Accounting Standard (AS) 11: The Effects of Changes in Foreign Exchange Rates
The statement applies mandatorily in respect of:
(a) Accounting for transaction in foreign currencies
(b) Translating the financial statements of foreign branches for inclusion in the financial statements of the reporting enterprise.
A transaction in a foreign currency is recorded in the financial records of an enterprise normally at the rate
(a) On the date of transaction i.e. spot rate,
(b) Approximate actual rate i.e. averaging the rates during the week/month in which transactions occur if there is no significant fluctuations.
(c) Weighted average in the above line.
However, for interrelated transaction (by virtue of being set off against receivables and payables) it is translated with reference to the net amount on the date of transaction.
After initial recognition, the exchange difference on the reporting date of financial statement should be treated as under:
(a) Monetary items like foreign currency balance, receivables, payables, loans at closing rate (in case of restriction or remittance other than temporary or when the closing rate is unrealistic, it is reported at the rate likely to be realized
(b) Non-monetary items like fixed assets, which are recorded at historical cost, should be made at the rate on the date of transaction.
(c) Non-monetary items other than fixed assets are carried at fair value or net realizable value on the date which they are determined i.e. B/S date (inventories, investments in equity-shares).
Exchange difference on repayment of liabilities incurred for acquiring fixed assets should be adjusted in the carrying amount of fixed assets on reporting date. The same concept applies to revaluation as well but in case such adjustment on revaluation should result into showing the actual book value of the fixed assets/or class of, exceeding the recoverable amount, the remaining amount of the increase in liability should be debited to Revaluation Reserve or P/L Statement in case of inadequacy/ absence of Revaluation Reserve.
Except as stated above (fixed assets) other exchange difference should be recognized as income or expense in the period in which they arise or spread over to pertaining accounting period.
Depreciation as per AS-6 should be provided on the unamortised carrying amount of depreciable assets (after taking into account the effect of exchange difference).
Disclosure under AS -11: An enterprise should disclose:
(a) The amount of exchange difference included in the net profit or loss for the period.
(b) The amount of exchange difference adjusted in the carrying amount of fixed assets during the accounting period.
(c) The amount of exchange difference in respect of forward contracts to be recognized in the profit/loss for one or more subsequent accounting period.
(d) Foreign currency risk management policy.