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EFFECTS OF CHANGES IN FOREIGN EXCHANGE
RATES
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TOPICS COVERED
1. EXISTING STANDARD
2. AS – Vs - MCA
3. AS - Vs - Ind AS
4. Ind AS - Vs - IFRS
5. PRACTICAL ISSUES
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Accounting Standard - 11
Originally Issued in the year 1989 & revised in 1994.
Again revised in 2003.Revised Standard - Applicable in
respect of Accounting periods commencing after 01-04-2004.
To be succeeded by Ind AS – 21.
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Coverage At A Glance
Foreign Currency Transactions Foreign Operations
Foreign Currency Activities
a) Conversionb) Recognition of Ex. Diff.c) Eg. : FC Transaction
a) Classification of FOb) Conversion of FSc) Disposal of NFOd) Change in classification
Direct business dealings with Customers, Suppliers etc. from local point
Business dealings through foreign based branch, JV, Subsidiary, Associate etc.
ForwardExchangeContracts
Tax Effect ofEx. Diff.
Disclosure TransitionalProvisions
Accounting
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Conversion of FC TransactionsInitially FC transactions shall be recorded at TDR * / ARFor practical purpose Average Rate (AR) can be used in place of TDR. Appropriate Accounting Policy shall be established for the purpose.View Eg. AR Policy >>>>>>>*TDR = Spot Rate on Transaction Date
Conversion Rate Table for FC Transactions (FCT)
Classification of BS Items Initial A/cing Conversion at BS Dt
Monetary Items TDR / AR Closing Rate (CR)*
Non Monetary Carried @
Historical Cost TDR / AR TDR/AR
Fair Value TDR / AR Valuation Date Rate
Contingent Liabilities ----- Closing Rate
*CR = Rate on BS Date
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Eg. : Average Rate (AR) Policy
Accounting Policy for Initial Recognition : - Purchases & Sales in FC are recorded at rates
prevailing on the Date of Transfer of Significant Risks & Rewards.
Other Transactions in FC are recorded at TDR i.e. Ex. Rates prevailing on Date of Transaction
Note :- AR should approximate to the TDR
i.e. AR can not be used if Ex. Rates fluctuates significantly RKEANS
Transaction@ TDR / AR
Reported in BS @Closing
Rate
Settled @ TDR / AR
Settled after the BS Date
Recognition of Ex. Diff. - FCT
The same should be recognized in P & L A/c for the period
Ex. Diff. arises EITHER on Settlement OR on Reporting in BS
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Eg. : Ex. Diff. on FC Transaction
Accounting Year 2014-15 2015-16
Accounting of purchase as per revised AS 11 (2003)
Purchase worth US $ 1/- Purchase 01.12.14
Payment 31.01.15
BS Dt 31.03.15
Payment 30.04.15
BS Dt 31.03.16
Spot Rates ( `/$) 50/- 52/- 47/- 46/- 52/-
Purchase A/c DR 50.00
Vendor A/c DR 50.00 3.00 47.00
Ex. Loss A/c DR 2.00 5.00
Rs. Current A/c CR 52.00 46.00
Vendor A/c CR 50.00 5.00
Ex. Gain A/c CR 3.00 1.00
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Classification of FO
Foreign Operation (FO) is defined as a subsidiary, associate, joint venture or branch based in a foreign country.
Classified : Way in which financed & operates w.r.t. Reporting Entity (RE)
Particulars Integral FO (IFO) Non Integral FO (NFO)
Definition FO whose activities are an integral part of the activities of RE
Negatively defined –FO which is not an IFO
Operates as Extended arm of RE Separate Entity
Example Selling Agent may just sell goods received from RE and remit proceeds back to RE
Independent Branch Generates Income, Incurs Expenses, Accumulates Monetary Items, Borrows locally etc. etc.
Effect of Rate Fluctuation
Has immediate effect on RE’s Cash Flows from Operations
Do not have direct impact on RE’s Cash Flows from Operations
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Indicators of NFO Major factor : Impact on cash flows from operations
Other indicators of NFO are –
a) High degree of autonomy in carrying operations
b) Low proportion of transactions with RE
c) No dependence on RE for finance
d) COP or services settled on it’s own
e) Sales are in currencies other than RC (Rs.)
f) Cash flows of RE are insulated from day-to-day activities of FO
g) Sales prices are not responsive to Ex. Rate Fluctuations
h) Existence of local demand for the product
If can’t be classified clearly then judgment is necessary for determination.
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Conversion of FSs of FO &Recognition of Ex. Diff. thereofFor Conversion, IFO is treated as FC Transaction
Particulars Integral FO =FC Transaction
Non Integral FO
P & L Items TDR / AR TDR / AR
Monetary Items Closing Rate Closing Rate
Non Monetary carried @ Historical Cost
TDR / AR Closing Rate
Non Monetary carried @ Fair Value
Valuation Date Rate Closing Rate
Recognition of Ex. Diff.
Recognized in P & L A/c as & when arise
Accumulated in FOREX Reserve A/c (Accumulation will continue until disposal of NFO)
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Eg. : Conversion of NFO FSParticulars Rate Dr $ Dr. ` Cr $ Cr. `
Acquisition of Chemicals Inc., USA on 31.03.14 (Spot = 40/-)
Share Capital 40/- 100 4000
Reserves 40/- 50 2000
Assets / Liabilities 40/- 200 8000 50 2000
Total 200 8000 200 8000
On next BS Dt 31.03.15 (Spot = ` 50/-, AR = ` 45/-)
Share Capital Original 100 4000
Opening Reserves Original 50 2000
Current Profit AR = 45/-
20 900
Assets / Liabilities CR = 50/-
400 20000
230 11500
Foreign Currency Translation Reserve (Balancing Figure)
1600
Total 400 20000
400 20000
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Disposal of NFO
Particulars Nature of Disposal
100% Disposal Part Disposal
Gain or Loss on Disposal
Recognize inP & L A/c
Recognize in P & L A/c
Accumulated amount in FCT Reserve A/c
100% transfer to P & L A/c
Part amount transfer to P & L A/c on pro-rata basis
When to transfer FCT Reserve to P & L
Period in which gain or loss on disposal is recognized in P & L A/c
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Change in Classification of FOParticulars Conversion Rate for
IFO = FCT NFO
P & L Items TDR / AR TDR / AR
Monetary Items Closing Rate Closing Rate
Non Monetary carried @ Historical Cost (FC)
TDR / AR Closing Rate
Non Monetary carried @ Fair Value (FC)
Valuation Date Rate Closing Rate
IFO reclassified as NFO Ex. Diff. will arise on conversion of non-monetary items ;& The same shall be accumulated in FOREX Reserve
NFO reclassified as IFO FOREX Reserve is continued until actual disposal of FO Translated amounts for Non Monetary Items are treated as
historical cost of those items, from that date.
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Eg. : Reclassification IFO to NFO
BS Dt 31.03.15 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)
Particulars US$
IFO NFO
Rate Rs. Rate Rs.
Share Capital 100 40/- 4000 40/- 4000
Op. Reserves 50 40/- 2000 40/- 2000
Current Profit 20 45/- 900 Original 2000
Ex. Gain Loss 1100
FOREX Reserve 500
Monetary Liabilities 230 50/- 11500 50/- 11500
Total 400 19500 20000
Monetary Assets 300 50/- 15000 50/- 15000
Non Monetary @ Historical Cost
100 45/- 4500 50/- 5000
Total 400 19500 20000RKEANS
Eg. : Reclassification NFO to IFOBS Dt 31.03.15 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)
Particulars $ Rate NFO Rs. IFO Rs. Remarks
Share Capital 100
40/- 4000 4000
Op. Reserves 50 40/- 2000 2000
Current Profit 20 45/- 900 900
FOREX Reserve 1600 1600 Continued until disposal of FO
Liabilities 230
50/- 11500 11500
Total 400
20000 20000
Monetary Assets
300
50/- 15000 15000
Non Monetary @ Historical Cost
100
50/- 5000 5000 Treated as Historical Cost from date of
reclassification
Total 400
20000 20000RKEANS
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Forward Exchange Contracts
AS 11 (revised 2003) orginally prescribed Accounting treatments for Forward Exchange Contracts entered for Both Hedging & Speculative purposes.
In 2004 Hedging of Firm Commitments & Highly Probable forecasts were eliminated. Between 2006 to 2008 several clarifications were given for accounting & disclosure of Hedges & Derivatives which were postponed till 2008.
In 2011 when AS 30 was supposed to be effective ICAI brought Limited revision to AS 11 to eliminate all Hedging & Derivative Transactions & relevant portions.
AS 30,31& 32 not notified till date. Ind AS 32, 39 & 107 yet to be applicable.
Forward Exchange Contract (FEC)FEC is an agreement to exchange different currencies at Forward Rate in respect of Existing Assets & Liabilities.
# Particulars FEC
1 Purpose Manage risks
2 Eg. Say Minimizing Ex. Rate fluctuation risk associated with Accounts Receivable of USD 100K
3 Accounting Purpose different hence different A/cting treatment
Premium/ Discount Deferred over tenor of the contract
Ex. Diff. Recognize on the basis of ex. rate movements
4 Practical View Eg. >>>>
Profit or Loss on Cancellation/Renewal is recognized in P & L A/c
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Eg. : Accounting FEC
Accounts Payable
US $
Sale Dt 01.12.14
FEC Dt 01.12.14
BS Dt 31.03.15
Settlement Dt 30.04.15
1/= Spot = 43/- FR = 48/- Spot = 45/- Spot = 47.50
Accounting as per Revised AS 11 (2003)
Accounting Year
Premium (5/-) Amortization
Exp.Rs.
Ex. Loss Calculation
Ex. Diff Rs.
Net (Gain) /
Loss
2014-15 5 * (4/5) 4/- 43 – 45 (2/-) 2/-
2015-16 5 * (1/5) 1/- 45 - 47.50 (2.50) (1.50)
Total 5/- 4.50 0.50
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Eg. : Speculative Other FEC
FEC Date 1st March, 2015
Forward Purchase of USD 1/-
Maturity Date 30th June, 2015
Forward Rate ` 50/- per $
Forward Rate available on BS date (31.03.15) for remaining maturity of the contract
` 48/- per $
Ex. Loss in 2014-15 ` 2/-
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Tax Effects of Foreign Ex. Diff.
There will be some tax effects associated with the gain or loss from exchange rate fluctuation
These tax effects shall be accounted for in accordance with AS 22 i.e. Accounting for Taxes on Income
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DisclosureAn Enterprise shall specifically disclose –
1. Ex. Diff. recognized in P & L A/c for the period
2. FCT Reserve as part of Share Holder’s Funds
3. Reconciliation of Opening & Closing FCT Reserve
4. Where RC is different from the currency of domiciled country, reasons thereof
5. Where RC currency has been changed from previous accounting period then reasons for such change
6. If classification of FO has been changed, then - Nature & Reasons for Change
Impact of change on Share Holder’s Funds
Impact on Net Profit or Loss for each prior period, as if change is applicable from retrospective effect.
7. AS 11 encourages disclosure of Enterprise’s FC Risk Management Policy
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Transition on 1st April, 2004
Revised AS 11 is applicable from 1st April, 2004.
On 1st time application, if a Foreign Branch is classified as NFO then accounting treatment pertaining to change in classification of FO shall be applied
i.e. Accumulate Ex. Diff. on conversion of Non Monetary Items in FC Translation Reserve
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AS 11 & Rev Schedule VI
Background
Schedule VI of the Companies Act provided for capitalisation of increase or decrease of a Liability (loan) due to fluctuation of exchange rates. GSR 129 Dt. 03/01/1968
As per AS – 11, any gains/losses arising in such valuation are required to be recognised in the statement of profit and loss.In 2003, ICAI had made an announcement stating that Auditors need not Qualify in case adoption of Schedule VI.
MCA issued the Companies (Accounting Standards) Rules, 2006, by way of Notification in the Official Gazette dated 7th December, 2006. In Rules it was clarified by MCA that accounting treatment of exchange differences will be made as per AS 11 and further categorically mentioned that provisions of AS-11 is required to be followed irrespective of the relevant provision of Schedule-VI to the Companies Act, 1956.
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AS 11 & Rev Schedule VI
On July 18, 2007, ICAI withdrew the Announcement on ‘Treatment of exchange differences under Accounting Standard (AS) 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates vis-à-vis Schedule VI to the Companies Act, 1956’.
MCA introduced Clause 46 to AS -11 on 31-03-09, giving an option to accumulate FC gains/losses on LT FC Monetary Items to FC Monetary Item Translation Diff A/c or adjust to Asset value and amortise upto 31.03.2011 and also permitted retrospective application from 7-12-06.
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AS 11 & Rev Schedule VI
MCA introduced Clause 46A to AS -11 on 29-12-11, extending the period of amortisation upto the Balance life of the Asset / Liability.
There is no specific mention about the treatments in Revised Schedlue VI .
Guidance Note issued by ICAI on Rev-Sh VI only speaks about manner of disclosure of such items under “Other Adjustments” in the Reconciliation of Gross & Net Carrying amounts of Assets. ICAI Announcement on 26/03/2013 gives the disclosure treatment for FC Monetary Item Translation Diff A/c.
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Ind AS 21 Vs AS 11
Functional Currency Concept.
Does not deal with Forward Exchange Contracts covered under Ind As 39.
FEV on Long Term Monetary Items accumulated to Equity & transferred to P&L over the term.
Clarity on ERV arising on Inventory valuation & Impairment of Assets.
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Ind AS 21 Vs IAS 21
FEV on Long Term Monetary Items accumulated to Equity & transferred to P&L over the term – not in IFRS.
Change in Functional currency required disclosure of FACT & Reason – not in Ind AS.
“Statement of Financial Position” used in IFRS instead of “Balance Sheet”.
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PRACTICAL ISSUES
Accounting for Advances.Previous years Figures in
Consolidation.Effect on Depreciation.Forex AccountsPostponement of recognition due to
Uncertainty of Realisation.
Eg. : Ex. Diff. on FC Transaction
Accounting Year 2014-15
Accounting of Sales as per revised AS 11 (2003)
Sales worth US $ 2/- Payment 1 $
01.12.14
Sale2$
31.01.15
Payment1$
02.02.15
Sale2$
31.01.15
Payment1$
02.02.15
Spot Rates ( `/$) 50/- 52/- 52/- 52/- 52/-
Sales A/c Cr 104/- 102/-
Vendor A/c DR 104/- 102/-
Ex. Loss A/c DR 2/-
Rs. Current A/c Dr 50/- 52/- 52/-
Vendor A/c CR 50/- 54/- 52/-
Ex. Gain A/c CR
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Eg. : Conversion of NFO FSParticulars Rate Dr $ Dr. `
Acquisition of Chemicals Inc., USA on 31.03.14 (Spot = 40/-, AR = 42/-)
Fixed Assets 40/- 100 4000
Depreciation 42/- 50 2100
Closing Balance 40/- 50 1900
40 X 50 = 2000
Particulars Rate Dr $ Dr. `
On next BS Dt 31.03.15 (Spot = ` 50/-, AR = ` 45/-)
Fixed Assets 50/- 50 2500 1900
Depreciation 45/- 50 2250 2250
Closing Balance 0 250 -350
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Eg. : Conversion of Forex Bal
Particulars Rate $ `
Sale Realisation 40/- 100 4000
Payment for Purchases 42/- - 50 - 2100
Closing Balance 44/- 50 1900
44 X 50 = 2200
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THANK YOU
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