ACCOUNTING FOR EFFECTS OF CHANGES IN

Com.i SEM
1.
EXCHANGE RATES [AS 11] FOOREIGN
The Accounting Standard 11 :Acoounting for Effects of changesin Foreign Exchange
commencing on or after 1-4-2004 and
This revisedstandard ) Accounting1is
into effect in respect of accounting periodssupersedes the earlier (1993)A standardiASY mandt
nature from that date.
Themain provisions ofthis AS are as follows :
Objective :
involving foreign exchange i.e. it may have
orderontoactivities
An enterprise
foreign currencies. carry
may In include foreign currency transactions in the financial| statement
enterprise, transactions must be expressed into the
enterprise's reporting currency. transactiensy
Issues :
currency transactions are to decide which
The principal issues in accounting for foreign statements the financial effect of changesin
rate touse and how to recognize in the financial
rates.
Scope :
transactionsin foreign currencies.
1. The Statementshould be applied in accounting for
in the nature of fir
2. This Statement also deals with accounting for foreign currency transaction
exchange contracts.
financi
3. This Statement does not specify the currency in which an enterprise presents its
statements. However, an enterprise normally uses the curTency of the country in which ts
domiciled. If it uses a different currency, this Statement requires disclosure of the reason fr
using the currency. This Statement also requires disclosure of the reason for any change in te
reporting currency.
4. This Statement does not deal with the restatement of an enterprise's financial statements from i
reporting currency into another currency for the convenience for users accustomed to that curensy
or for similar purposes.
5. This Statement does not deal with the presentation in a cash flow statement of cash flows arsy
from transactions in a foreign currency and the transaction of cash flows of a foreign opera
(see AS 3, Cash Flow Statements).
6. This Statement does not deal with the exchange diference arising from foreign cur
borrowings to the extent that they are regarded as an adjustment interest costs (see parag
(e) of AS 16, Borrowings Costs.
Definitions :
7. The following terms are used in this Statement with meanings specified:
(a) Average rate is the mean of the exchange rates in force during a period.
(b) Closing rate is the exchange rate at the balance sheet date.
o
(c) Exchange difference is the difference resulting from reporting the same number ofunits
foreign currency in the reporting currency at differentexchange rates.
(d) Exchange rate is the ratio for exchange of two
currencies.
(e) Fair Value is the amount for which an asset could be exchanged, or aliabilitysettled,
knowledgeable, willing parties in an arm's
) Foreign Currency is acurrency other thanlength transaction.
the reporting currency of an enterprise
paidintixada
(g) Monetary itemns aremoney held and
assets and liabilities to be received or
determinable amounts of money.
(h) Non-monetary items are assets and
liabilities other than monetary items.
() Reporting currency is the currency used in
presenting the financial statemeh
presumedthat
*Tutorial Note : Though the syllabus does not
topic is to be explained in the light of AS I1. specifically mention AS 11, Uis
 Accounting of Transactions of Foreign Currency
143
Eoreign Currency Transactions
Jnitial Recognition :
&.Aforeign currency transaction is atransaction which is denominated in or
foreign currency, including transactions arising when an requires settlement in
enterprise either:
(a) buys or sells goods or services whose price is denominated in a foreign
borroWs or lends funds when the amounts payable or receivable are currency.
currency: denominated in a foreign
(c).becomes a partyto an unpertrformed forward
exchange
iA otherwise acquires or disposes of assets, or incurs or contract; or
foreign currency.
settles liabilities, denominated in a
Aforeign currency tran saction should be recorded, on initial
hy applying to the foreign currency amount the exchange recognition
in the reporting currency.
rate between the reporting currency
and the foreign currency at the date of thetransaction.
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 transaction
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.
Reporting at Subsequent Balance Sheet Dates :
Ateach balance sheet date :
11. (a) certain
foreign circumstan
currency monetary items should be reported using the closing rate. However, in
ces, the closing rate may not reflect with reasonable accuracy the amount
in reporting currency that is likely to be realized from, or required to disburse, a foreign
currency monetary item at the balan ce 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 currenciesat 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 realized
from, or required to disburse, such item at the balance sheet date;
(b) non-mon etary 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 tran saction; 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 payable are examples of monetary items. Fixed assets, inventories, and
investments in equity shares are examples of non-monetary items. The carrying amountcertain of an
item is determined in accordance with the relevant Accounting Stan dards. For example,
or at
assets may be measured at fair value or other similar valuation (e.g., net realizable value)
value or other similar
historicalcost. Whether the carrying amount is determined based on fair
valuation or at historical cost, the amounts so determined for foreign currency items are then
The contingent liability
reported in the reporting currency in accordance with this Statement. using the closing rate
denominated in foreign currency at the balance sheet date is disclosed by
Kecognition of Exchange Differences :
on reporting an enterprise's
3.Exchange differences arising on the settlement of mnonetary items orinitially
they were recorded during the
monetary items at rates different from those at which be recognized as income or as expen ses
Penod, or reported in previous financial statements, should
in the period in which they arise.
change in the exchange rate between the transaction
An exchange difference results when there is a items arising from a foreign currency transaction.
ate and the date of settlement of anymonetary accounting period as that in which itoccurred
When the transaction is settled within the same period. However, when the transaction is settled
allthe difference is recognized in that
in a exchangeaccounting period, the exchange differenceexchange rates
recognized in cach intervening period
subsequent
p to the period of settlement is determined by
change in during that period.
 FinancialAccounting (T. Y,B. Com..:
144 SEM-V),
Disclosure of exchange
diferences included in the net
disclosethe amount profit
15, An enterprise should
loss of the period. country in which
currency is different fromthecurrency of the disclosed, the enterpri
l6. When the reporting reason
currency
for using a diferent disclosed.
should be The reason for
is domiciled, the
currency should also be
change in the reporting
OF TRANSACTIONS IN FOREIGN CURRENCY
2. TRANSLATION
NEED TO BE TRANSLATED
2.1 WHICH TRANSACTIONS
concern may enter into the following transactions in foreign currency:
A
or payable in foreign currency):
(a) import goods (where price is paid
receivable in foreign currency);
(b)export goods (where price is received or
in foreign currency).
(c) purchase fixed assets (where price is paid or payable purchase fixed assets or for any othe
cy) to
(d) take loan (and repay such loan; in foreign curren
purpose;

2.2 WHY TRANSACTIONS NEED TOBE TRANSLATED

ifan Indian company imports gos
Above transactions take place in foreign currency. For example, Since
US $10,000. the Indian company keeps is
from U.S.A., the Import Invoice willbe, say, forentered in terms of US S in its accounts. Under he
accounts in rupees, this import billcannot be Therefore, the amount of impun
Companies Act also, the accounts have to be prepared in rupees.
billshown in US S must be translated (converted) into rupees.
2.3 WHEN TRANSACTIONS ARETRANSLATED
pavment basis, the lnu
(a) Initial Recognition: If the above imports are on immediate cash remit such dollars
company will purchase US S from say the State Bank ofIndia [SB1l and the
rate. In this case,
partyin the U.S.A. The dollars will be purchased at the prevailing exchange
translation intoRupees is done immediately. This is known as translation on initial recog
translation willbe donea
(b) Recognition in Stages: If the above import is on eredit basis, the
various stages i.e.
(i) on the date of purchase, the import bill willbe recorded: record
bee
(ii) if, on the date of the balance sheet, the billis still outstanding,the ereditors wiill
(iii) on the date of settlement,the payment, in US S willbe recorded. givesrise
(c) Accounting Problems: At each stagethe exchange rate may be different. This Paymenckad
accounting problems -
(a) at what rate translation should be done on each date(purchase; balance sheet: duel osu
(b) if the exchange rates on these dates are different, how the gain or loss arising
difference should be recorded in the accounts. explained lom
How these accounting problems are recomnmended to be solved by the AS Ilis
tbe
24 AT WHAT RATE TRANSACTIONS ARE TRANSLATED the
dateof
Transactions are translated at the exchange rate prevailing 0n betweonrup
(a) Spot Rate : in foretb
Atransaction Tate
transaction. This exchange rate is known as the spot rate.
applyingto the foreign currency amount the exchange
recorded inrupees by atthe date of the transaction.
currency
and the foreign
 Accountingof.Transactions of Foreign Currency 145
Mlustration 1 :
An
Indian coompany makes an import of UsS 10,000 on
is US $ 1
-49.
= State the accounting 1-4-2012. The exchange rate on 1-4-2012
Solution :
treatment recommended
under AS 11.
The Indian Company will
translate the amount [US S
1-4-2012 US $ 1 - 49], and record this import in its 10,000] by applying the exchange rate on
practice, it will pay 4,90,000 to a bank which will remit books
US
in terms of rupees 4,90.000) [in
=49 on 1-4-2012, in the above $ 10,000 to the party in USAJ The rate
of US $ 1 example, is known as the spot rate.
(b) Average
Rate: For practical
reasons, however, an average rate for all
con cerned week or month may be transactions during the
used. Average rate is not used, if the
significantly. exchange rates fluctuate
Wustration 2:
An Indian company is a regular importer of
-2012 for goods worth USS 10,000. goods on credit. It makes its first
During the 4 working days in that week the import for 2012 on
e1-845, 45.25, 44.65 and 45.10. State the accounting exchange rates were:
Solution:
treatment recommended under AS 11.
The indian company can translate the
rate during the week R 45 i.e. [(f 45 + amount+ [US $ 10,000] by applying the average exchange
45.25 44.65 + 45.10) + 4]. It can record this
books at 4,50,000. import in its

3. TRANSLATION OF BALANCES AT YEAR-END

3.1 WHICH BALANCES NEED TO BE
TRANSLATED
After the initial recognition (recording of transactions), the need for
the balance sheet at the year-end (reporting of translation arises while preparing
items denominated in foreign currency need to be balances). At this stage, the balances of following
translated into rupees:
(a)Monetary Items : Monetary items are money held and assets or liabilities to be settled in fixed
amounts of money, e.g. foreign currency notes included in Cash on hand;
denominated in a foreign currency (EEFC a/c); debtors, creditors or balances
in bank accounts
loans denominated
in a
foreign currency.
(D) Non-monetary Items : Non-monetary items are assets and liabilities other than
e-g. fixed assets, inventories, investment in equity shares. monetary items
lustration 3 :
Classify the following as monetary or non-monetary item:
1. Share Capital
2. Trade Receivables
3. Investrnents
4. Fixed Assets.
(CA-Inter, May 2013, adapted)
Solution:
Share Capital Non-monetary
Trade Receivables Monetary
Investments
Fixed Assets Non-monetary
Non-monetary
3.2 WHY
Above BALANCES NEED TO BE TRANSLATED
from U.balS.aAnces
. on are expressed in foreign currency. For example, ifan Indian company imports goods
credit for US S10.000: andthe amount is still outstanding as at the yea-end, it must
includedof in the creditors in the balance sheet. Sincethe balance sheet is in rupees, the outstanding
amount US S
10,000 must be translated (converted) into rupees.
146
FinancialAccounting (T.Y.B.Com.: SEM-VI,
3.3 AT WHAT RATEBALANCES ARE TRANSLATED
(a) Monetary items : Balances of monetary items e.g. cash, receivables, payables etc.
translated at the closing rate.(i.e, rate on the date of balance
sheet), However,
unrealistic, where
,such item should bbe
shoul
there dae
restrictions on remitances or where the closing rate is
which thel balance is likely to be translated
at the expected realizable value (i.e. theamount at settled at the
balance sheet date).
(b) Non-monetary items carried at historical cost : Balances of non-monetary items (e.g inventory
or machinery), valued at historical cost den ominated in aforeign currency, should be
at the exchange rate on the date of the original transaction (i.e. historical cost), translatad
(o) Non-monetary items carried at fair value : Balances ofnon-monetary items which are cari
in terms of fair value, denominated in a foreign currency, should be translated at the exchane
rate that existed when such value was deternmined.

ACCOUNTING FOR EXCHANGE DIFFERENCE

4.1 MEANING

AS 11 defines Exchange Difference, as the differen ce resulting from reporting the same number df
units of a foreign currency in the reporting currency at different exchange rates.
Atransaction recorded in terms of rupees is quite simple in nature. Thus, in case of credit purchase
of t50,000, purchases are recorded at 50,000; payment, ifmade, is recorded at 50,000; and ifne
payment is made, the balance of creditor is shown in the balance sheet at 50,000. Howeve, 4
Similar purchase in foreign currency may give rise to exchan gedi fferences. Exchange differences
arise because different exchange rates are used at different stages to record a transaction and o
report the balances at the year-end. Thus, in case of an import of goods for USS 1,000; purchases
may be transl ated and recorded at 50,000 (ifUS S 1 = 50 on date of purchase); payment may
recorded at R51,000 (if US SI =*5l on the date of payment, leading to a loss of 1,000 due te
exchange rate differen ce); if, on the other han d, no payment is made, creditors may be reporteu
49,500 (ifUS S 1=49.50 on the date of balance sheet, leading to a gain ofB 500 due to exchaie
rate difference). Exchange difference on foreign currency transactions/balances should be revu
in the accounts in the following manner as laid down in AS 11.
4.2 EXCHANGE DIFFERENCE ON SETTLEMENT AND BALANCES
(1) Difference on Settlement : Exchange differences arising on settling foreign currency transactions
shouldbe recorded as inconme or as expense in the period in which they arise.
llustration 4:
31-05-2012 ox
Refer llustration 2 above. Assuming that the actual rate paid by the importer on recommenced
purchasing dollars for remittance was ? 45.50 per $ state the accounting treatment
under AS 11.
Solution :
paymentwas
The import was recorded at ? 4,50,000 (by using the average rate), The actual be debited
Z4,55,000 ($ 10,000 x 45.50) The loss due to exchange difference of 5,000 Would
account.
the profitand loss
(2) Difference on Balance Valuations : Exchange difference arising due to translalio lossdue à
8ainoc the
balances is also recorded as income or expensein the relevant period. Thus account or
translation of balances asat 31-3-2013 would be transferred to the profit and loss
-3-2013.
year ended 31 31-32013(he
Illustration 5 : recommended
till
Illustration 2above. Assume that tthe amount was not paid by the importer
Refer exchange rate was $1=44.75. State the accounting treatnent
year-end) when the
under AS 11.
 Accounting off Transactions of Foreign Currency
Solution 147

The import was recorded at 4,50,000. The balance pay

recorded
valued at the closing rate at 4,47,500. The gain able (creditor) as on
credited to the profit and
and loss account for the year due to exchangedifference 31-3-2013
of 2,500 would be
Difference Non-Monetary ending on
31-3-2013. would be
(3) NNo Exchange Difference on Items :
to AS 11(revised) only in Exchangedifference can arise, according
encewill arise on respect of monetary items i.e, cash, debtors
differen or ereditors. No
non-monetaryitems e.g. inventory, fixed assets,
pontinue to be valued at a constant exchange
amount originally recor ded investments, etc. Such
value). (historical cost or fair