Accounting Standard – 11 Effects of Changes in ... - tnkpsc.com

Accounting Standard – 11Effects of Changes in ForeignExchange RatesAshish MakhijaLL.B., AICWA, FCA17/05/2008 1

ApplicabilityRevised in 2003Applicable in respect ofaccounting periods commencingon or after 1-4-200417/05/2008 2

Objective‣ Which exchangerate to use ?‣ How to recogniseeffect of changesin exchange rates ?17/05/2008 3

ScopeTo be applied in‣ Accounting for transactions inforeign currencies‣Translating the financial statementsof foreign operations17/05/2008 4

Foreign Currency TransactionInitial RecognitionInitial recognition to be done byapplying exchange rate prevailingat the date of transaction17/05/2008 5

Reporting at SubsequentBalance Sheet DatesItemMonetary itemsNon-monetary itemscarried at historical costNon-monetary itemscarried at fair valueContingent LiabilityExchange RateClosing RateRate at the date ofthe transactionRate existing at thetime of determinationof such valuesClosing Rate17/05/2008 6

Recognition of ExchangeDifferencesTo be recognised as income orexpense in the period in which theyarise17/05/2008 7

Example• Purchases of US $ 20000 made on 30.09.2004– US $ rate on 30.09.2004 is Rs. 48/-. Transaction to berecorded at this rate.• Payment made on 10.01.2005 at Rs. 47/- per US $– Difference of Rs. 20000/- to be recognised as income• Payment not made till 31.03.2005 but US $ rate isRs. 49/-– Difference of Rs. 20000/- to be recognised as expense17/05/2008 8

Financial Statements ofForeign Operations‣Integral foreign operations‣Non-integral foreign operations17/05/2008 9

Integral Foreign Operations• Carries on business as if it were an extension ofthe reporting enterprise’s operations• Foreign operation only sells goods of reportingenterprise only and remits the proceeds ofreporting enterprise• Change in the exchange rate has an immediateeffect on the reporting enterprise’s cash flow fromoperations17/05/2008 10

Non-integral Foreign Operations• Accumulates Cash & other monetary items,incurs expenses, generates income andborrows in local currency• Change in exchange rate has little or nodirect effect on the present and future cashflows from operations17/05/2008 11

Non-integral Foreign OperationsIndicators- Degree of Autonomy- % of transactions with reporting enterprise- Financing of activities from own operations- Sales are in local currency- Expenses are settled in local currency- Cash flows of reporting enterprise are not affected- Sale prices are determined by competition- Active local sales market for F.O. products17/05/2008 12

Integral Foreign OperationsItemMonetary itemsNon-monetary itemscarried at historical costNon-monetary itemscarried at fair valueContingent LiabilityExchange RateClosing RateRate at the date ofthe transactionRate existing at thetime of determinationof such valuesClosing Rate17/05/2008 13

Non-integral ForeignOperationsItemAssets & Liabilities-Monetary & Non-monetaryIncome & ExpensesExchange RateClosing RateAt the date oftransactionExchange difference to be accumulated in aforeign currency translation reserve till netinvestment is disposed off17/05/2008 14

Disposal of Non-integralForeign OperationCumulative exchange difference tobe recognised as income or asexpenses in which the gain or losson disposal is recognised17/05/2008 15

Forward Exchange ContractsItemPremium or Discountarising at inception offoreign exchange contractExchange Difference onsuch a contractTreatmentTo be amortised asexpense or income overthe life of contractTo be recognised asincome or loss in theyear in which theexchange rate changes17/05/2008 16

Forward Exchange ContractsItemProfit or loss arising oncancellation or renewal offorward exchangecontractTreatmentTo be recognised asincome or as expensein the period17/05/2008 17

Disclosure‣Amount of exchange differences in thenet profit or loss for the period‣Net exchange differences accumulatedin foreign exchange translation reserveas component of shareholders’ funds17/05/2008 18

Disclosure‣Reconciliation of amount of exchangedifference at the beginning and at end‣Reasons for using a different currencyother than reporting currency17/05/2008 19

Disclosure‣In case of change in classification ofsignificant foreign operation‣Nature of change‣Reasons for change‣Impact of change on shareholders’ funds‣Impact on net profit or loss for each priorperiod17/05/2008 20

Thank You17/05/2008 21