The Effects of Changes in
Foreign Exchange Rates
AS- 11
SCOPE
Effect in respect of accounting periods commencing on or after 1-4-2004 and
is mandatory in nature
Cactivities involving foreign exchange in two ways.
• transactions in foreign currencies
• have foreign operations
In which currency financial statements to be prepared?
Scope
Applies to :
❖accounting for transactions in foreign currencies
❖translating the financial statements of foreign operations
❖accounting for foreign currency transactions in the nature
of forward exchange contracts
Scope
Does not specify the currency in which an enterprise
presents its financial statements
Does not cover restatement in different currency for
convenience of users
Does not deal with presentation in a cash flow statement
does not deal with exchange differences arising from
foreign currency borrowings
Classification for accounting treatment
Category 1 Category 2
Buying and selling of goods and service Foreign branch
Lending and borrowing Associate
Acquisition and disposal of assets in Foreign subsidiary
foreign currency Joint venture
Category 3
Managing risk / Hedging
Trading and speculation
Definition
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
Definition
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.
Definition
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
Definition
Reporting currency is the currency used in presenting the
financial statements.
Foreign currency is a currency other than the reporting currency of
an enterprise
Monetary items are money held and assets and liabilities to be
received or paid in fixed or determinable amounts of money.
Foreign
Currency
Transaction
Reporting at a
Initial
subsequent
Recognition
date
Initial Recognition
Recorded on initial recognition in the reporting currency -
exchange rate at the date of the transaction
Practical Reasons - approximates the actual rate at the date of
the transaction is often used – Average rate
If the difference between average rate and the actual rate is
insignificant the average rate may be used.
Reporting at a
subsequent
date
Non Monetary
Monetary Items
items
Reporting at balance sheet date
Foreign currency monetary items (Example: Cash,
receivables, and payables) - reported using closing rate
certain situations:
where there are restrictions on remittances or
where the closing rate is unrealistic
Reporting at balance sheet date
non-monetary items
(Example: Fixed assets, inventories, and investments in
equity shares)
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
Reporting at balance sheet date
The carrying amount - relevant Accounting Standards
Non Monetary items – ( Example assets)
◦fair value or
◦other similar valuation - NRV
The contingent liability - closing rate.
Exchange differences
on the settlement of monetary items - recognised as income or as expenses
settled within the same accounting period
settled in a subsequent accounting period(s)
Exchange differences arising from net investment in a non integral foreign
operation should be accumulated in a foreign currency translation reserve
Foreign
Operation
Non
Integral
Integral
Integral to the operations of the reporting enterprise
carries on its business as if it were an extension of the
reporting enterprise’s operations
Non-integral foreign operation accumulates cash and
other monetary items, incurs expenses, generates
income and perhaps arranges borrowings, all
substantially in its local currency.
Integral Foreign Operation
Branch In
HO in India USA
Carry
Manufacturing
activity
Non Integral Foreign Operations
Situations
activities of the foreign operation are carried out with a significant
degree of autonomy
transactions with the reporting enterprise are not a high proportion
of the foreign operation’s activities
financed mainly from its own operations or local borrowings rather
than from the reporting enterprise
the foreign operation’s sales are mainly in currencies other than the
reporting currency
Non Integral Foreign Operations
Situations
Insulated from the day-to-day activities of the foreign operation
rather than being directly affected by the activities of the foreign
operation
Judgement is necessary to determine the Classification
Translation of Integral Foreign Operation
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.
Tangible Fixed assets – Date of purchase
◦ Similar to non-monetary items
inventories - exchange rates that existed when those costs
were incurred. – Net Realisable Value – Closing Rate
Expenses – Date of transaction
Translation of Non Integral Foreign
Operation
the assets and liabilities, both monetary and non-monetary,
of the non-integral foreign operation should be translated at
the closing rate
income and expense - at exchange rates at the dates of the
transactions
Example 1
Goods purchased on 25-12-2020 USD 10,000 on credit- Exchange
Rate Rs 75
Exchange rate on 31-03-2021 Rs 80
Date of payment 15-02-2021 - Exchange rate Rs 82
How this would be recorded in books as per AS11
Date of Transaction - 10,000 x Rs 75 = 7,50,000 – Initial Recognition
Monetary Transaction
Date of settlement 10,000 x Rs 82 = 8,20,000
Example 2
Goods purchased on 25-12-2020 USD 10,000 on credit- Exchange
Rate Rs 75
Exchange rate on 31-03-2021 Rs 80
Date of payment 15-04-2021 - Exchange rate Rs 82
How this would be recorded in books as per AS11
Date of Transaction 10,000 x Rs 75 = 7,50,000
Date on closing the books 10,000 x Rs 80 = Rs 8,00,000
Date of settlement 10,000 x Rs 82 = 8,20,000
Treatment of Exchange Rate Difference
Non Integral Foreign Operations
not recognised as income or expenses
reported as part of, the minority interest in the consolidated
balance sheet
When exchange rate difference arises in Monetary item –
Intra group balances - Gain or loss as income or expenses
Change in the Classification of a Foreign Operation
once classified as integral or non-integral is continued to be so classified
integral to non-integral foreign operation, - exchange differences of
reclassification are accumulated in a foreign currency translation reserve
non-integral to integral foreign operation - Exchange differences are not
recognised as income or expenses until the disposal of the operation
