AS -11 Foreign Exchange

Accounting Standard (AS) 11*

 The Effects of Changes in Foreign Exchange Rates

Objective

An enterprise may carry on activities involving foreign exchange in two ways. It may have transactions in foreign currencies or it may have foreign operations. In order to include foreign currency transactions and foreign operations in the financial statements of an enterprise, transactions must be expressed in the enterprise’s reporting currency and the financial statements of foreign operations must be translated into the enterprise’s reporting currency.

The principal issues in accounting for foreign currency transactions and foreign operations are

- to decide which exchange rate to use and

 - how to recognise in the financial statements the financial effect of changes in exchange rates.

Scope –

1. This Standard should be applied:

(a) in accounting for transactions in foreign currencies; and

 (b) in translating the financial statements of foreign operations

(c) accounting for foreign currency transactions in the nature of forward exchange contracts.

2. The standard does not specify-

1. The currency in which an enterprise presents its financial statements.
2. This Standard does not deal with the restatement of an enterprise’s financial statements from its reporting currency into another currency for the convenience of users accustomed to that currency or for similar purposes.
3. This Standard does not deal with the presentation in a cash flow statement of cash flows arising from transactions in a foreign currency and the translation of cash flows of a foreign operation (see AS 3, Cash Flow Statements).
4. This Standard does not deal with exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

 

 

 

 

Definitions-

• Closing rate -

Closing rate is the exchange rate at the balance sheet date.

• Exchange difference

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.

• Exchange rate

  Exchange rate is the ratio for exchange of two currencies.

• Fair value

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.

• Foreign currency

 Foreign currency is a currency other than the reporting currency of an enterprise.

• Foreign operation

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.

• Forward exchange contract

Forward exchange contract means an agreement to exchange different currencies at a forward rate

• Monetary items

Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money.

• Non-monetary items

Non-monetary items are assets and liabilities other than monetary items.

• Reporting currency

Reporting currency is the currency used in presenting the financial statements.

 

 

Foreign currency transactions

• A foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. – spot rate

 

• A rate that approximates the actual rate at the date of the transaction is often used, for example, an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. 

• If exchange rates fluctuate significantly, the use of the average rate for a period is unreliable.

At each balance sheet date, various items are to be stated using the following rates:

                                                                                                  

• Foreign currency monetary items

Closing rate with an exception where the closing rate may not reflect the amount likely to be realised or disbursed . Cash, receivables, and payables are examples of monetary items

 

• Non-monetary items which are carried in terms of historical cost denominated in a foreign currency

Exchange rate at the date of transaction. . Fixed assets, inventories, and investments in equity shares are examples of non-monetary items.

 

• Non-monetary items which are carried at fair value or other similar valuation, eg, net realisable value denominated in a foreign currency

Exchange rates prevailing at the time values were determined

 

Recognition of Exchange Differences-

Exchange differences arising on the settlement of monetary items or on reporting an enterprise’s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognised as income or as expenses in the period in which they arise, with the exception of exchange differences dealt with in accordance with paragraph 15.

 

When the transaction is settled in a subsequent accounting period, the exchange difference recognised in each intervening period up to the period of settlement is determined by the change in exchange rates during that period.

 

 

 

 

Foreign exchange transactions is of two types-

• Integral  foreign  operation is a foreign operation, the activities of which are an integral part of those of the reporting enterprise.
• Non-integral  foreign operation is a foreign operation that  is  not an integral foreign operation.

Method of Translation of Integral Operations

Individual items-

A foreign operation that is integral to the operations of the reporting enterprise carries on its business as if it were an extension of the reporting enterprise’s operations.

Treatment of cost & depreciation on tangible assets –

It is calculated on the basis of rate on the date of purchase of asset.

If it is carried at fair value

Then the rate is taken on the date of valuation

Valuation of inventories –

The  cost  of inventories  is  translated  at  the  exchange  rates  that  existed  when  those costs  were  incurred.

Recoverable Amount or Realisable Value-

  The  recoverable  amount  or  realisable  value  of  a asset is translated using the exchange rate that existed when the recoverable amount or net realisable value was determined.

 

                Method of translation of Non- Integral Operations

• Assets & Liabilities whether monetary or non monetary-

                                Valued at closing rate

• Income & Expense items-

Rate at the date of transactions.  For practical reasons, a rate that approximates the actual rate

• Contingent liability disclosed in the financial statements  - Closing Rate
• Goodwill/capital reserve arising on acquisition  - Closing Rate

 

In case of Long term foreign currency monetary items:

 • Relating to the acquisition of a depreciable capital asset-

 Added to or deducted from the cost of the asset and depreciated over the balance life of the asset

• Other cases-

Accumulated in a “Foreign Currency Monetary Item Translation Difference Account”(FCMIT) in the enterprise’s financial statements and amortised over the balance period of such long-term asset/liability

Disposal of a Non-integral Foreign Operation

On the disposal of a non-integral foreign operation, the cumulative amount of the exchange differences which have been deferred and which relate to that operation should be recognised as income or as expenses

Change in the Classification of a Foreign Operation

  When there is a change in the classification of a foreign operation, the translation procedures applicable to the revised classification should be applied from the date of the change in the classification.

Forward Exchange Contracts

• An  enterprise  may  enter  into  a  forward  exchange  contract  or another  financial  instrument  that  is  in  substance  a  forward  exchange contract, which is not intended for trading or speculation purposes, to establish the amount of the reporting currency required or available at the settlement date of a transaction.
• The premium or discount arising at the inception of such a forward exchange contract should be amortised as expense or income over the life of the contract.
• Exchange differences on such a contract should be recognised in the statement of profit and loss  in  the  reporting  period  in  which  the  exchange  rates  change.
• Any profit  or  loss  arising  on  cancellation  or  renewal  of  such  a  forward exchange contract should be recognised as income or as expense for the period.

 

 

 

 

 

Other Contracts

• A gain or loss should be computed by multiplying the foreign currency amount of the forward exchange contract by the difference between the forward rate available at the reporting date for the remaining maturity of the contract and the contracted forward rate (or the forward rate last used to measure again or loss on that contract for an earlier period). 
• The gain or loss so computed should be recognised in the Statement of Profit and Loss for the period.
• The premium or discount on the forward exchange contract is not recognised separately