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Thread: 11 Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11

  1. #1
    Accounting Standards
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    Default 11 Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11

    Accounting Standard (AS) 11
    (revised 2003)
    The Effects of Changes in
    Foreign Exchange Rates
    (This Accounting Standard includes paragraphs set in
    bold italic type and plain type, which have equal authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should
    be read in the context of its objective and the Preface to the Statements of Accounting Standards
    1.)

    Accounting Standard (AS) 11, The Effects of Changes in Foreign Exchange Rates (revised 2003), issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods
    commencing on or after 1-4-2004 and is mandatory in nature
    2 from that date. The revised Standard supersedes Accounting Standard (AS) 11, Accounting for the Effects of Changes in Foreign Exchange Rates (1994),
    except that in respect of accounting for transactions in foreign currencies entered into by the reporting enterprise itself or through its branches before the date this Standard comes into effect, AS 11 (1994) will continue to be
    applicable. The following is the text of the revised Accounting Standard.


  2. #2
    Accounting Standards
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    Default Objective of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11

    Objective of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11


    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.

  3. #3
    Accounting Standards
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    Default Scope of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11

    Scope of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11


    1. This Statement should be applied:


    (a) in accounting for transactions in foreign currencies; and
    (b) in translating the financial statements of foreign operations.


    2. This Statement also deals with accounting for foreign currency transactions in the nature of forward exchange contracts.


    3. This Statement 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 Statement requires disclosure of the reason for using that currency. This Statement also requires disclosure of the reason for any change in the reporting currency.


    4. This Statement 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.


    5. This Statement 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).

    6. This Statement does not deal with exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs (see paragraph 4(e) of AS 16, Borrowing Costs).

  4. #4
    Accounting Standards
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    Default Definitions of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11

    Definitions of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11


    7. The following terms are used in this Statement with the meanings specified:


    Average rate is the mean of the exchange rates in force during a period.


    Closing rate is the exchange rate at the balance sheet date. 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 is the ratio for exchange of two currencies. 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 is a currency other than the reporting currency of an enterprise.
    Foreign operation is a subsidiary , associate , joint venture6 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 means an agreement to exchange different currencies at a forward rate.


    Forward rate is the specified exchange rate for exchange of two currencies at a specified future date.

    Integral foreign operation is a foreign operation, the activities of which are an integral part of those of the reporting enterprise. Monetary items are money held and assets and liabilities to be received
    or paid in fixed or determinable amounts of money. Net investment in a non-integral foreign operation is the reporting enterprise’s share in the net assets of that operation.

    Non-integral foreign operation is a foreign operation that is not an integral foreign operation.


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


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

  5. #5
    Accounting Standards
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    Default Foreign Currency Transactions of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11

    Foreign Currency Transactions of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11

    Initial Recognition

    8. A foreign currency transaction is a transaction which is denominated in or requires settlement in a foreign currency, including transactions arising when an enterprise either:


    (a) buys or sells goods or services whose price is denominated in a foreign currency;

    (b) borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency;

    (c) becomes a party to an unperformed forward exchange contract; or

    (d) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency.


    9. 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.

    10. For practical reasons, 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. However, if exchange rates fluctuate significantly, the use of the average rate for a period is unreliable.

  6. #6
    Accounting Standards
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    Default Reporting at Subsequent Balance Sheet Dates of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11

    Reporting at Subsequent Balance Sheet Dates of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11


    11. At each balance sheet date:

    (a) foreign currency monetary items should be reported using the closing rate. However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realised from, or required to disburse, a foreign currency monetary
    item at the balance sheet date, e.g., where there are restrictions on remittances or where the closing rate is unrealistic and it is not possible to effect an exchange of currencies at that rate at the balance sheet date. In such circumstances, the relevant monetary item should be reported
    in the reporting currency at the amount which is likely to be realised from, or required to disburse, such item at the balance sheet date;

    (b) non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction; and


    (c) non-monetary items which are carried at fair value or other similar valuation denominated in a foreign currency should be reported using the exchange rates that existed when the
    values were determined.



    12. Cash, receivables, and payables are examples of monetary items.Fixed assets, inventories, and investments in equity shares are examples of non-monetary items. The carrying amount of an item is determined in accordance with the relevant Accounting Standards. For example, certain assets may be measured at fair value or other similar valuation (e.g., net realisable value) or at historical cost. Whether the carrying amount is determined based on fair value or other similar valuation or at historical cost, the amounts so determined for foreign currency items are then reported in the reporting currency in accordance with this Statement. The contingent liability denominated in foreign currency at the balance sheet date is disclosed by using the closing rate.

  7. #7
    Accounting Standards
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    Default Recognition of Exchange Differences of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11

    Recognition of Exchange Differences[1]


    13. 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.


    14. An exchange difference results when there is a change in the exchange rate between the transaction date and the date of settlement of anymonetary items arising from a foreign currency transaction. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognised in that period. However, 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.










    1 It may be noted that the Institute has issued in 2003 an Announcement titled ‘Treatment of exchange differences under Accounting Standard (AS) 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates vis-a-vis Schedule VI to the Companies Act, 1956’. As per the Announcement, the requirement with regard to treatment of exchange differences contained in AS 11 (revised 2003), is different from Schedule VI to the Companies Act, 1956, since AS 11 (revised 2003) does not require the adjustment of exchange differences in the carrying amount of the fixed assets, in the situations envisaged in Schedule VI. It has been clarified that pending the amendment, if any, to Schedule VI to the Companies Act, 1956, in respect of the matter, a company adopting the treatment described in Schedule VI will still be considered to be complying with AS 11 (revised 2003) for the purposes of section 211 of the Act. Accordingly, the auditor of the company should not assert non-compliance with AS 11 (2003) under section 227(3)(d) of the Act in such a case and should not qualify his report in this regard on the true and fair view of the state of the company’s affairs and profit or loss of the company under section 227(2) of the Act. (published in ‘The Chartered Accountant’, November, 2003, pp. 497.) The full text of the Announcement has been reproduced in the section titled ‘Announcements of the Council regarding status of various documents issued by the Institute of Chartered Accountants of India’ appearing at the beginning of this Compendium.

  8. #8
    Accounting Standards
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    Default Net Investment in a Non-integral Foreign Operation of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11

    Net Investment in a Non-integral Foreign Operation of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11


    15. Exchange differences arising on a monetary item that, in substance, forms part of an enterprise’s net investment in a nonintegral foreign operation should be accumulated in a foreign currency translation reserve in the enterprise’s financial statements until the disposal of the net investment, at which time they should be recognised as income or as expenses in accordance with paragraph 31.


    16. An enterprise may have a monetary item that is receivable from, orpayable to, a non-integral foreign operation. An item for which settlement is neither planned nor likely to occur in the foreseeable future is, in substance, an extension to, or deduction from, the enterprise’s net investment in that non-integral foreign operation. Such monetary items may include long-term receivables or loans but do not include trade receivables or trade payables.

  9. #9
    Accounting Standards
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    Default Financial Statements of Foreign Operations of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11

    Financial Statements of Foreign Operations of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11

    Classification of Foreign Operations


    17. The method used to translate the financial statements of a foreign operation depends on the way in which it is financed and operates in relation to the reporting enterprise. For this purpose, foreign operations are classified as either “integral foreign operations” or “non-integral foreign
    operations”.


    18. 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. For example, such a foreign operation might only sell goods imported from the reporting enterprise and remit the proceeds to the reporting enterprise. In such cases, a change in the exchange rate between the reporting currency and the currency in the country of foreign operation has an almost immediate effect on the reporting enterprise’s cash flow from operations. Therefore, the change in the exchange rate
    affects the individual monetary items held by the foreign operation rather than the reporting enterprise’s net investment in that operation.


    19. In contrast, a non-integral foreign operation accumulates cash and other monetary items, incurs expenses, generates income and perhaps arranges borrowings, all substantially in its local currency. It may also enter into transactions in foreign currencies, including transactions in the reporting currency. When there is a change in the exchange rate between the reporting currency and the local currency, there is little or no direct effect on the present and future cash flows from operations of either the non-integral foreign operation or the reporting enterprise. The change in
    the exchange rate affects the reporting enterprise’s net investment in the non-integral foreign operation rather than the individual monetary and nonmonetary items held by the non-integral foreign operation.


    20. The following are indications that a foreign operation is a non-integral foreign operation rather than an integral foreign operation:

    (a) while the reporting enterprise may control the foreign operation, the activities of the foreign operation are carried out with a significant degree of autonomy from those of the reporting
    enterprise;

    (b) transactions with the reporting enterprise are not a high proportion of the foreign operation’s activities;

    (c) the activities of the foreign operation are financed mainly from its own operations or local borrowings rather than from the reporting enterprise;


    (d) costs of labour, material and other components of the foreign operation’s products or services are primarily paid or settled in the local currency rather than in the reporting currency;


    (e) the foreign operation’s sales are mainly in currencies other than the reporting currency;


    (f) cash flows of the reporting enterprise are insulated from the day-to-day activities of the foreign operation rather than being directly affected by the activities of the foreign operation;


    (g) sales prices for the foreign operation’s products are not primarily responsive on a short-term basis to changes in exchange rates but are determined more by local competition or local government
    regulation; and


    (h) there is an active local sales market for the foreign operation’s products, although there also might be significant amounts of exports.



    The appropriate classification for each operation can, in principle, be established from factual information related to the indicators listed above. In some cases, the classification of a foreign operation as either a nonintegral foreign operation or an integral foreign operation of the reporting
    enterprise may not be clear, and judgement is necessary to determine the appropriate classification.

  10. #10
    Accounting Standards
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    Default Integral Foreign Operations of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11

    Integral Foreign Operations of Accounting Standard 11 - The Effects of changes in foreign exchange rates - AS 11


    21. The financial statements of an integral foreign operation should be translated using the principles and procedures in paragraphs 8 to 16 as if the transactions of the foreign operation had been those of the reporting enterprise itself.


    22. The individual items in the financial statements of the foreign operation are translated as if all its transactions had been entered into by the reporting enterprise itself. The cost and depreciation of tangible fixed assets is translated using the exchange rate at the date of purchase of the asset or,
    if the asset is carried at fair value or other similar valuation, using the rate that existed on the date of the valuation. The cost of inventories is translated at the exchange rates that existed when those costs were incurred. The recoverable amount or realisable value of an asset is translated using the exchange rate that existed when the recoverable amount or net realisable value was determined. For example, when the net realisable value of an item of inventory is determined in a foreign currency, that value is translated using the exchange rate at the date as at which the net realisable value is determined. The rate used is therefore usually the closing rate. An adjustment
    may be required to reduce the carrying amount of an asset in the financial statements of the reporting enterprise to its recoverable amount or net realisable value even when no such adjustment is necessary in the financial statements of the foreign operation. Alternatively, an adjustment in the
    financial statements of the foreign operation may need to be reversed in the financial statements of the reporting enterprise.


    23. For practical reasons, 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. However, if exchange rates fluctuate significantly, the use of the average rate for a period is unreliable.

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