiliser production dependent on imported feedstock.

For these entities, a weakening rupee increases the rupee cost of inputs while revenue remains rupee-denominated. Where the ability to pass cost increases through to customers is constrained by competition or by administered pricing, the exposure lands directly in gross margin.

The functional currency determination generally points to the rupee for the same reason it does for IT, though from the opposite direction: sales prices are set in the Indian market, competitive forces and regulation are Indian, and the entity operates in India. Dollar-denominated inputs make the entity exposed to currency risk; they do not make the dollar its functional currency.

The Imported Capital Asset Asymmetry

A specific IAS 21 consequence affects manufacturers importing plant and equipment, and it mirrors the lease asymmetry noted in Post 77.

The imported asset is non-monetary. Property, plant and equipment measured at historical cost is translated at the rate on the transaction date and is never retranslated, regardless of subsequent currency movements.

The payable for it is monetary. A deferred payment obligation to the foreign supplier, or the external commercial borrowing taken to fund the purchase, is retranslated at each reporting date with exchange differences in profit or loss.

The asset is therefore locked at the rate prevailing when it was acquired, while the liability funding it moves with the currency. A manufacturer that imported equipment at Rs. 75 to the dollar and still holds the related borrowing at Rs. 90 carries the asset at the old rate and the liability at the new one, with the entire movement having passed through profit or loss.

Advance Payments to Foreign Suppliers

Manufacturers frequently pay advances against imports, and Post 77 established that advance consideration is non-monetary.

An advance paid in dollars is translated at the rate on the date of payment and is not retranslated. When the goods arrive, the cost recognised uses that historical rate for the advance portion, not the rate on the delivery date. The determination of which rate applies where multiple payments occur is addressed by IFRIC 22, covered in Post 87.

This produces a common error: retranslating supplier advances at the closing rate and recognising exchange differences that should not exist.

The Legacy Long-Term Borrowing Position

Import-heavy Indian manufacturers were among the heaviest users of external commercial borrowings, and were therefore the principal beneficiaries of the Ind AS 101 paragraph D13AA option described in Post 77.

That option permitted first-time adopters to continue the previous Indian GAAP treatment of capitalising or amortising exchange differences on long-term foreign currency monetary items existing at the transition date, rather than recognising them immediately in profit or loss.

The relief applies only to items existing at transition and only until those items are settled. It has been closing steadily as legacy borrowings mature, and any borrowing taken on after transition is subject to the ordinary requirement of immediate recognition in profit or loss.

Where a company still applies the option, its exchange difference charge is not comparable with a peer that does not, and the accounting policy disclosure is what allows a user to identify this.

Worked Example: The Same Rupee Move, Two Sectors

The rupee weakens from Rs. 84.00 to Rs. 90.00 over a financial year.

An IT exporter with a rupee functional currency holds USD 200 million of trade receivables at the year end and recognised USD 1,000 million of revenue during the year at an average rate of Rs. 87.00.

Revenue recognised: USD 1,000 million at Rs. 87.00 = Rs. 8,700 crore. Had the average rate been Rs. 84.00, revenue would have been Rs. 8,400 crore. The Rs. 300 crore difference is not an exchange gain; it is revenue measured at a different rate.

Receivables at year end: USD 200 million at Rs. 90.00 = Rs. 1,800 crore. Where those receivables arose when the rate averaged Rs. 87.00, giving an initial recognition of Rs. 1,740 crore, the retranslation produces an exchange gain of Rs. 60 crore in profit or loss.

Costs are almost entirely rupee-denominated and unaffected. Margin expands.

An import-dependent manufacturer with a rupee functional currency purchased USD 300 million of raw material during the year at an average rate of Rs. 87.00 and holds USD 80 million of trade payables at the year end.

Raw material cost: USD 300 million at Rs. 87.00 = Rs. 2,610 crore, against Rs. 2,520 crore at the earlier rate. Revenue is rupee-denominated and unchanged. Margin compresses.

Payables at year end: USD 80 million at Rs. 90.00 = Rs. 720 crore, against Rs. 696 crore at the rate when recognised, producing an exchange loss of Rs. 24 crore in profit or loss.

Identical currency movement. Opposite margin direction, and exchange differences of opposite sign.

What Big 4 Auditors Focus On

Functional currency determination for foreign subsidiaries. For IT groups with subsidiaries in multiple jurisdictions, auditors test each entity's determination, particularly where a subsidiary operates as a delivery arm of the Indian parent rather than as an autonomous business, which may point to the rupee rather than the local currency.

Classification of unbilled revenue and contract assets. Auditors test the monetary and non-monetary classification, whether it has been applied consistently, and whether the resulting retranslation or absence of retranslation is correct.

Net investment classification of intragroup balances. Auditors test whether balances classified as part of the net investment genuinely meet the condition that settlement is neither planned nor likely, since the classification moves exchange differences between profit or loss and OCI.

Retranslation of advances to and from foreign parties. Auditors specifically test whether supplier advances and customer advances have been incorrectly retranslated at the closing rate. This is a recurring finding at manufacturers with significant import advance payments.

Rates used for revenue and expense translation. Where average rates are used as an approximation for transaction date rates, auditors assess whether rates have fluctuated significantly during the period, in which case the approximation may not be acceptable and more granular rates are required.

Continued application of the D13AA option. Where an entity still applies the legacy long-term foreign currency monetary item treatment, auditors verify that it applies only to items existing at the transition date, that no post-transition borrowings have been included, and that the policy is adequately disclosed.

Constant currency reconciliation. As IFRS 18 requirements take effect, auditors will test whether management-defined performance measures such as constant currency growth are reconciled to the most directly comparable IFRS subtotal and calculated consistently.

Dip IFRS Exam Angle

Sector context does not appear directly in Dip IFRS questions, but the mechanics illustrated here are examined constantly.

Most tested areas:

Determining functional currency where revenue and costs are in different currencies, applying the primary indicators and recognising that the cost indicator can dominate.

Distinguishing the transaction effect on monetary items from the translation effect on foreign operations, and identifying which goes to profit or loss and which to OCI.

Classifying advances, prepayments, receivables, and payables as monetary or non-monetary, and applying the correct rate.

Calculating exchange differences on monetary items and identifying the correct destination.

Common traps:

Assuming an entity earning in foreign currency has that currency as its functional currency. The cost base and operating environment frequently point elsewhere.

Retranslating supplier or customer advances at the closing rate. They are non-monetary and stay at the rate on the date of payment or receipt.

Treating higher rupee revenue from a weaker rupee as an exchange gain. Revenue is measured at transaction date rates; the increase is in the revenue itself, not a separate gain.

Recognising foreign subsidiary translation differences in profit or loss. They go to OCI and are recycled only on disposal.

Retranslating imported property, plant and equipment at the closing rate. Non-monetary items at historical cost are not retranslated.

FAQ

Why is the rupee the functional currency of an Indian IT company that earns almost nothing in rupees?

Because the primary indicators weigh cost structure and operating environment alongside sales prices, and for an offshore delivery model the cost base is overwhelmingly rupee-denominated. Billing currency alone does not determine functional currency.

Is the higher rupee revenue from a weak rupee an exchange gain?

No. Revenue denominated in a foreign currency is translated at the rate on the transaction date, so a weaker rupee simply produces a higher rupee revenue figure. The exchange gain arises separately, on retranslating the resulting monetary receivable at the reporting date.

Where do translation differences on foreign subsidiaries go?

To other comprehensive income, accumulated in a currency translation reserve. They affect profit or loss only when the foreign operation is disposed of, at which point the cumulative amount is reclassified.

Should an advance paid to a foreign supplier be retranslated at year end?

No. Advance consideration is non-monetary. It is translated at the rate on the date of payment and is not retranslated, because the entity holds a right to receive goods, not a right to receive currency.

Is constant currency growth an IFRS measure?

No. It is a management-defined performance measure. Under IFRS 18 it must be explained, reconciled to the most directly comparable IFRS subtotal, and its calculation disclosed.

Why does an imported machine stay at the old exchange rate while the loan funding it moves?

Because the machine is a non-monetary item measured at historical cost, translated once at the transaction date, while the loan is a monetary liability retranslated at each reporting date. The asymmetry is a direct consequence of the monetary and non-monetary distinction and is not an error.

Enroll with Global Fin X

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This is Post 78 of the Global Fin X IFRS Series. Previous: IAS 21 Effects of Changes in Foreign Exchange Rates: Functional Currency, Translation and Monetary Items. Next: Post 79: IAS 29 Financial Reporting in Hyperinflationary Economies: Mechanics and Relevance for Indian Multinationals.

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