ACCOUNTING STANDARD - 11

ACCOUNTING FOR THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

J.P., KAPUR & UBERAI

PURPOSE

Accounting for transactions in foreign currencies and in translating the financial statements of foreign branches for inclusion in the financial statements of the reporting enterprise

J.P., KAPUR & UBERAI

RELEVANT DEFINITIONS


Reporting currency is the currency used in presenting the financial statements. Foreign currency is a currency other than the reporting currency of an enterprise. Exchange rate is the ratio for exchange of two currencies. Average rate is the mean of the exchange rates. Forward rate is the exchange rate established by the terms of an agreement for exchange of two currencies J.P., KAPUR & UBERAI

RELEVANT DEFINITIONS


Closing rate is the exchange rate at the balance sheet date. Monetary items include foreign currency notes, balances in bank accounts denominated in a foreign currency, receivables, payables and loans denominated in a foreign currency. Non-monetary items are assets and liabilities other than monetary items e.g.fixed assets, inventories, investments in equity shares. Settlement date is the date at which a receivable is due to be collected or a payable is due to be paid. Recoverable amount is the amount, to be recovered from the future use of an asset, including its residual value on disposal.

J.P., KAPUR & UBERAI

RECORDING A FOREIGN EXCHANGE TRANSACTION

A transaction in a foreign currency should be recorded 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. For practical reasons, a rate that approximates the actual rate is often used.

J.P., KAPUR & UBERAI

CHANGES IN EXCHANGE RATE SUBSEQUENT TO INITIAL RECOGNITION

Exchange differences on settlement of foreign currency transactions during an accounting period as income/expense of the period except exchange differences arising on repayment of the amount borrowed in foreign currency for the purpose of acquiring fixed assets is adjusted to the carrying amount of the fixed assets. In case the fixed assets are revalued the necessary adjustments should be given effect to the revalued asset.

J.P., KAPUR & UBERAI

CHANGES IN EXCHANGE RATE SUBSEQUENT TO INITIAL RECOGNITION CONTD.

Monetary items denominated in a foreign currency should be reported using the closing rate but in the circumstances where the closing rate is unrealistic or where there are restrictions on remittances etc. the relevant monetary item should be reported at the realisable value. Non-monetary items i.e. investment in equity shares listed on a foreign stock exchange have to be valued at the lower of cost and fair value. Fair value is determined with reference to the closing rate. Exchange difference, if any, on the above should be treated as income/expense for the period.
J.P., KAPUR & UBERAI

ACCOUNTING TREATMENT- FORWARD TREATMENTEXCHANGE CONTRACTS

In case of a forward exchange contract with regard to a foreign exchange transaction other than liabilities incurred for acquiring fixed assets: Difference between the forward rate and the exchange rate at the date of the transaction should be recognised as income/expense over the life of the contract Any profit or loss on cancellation or renewal should be recognised as income/expense for the period. If the forward exchange contract relates to liabilities incurred for acquiring fixed assets such difference should be adjusted in the carrying amount of the respective fixed assets. J.P., KAPUR & UBERAI

TRANSLATION OF FINANCIAL STATEMENTS OF FOREIGN BRANCHES

-Revenue items, except opening and closing inventories and depreciation- average rates. -Opening inventories rate prevalent at the commencement of the accounting period. -Monetary items, Closing inventories- closing rate or realisable value. -Non monetary items other than inventories and fixed assets- rate prevalent at the date of the transaction. -Fixed assets- rate prevalent at the date of the transaction as adjusted for exchange difference arising on settlement or restatement of liabilities incurred for acquiring those assets. -Balance in Head office account- balance in the branch account in head office books after adjusting for unresponded transactions. -Net exchange difference should be recognised as income/expense for the period. -Contingent Liabilities- closing rate, translation does not result in any exchange difference.

J.P., KAPUR & UBERAI

DISCLOSURE
Amount of exchange difference - Included in the net profit or loss for the period. - Adjusted in the carrying amount of fixed assets during the accounting period. - In respect to the outstanding forward exchange contract relating to one or more subsequent accounting periods.

J.P., KAPUR & UBERAI