AS 11 The Effects of Changes in Foreign Exchange Rates. In the previous article, we have given AS 5 Net Profit or Loss For the Period, Prior Period Items and AS 29 Provisions, Contingent Liabilities and Contingent Assets. Today we are providing the details of accounting standard 11 the effects of changes in foreign exchange rates. At the end of this article, you can download AS 11 foreign exchange summary notes by ICAI. This notes is useful for CA IPCC and CA Final students.
AS 11 Effects of Changes in Foreign Exchange Rates
1. This Standard should be applied:
- in accounting for transactions in foreign currencies; and
- in translating the financial statements of foreign operations
2. This Standard also deals with accounting for foreign currency transactions in the nature of forward exchange contracts.
3. This Standard does not specify the currency in which an enterprise presents its financial statements. However, an enterprise normally uses the currency of the country in which it is domiciled. If it uses a different currency, this Standard requires disclosure of the reason for using that currency. This Standard also requires disclosure of the reason for any change in the reporting currency.
The following terms are used in this Standard with the meanings specified:
1. Average rate is the mean of the exchange rates in force during a period.
2. Closing rate is the exchange rate at the balance sheet date.
3. Exchange difference is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency at different exchange rates.
4. Exchange rate is the ratio for exchange of two currencies.
5. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
6. Foreign currency is a currency other than the reporting currency of an enterprise.
7. Foreign operation is a subsidiary , associate , joint venture or branch of the reporting enterprise, the activities of which are based or conducted in a country other than the country of the reporting enterprise.
8. Forward exchange contract means an agreement to exchange different currencies at a forward rate.
9. Forward rate is the specified exchange rate for exchange of two currencies at a specified future date.
10. Integral foreign operation is a foreign operation, the activities of which are an integral part of those of the reporting enterprise.
11. Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money.
12. Net investment in a non-integral foreign operation is the reporting enterprise’s share in the net assets of that operation.
13. Non-integral foreign operation is a foreign operation that is not an integral foreign operation.
14. Non-monetary items are assets and liabilities other than monetary items.
15. Reporting currency is the currency used in presenting the financial statements.
Initial recognition of a foreign currency transaction shall be by applying the foreign currency exchange rate as on the date of transaction. In case of voluminous transactions a weekly or a monthly average rate is permitted, if fluctuation during the period is not significant.
At each Balance Sheet date foreign currency monetary items such as cash, receivables, payables shall be reported at the closing exchange rates unless there are restrictions on remittances or it is not possible to effect an exchange of currency at that rate. In the latter case it should be accounted at realisable rate in reporting currency.
Non monetary items such as fixed assets, investment in equity shares which are carried at historical cost shall be reported at the exchange rate on the date of transaction. Non monetary items which are carried at fair value shall be reported at the exchange rate that existed when the value was determined.
Points to remember:
1) Exchange differences arising on the settlement of monetary items or on restatement of monetary items on each balance sheet date shall be recognised as expense or income in the period in which they arise.
2) Exchange differences arising on monetary item which in substance, is net investment in a non integral foreign operation (long term loans) shall be credited to foreign currency translation reserve and shall be recognised as income or expense at the time of disposal of net investment.
3) The financial statements of an integral foreign operation shall be translated as if the transactions of the foreign operation had been those of the reporting enterprise; i.e., it is initially to be accounted at the exchange rate prevailing on the date of transaction.
4) For incorporation of non integral foreign operation, both monetary and non monetary assets and liabilities should be translated at the closing rate as on the balance sheet date. The income and expenses should be translated at the exchange rates at the date of transactions. The resulting exchange differences should be accumulated in the foreign currency translation reserve until the disposal of net investment. Any goodwill or capital reserve on acquisition on non-integral financial operation is translated at the closing rate.
5) In Consolidated Financial Statement (CFS) of the reporting enterprise, exchange difference arising on intra group monetary items continues to be recognised as income or expense, unless the same is in substance an enterprise’s net investment in non-integral foreign operation.
6) When the financial statements of non-integral foreign operations of a different date are used for CFS of the reporting enterprise, the assets and liabilities are translated at the exchange rate prevailing on the balance sheet date of the non-integral foreign operations. Further adjustments are to be made for significant movements in exchange rates up to the balance sheet date of the reporting currency.
7) When there is a change in the classification of a foreign operation from integral to non integral or vice versa the translation procedures applicable to the revised classification should be applied from the date of reclassification.
8) Exchange differences arising on translation shall be considered for deferred tax in accordance with AS 22.
9) Forward Exchange Contract may be entered to establish the amount of the reporting currency required or available at the settlement date of the transaction or intended for trading or speculation. Where the contracts are not intended for trading or speculation purposes the premium or discount arising at the time of inception of the forward contract should be amortized as expense or income over the life of the contract. Further, exchange differences on such contracts should be recognised in the P & L A/c in the reporting period in which there is change in the exchange rates. Exchange difference on forward exchange contract is the difference between exchange rate at the reporting date and exchange difference at the date of inception of the contract for the underlying currency.
10) Profit or loss arising on the renewal or cancellation of the forward contract should be recognised as income or expense for the period. A gain or loss on forward exchange contract intended for trading or speculation should be recognised in the profit and loss statement for the period. Such gain or loss should be computed with reference to the difference between forward rate on the reporting date for the remaining maturity period of the contract and the contracted forward rate. This means that the forward contract is marked to market. For such contract, premium or discount is not recognised separately.
Disclosure to be made for:
- Amount of exchange difference included in Profit and Loss statement
- Net exchange difference accumulated in Foreign Currency Translation Reserve.
- In case of reclassification of significant foreign operation, the nature of the change, the reasons for the same and its impact on the shareholders fund and the impact on the Net Profit and Loss for each period presented.
Non-mandatory Disclosures can be made for foreign currency risk management policy.
In respect of accounting period commencing on or after 7th December and ending on or before 31st March 2011 at the option of the enterprise, exchange differences arising on reporting of long term foreign currency monetary items at rates different from those at which they were initially recorded during the period or reported in previous financial statements in so far as they relate to the acquisition of a depreciable capital assets can be added to or deducted from the cost of the assets and shall be depreciated over the balance life of the assets and in other cases can be accumulated in a Foreign Currency Monetary Item Translation Difference Account and amortized over the balance period of such long term assets / liability but not beyond 31st March 2011 by recognition as income or expense in each of such period with the exception of exchange differences dealt with in accordance with paragraph 15 of AS 11.
Such an option to be irrevocable and to be exercised retrospectively for such accounting period from the date of this transitional provision comes into force or the first date on which the concerned foreign currency monetary item is acquired whichever is later and applied to all such foreign currency monetary items
For the purpose of exercise of this option an asset or a liability shall be designated as long term foreign currency monetary item if the asset or liability is expressed in foreign currency and has a term of 12 months or more at the date of origination of asset or liability.
Any difference pertaining to accounting period commencing on or after 7th December 2006, previously recognized in the profit and loss account before the exercise of the option shall be reversed in so far as it relates to acquisition of depreciable capital asset by way of addition to or deduction from the cost of the asset and in other cases by transfer to Foreign Currency Monetary Item Translation Difference Account, in both the cases by debit or credit, as the case may be , to the general reserve.
Click Here to download AS 11 Foreign Exchanges Rates notes by ICAI.
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