AS-11-ACCOUNTING FOR THE EFFECTS OF CHANGES IN

FOREIGN EXCHANGE RATES.

PRESENTED BY:

DR. RAJ K. AGARWAL

M.COM FCA, FCS,AICWA,LLB,Phd.

M/S RAKESH RAJ & ASSOCIATES

CHARTERED ACCOUNTANTS

APPLICABILITY

ALL ENTERPRISES - CORPORATES OR NON-CORPORATES.

STATEMENT OF 1994 REVISED IN 2003.

REVISED STATEMENT EFFECTIVE FROM 1ST APRIL 2004

MANDATORY IN NATURE.

SCOPE

ACCOUNTING FOR TRANSACTIONS IN FOREIGN CURRENCIES.

TRANSLATING THE FINANCIAL STATEMENTS OF FOREIGN OPERATIONS.

EXCLUSIONS

DOES NOT APPLY ON RESTATEMENTS

DOES NOT APPLY ON CASH FLOW STATEMENTS

DOES NOT DEAL WITH EXCHANGE DIFFERENCES RELATING TO INTEREST ON FOREIGN CURRENCY BORROWINGS

ISSUES INVOLVED

WHICH EXCHANGE RATE TO USE.

FINANCIAL EFFECT OF CHANGES IN EXCHANGE RATES.

INITIAL RECOGNITION OF TRANSACTIONS

AS PER EXCHANGE RATE AT THE DATE OF TRANSACTION .

AVERAGE RATE IF NOT TOO MUCH FLUCTUATION.

EFFECTS OF CHANGES IN EXCHANGE RATES AT B/S DATE

MONETARY ITEMS - TO BE RESTATED AT CLOSING

RATE FOREIGN CURRENCY NOTES BALANCE IN FOREIGN CURRENCY BANK A/CS RECEIVABLES/ PAYABLES FOREIGN CURRENCY LOANS

NON MONETARY ITEM - AT HISTORICAL COST - RATE OF DATE OF

TRANSACTION

AT FAIR MARKET - AT CLOSING RATE

VALUE

INVENTORIES/ INVESTMENTS/ FIXED ASSETS

.

(REVISED)AS-11 - DIFFERENCE OF EXCHANGE RATE

RELATING TO CORRESPONDING LIABILITY

TO BE ADJUSTED IN P & L A/C.

SCHEDULE VI - EXCHANGE DIFFERENCE OF LIABILITIES INCURRED

FOR FIXED ASSESTS TO BE ADJUSTED IN THE COST OF RESPECTIVE FIXED ASSESTS

ISSUES AS PER PREFACE TO ACCOUNTING STANDARD STATUTORY REQUIREMENT OF ANY LAW TO GET PRECEEDENCE OVER AS

IN CASE AS-11 BEING FOLLOWED - DEVIATION FROM INCOME TAX ACT SECTION 43A - ADJUSTMENT OF TIMING DIFFERENCE AS PER AS-22

TREATMENT OF FIXED ASSET - AS Vs. SCHEDULE VI

RECOGNITION OF EXCHANGE DIFFERENCES

INCOME OR EXPENSE IN THE PERIOD IN WHICH THEY ARISE.

ISSUES

SEPERATE HEAD OR ADJUSTMENT IN RESPECTIVE HEAD OF INCOME/LOSS.

EVENT OCCURING AFTER BALANCE SHEET DATE-ACTUAL SETTLEMENT AMOUNT.

CASE STUDY1 - MONETORY ITEM AT CLOSING RATE

TRANSACTION CLOSING

DATE @ 42/- DATE@ 45/- PURCHASES DR.$1000 42,000 42,000 -

INVENTORY

TO PAYABLE $ 1000 42,000 45,000 DIFFERENCE TO

GO TO EXCHANGE

FLUCTUATION , VALUEOFINVENTORY

OR PURCHASES NOT TO BE ADJUSTED.

.

PROFIT & LOSS A/C PURCHASES 42,000 VALUE OF 42,000 CLOSING STOCK EXCHANGE 3,000 FLUCTUATION

BALANCE SHEET PAYABLES 45,000 CLOSING 42,000

STOCK

CASE STUDY : SUBSEQUENT YEAR NO FOREIGN CURRENCY

TRANSACTION 31/3/06 RECEIVABLES / PAYABLES - ON CLOSING

RATE

NEXT YEAR ACTUAL SETTLEMENT - FOREIGN EXCHANGE RATE DIFFERENCE

NO FOREIGN CURRENCY TRANSACTION IN NEXT YEAR - ALLOWABILITY / TAX EXEMPTION OF SUCH FOREIGN EXCHANGE FLUCTUATION AMOUNT IN NEXT YEAR UNDER INCOME TAX ACT.

CASE STUDY2- NON MONETORY

ITEM AT FAIR VALUE TRANSACTION B/S DATE DATE COST $ 100 FAIR VALUE $ 90 TO

CARRY

@ Rs.40 PER $ @ Rs.50/- PER $ IN B/S AT Rs. 4000 /- Rs. 4500/- Rs.4000/-

OR

Rs.4500/-

FORWARD EXCHANGE CONTRACTS

TRANSACTION TO BE RECODED AT EXCHANGE RATE OF TRANSACTION DATE

PREMIUM OR DISCOUNT RELATING TO FORWARD EXHANGE CONTRACT - TO BE RECOGNISED AS INCOME OR EXPENSE OVER THE LIFE OF THE CONTRACT - PERIOD WISE.

TRANSLATION OF THE FINANCIAL STATEMENTS OF FOREIGN

OPERATIONS

INTEGRAL FOREIGN OPERATIONS

TO BE TREATED AT PAR WITH DOMESTIC OPERATIONS.

.

CONSOLIDATION OF NON INTEGRAL FOREIGN

OPERATIONS

.

AN FOREIGN OPERATION THAT IS NOT INTEGRAL TO OPERATIONS OF REPORTING ENTERPRISE

INDICATORS OF NON INTEGRAL FOREIGN OPERATIONS - 1. AUTONOMY OF OPERATIONS

2. NO OR LITTLE CORELATION OF CASH FLOWS OF REPORTING ENTERPRISE AND FOREIGN OPERATION

3. FINANCING OF ACTIVITIES OF FOREIGN OPERATION BY ITS LOCAL RESOURCES (AND NOT BY REPORTING ENTERPRISE)

MEANING OF NON INTEGRAL FOREIGN OPERATIONS

TRANSLATION OF THE FINANCIAL STATEMENTS OF NON INTEGRAL FOREIGN

OPERATIONS

ASSETS & LIABILITIES

BOTH MONETARY AND CLOSING RATE NON MONETARY

INCOMES & EXPENSEEXCHANGE RATE AT THE DATE OF TRANSACTION (OR AVERAGE RATES)

RECOGNITION OF EXCHANGE DIFFERENCES

TO BE ACCUMULATED IN A FOREIGN CURRENCY TRANSLATION RESERVE TILL DISPOSAL OF “NET INVESTMENT” IN FOREIGN OPERATION

TO BE TRANSFERRED TO INCOME/ EXPENSE IN THE PERIOD IN WHICH PROFIT / LOSS ON DISPOSAL OF “NET INVESTMENT” IN OPERATION IS RECOGNISED

ISSUES

CONSOLIDATION OF FINANCIAL STATEMENTS

RECLASSIFICATION OF FOREIGN OPERATIONS - REVISED CLASSIFICATION TO APPLY FROM DATE OF CHANGE OF CLASSIFICATION

DISCLOSURES

AMOUNT OF EXCHANGE DIFFERENCES INCLUDED IN P & L A/C.

NET EXCHANGE DIFFERENCE ACCUMULATED IN “FOREIGN CURRENCY TRANSLATION RESERVE”

.

AMOUNT OF EXCHANGE DIFFERENCES IN RESPECT OF FORWARD EXCHANGE CONTRACTS

FOREIGN EXCHANGE RISK MANAGEMENT POLICY.

.

.