Companies (Indian Accounting Standards) Amendment Rules, 2025.
On 7th May 2025, the Ministry of Corporate Affairs (MCA) issued G.S.R. 291(E), notifying the Companies (Indian Accounting Standards) Amendment Rules, 2025. These rules amend the Companies (Indian Accounting Standards) Rules, 2015, with a primary focus on updating Indian Accounting Standard (Ind AS) 21 – The Effects of Changes in Foreign Exchange Rates. This blog provides a detailed, accurate, and copyright-free analysis of the amendments, their objectives, implications, and practical considerations for businesses in India.
Background of the Amendment
The Companies (Indian Accounting Standards) Rules, 2015, govern the application of Ind AS for companies in India, ensuring consistency and transparency in financial reporting. Ind AS are converged with International Financial Reporting Standards (IFRS) to align Indian accounting practices with global standards while addressing local economic and regulatory nuances. The 2025 amendment specifically targets challenges in foreign currency transactions, particularly in scenarios where currencies are not freely exchangeable.
The amendments were introduced under the powers conferred by Section 133 and Section 469 of the Companies Act, 2013, in consultation with the National Financial Reporting Authority (NFRA). The need for these changes arose from practical difficulties faced by Indian companies operating in global markets, especially in regions with restricted or hyperinflationary currencies.
Key Amendments to Ind AS 21
The Companies (Indian Accounting Standards) Amendment Rules, 2025, introduce significant updates to Ind AS 21 – The Effects of Changes in Foreign Exchange Rates. Below are the key changes:
1. Handling Non-Exchangeable Currencies
- Definition and Recognition: The amendments clarify how entities should account for transactions when a currency is not exchangeable into another currency (e.g., due to regulatory restrictions or lack of a liquid market). A currency is deemed non-exchangeable if an entity cannot convert it through legal exchange mechanisms within a reasonable timeframe.
- Estimation of Spot Exchange Rate: When exchangeability is lacking, entities must estimate the spot exchange rate. The rules permit the use of:
- Observable exchange rates, such as historical rates or rates from unofficial markets (e.g., parallel markets), if reliable.
- Other estimation techniques, such as discounted cash flow models or rates implied by forward contracts, when observable rates are unavailable.
- Practical Guidance: The amendments provide illustrative examples to guide entities in determining appropriate estimation methods, ensuring consistency in application.
2. Enhanced Disclosure Requirements
- Entities must disclose detailed information about transactions involving non-exchangeable currencies, including:
- The nature and extent of the currency’s non-exchangeability.
- The estimation method used to determine the spot exchange rate.
- The financial impact of using an estimated rate versus an official rate (if applicable).
- Risks and uncertainties associated with the estimation process.
- These disclosures aim to enhance transparency and enable stakeholders to assess the reliability of reported financial figures.
3. Alignment with IFRS
- The amendments align Ind AS 21 more closely with IFRS 21, particularly in addressing non-exchangeable currencies. However, the rules incorporate India-specific considerations, such as the regulatory framework governing foreign exchange under the Foreign Exchange Management Act (FEMA).
- This alignment facilitates comparability of financial statements for Indian companies with global peers while ensuring compliance with domestic laws.
Objectives of the Amendments
The Companies (Indian Accounting Standards) Amendment Rules, 2025, aim to achieve the following objectives:
- Improved Financial Reporting: By providing clear guidance on handling non-exchangeable currencies, the amendments ensure that financial statements accurately reflect the economic realities of foreign currency transactions.
- Enhanced Transparency: The disclosure requirements enable stakeholders to understand the assumptions and risks underlying exchange rate estimations, fostering trust in financial reporting.
- Global Alignment: Aligning with IFRS enhances the credibility of Indian companies in international markets, making it easier for them to attract foreign investment.
- Practical Solutions: The rules address real-world challenges faced by Indian companies operating in countries with restricted or hyperinflationary currencies, such as Venezuela or Zimbabwe.
Effective Date and Applicability
The amendments are effective for annual reporting periods beginning on or after 1st April 2025. This means companies preparing financial statements for the financial year 2025-26 onward must comply with the updated Ind AS 21 provisions. Early adoption is not explicitly permitted under the rules, so companies should plan their transition accordingly.
The rules apply to all entities preparing financial statements under Ind AS, including:
- Listed companies.
- Companies with a net worth of ₹250 crore or more.
- Subsidiaries, associates, or joint ventures of such companies.
- Other entities voluntarily adopting Ind AS.
Practical Implications for Businesses
The amendments introduce several practical implications for companies, particularly those with foreign operations or transactions in non-exchangeable currencies. Key considerations include:
1. Reassessment of Accounting Policies
- Companies must review and update their accounting policies for foreign currency transactions to incorporate the new guidance on non-exchangeable currencies.
- This may involve training accounting teams and updating internal controls to ensure compliance with the estimation and disclosure requirements.
2. System and Process Upgrades
- Entities may need to enhance their financial reporting systems to capture data related to non-exchangeable currencies and generate the required disclosures.
- Robust processes for estimating exchange rates, including documentation of assumptions and methodologies, will be critical to withstand audit scrutiny.
3. Impact on Financial Statements
- The use of estimated exchange rates may result in differences in reported assets, liabilities, revenues, and expenses compared to using official rates.
- Companies should assess the potential impact on key financial metrics, such as profit margins, net assets, and earnings per share, and communicate these changes to stakeholders.
4. Audit and Compliance
- Auditors will closely scrutinize the estimation methods and disclosures related to non-exchangeable currencies. Companies should maintain detailed records to support their calculations.
- Compliance with FEMA and other regulatory requirements remains critical, as the amendments do not override existing foreign exchange regulations.
5. Stakeholder Communication
- Companies should proactively communicate the impact of the amendments to investors, analysts, and other stakeholders to manage expectations.
- Transparent disclosures about the use of estimated rates and associated risks will be key to maintaining credibility.
Challenges and Considerations
While the amendments address critical gaps in Ind AS 21, they also present certain challenges:
- Complexity in Estimation: Estimating spot exchange rates for non-exchangeable currencies can be complex, especially in volatile or illiquid markets. Companies may need to engage experts or rely on external data sources.
- Increased Compliance Burden: The enhanced disclosure requirements add to the compliance burden, particularly for smaller companies with limited resources.
- Regulatory Alignment: Companies must ensure that their exchange rate estimation practices comply with both Ind AS and FEMA, which may require coordination with legal and compliance teams.
- Global Consistency: While the amendments align with IFRS, differences in implementation across jurisdictions could create challenges for multinational companies.
Conclusion
The Companies (Indian Accounting Standards) Amendment Rules, 2025, mark a significant step toward enhancing the robustness and transparency of financial reporting in India. By addressing the challenges of non-exchangeable currencies, the amendments to Ind AS 21 provide practical solutions for companies operating in complex global markets. However, businesses must proactively prepare for the changes by updating their accounting policies, systems, and processes to ensure compliance by 1st April 2025.
For a detailed understanding of the amendments, companies should refer to the official notification G.S.R. 291(E) on the MCA website (www.mca.gov.in) or consult with accounting professionals. As India continues to align its accounting standards with global best practices, these changes reinforce its position as a credible player in the international financial reporting landscape.
Disclaimer: This blog is for informational purposes only and does not constitute professional accounting or legal advice.
