Download Quick Reference on Accounting Standard (AS) 11 The Effects of Changes in Foreign Exchange Rates
Activities involving foreign exchange
- Accounting for transactions in foreign currencies
- Translating the financial statements of foreign operations
- Forward exchange contracts
AS 11 lays down principles of accounting for foreign currency transactions and foreign operations, i.e., which exchange rate to use and how to recognise in the financial statements the financial effect of changes in exchange rates.
Exchange difference is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency at different exchange rates.
Foreign currency is a currency other than the reporting currency of an enterprise.
Foreign operation is a subsidiary, associate, joint venture or branch of the reporting enterprise, the activities of which are based or conducted in a country other than the country of the reporting enterprise.
Forward exchange contract means an agreement to exchange different currencies at a forward rate.
Reporting currency is the currency used in presenting the financial statements.
Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money.
Non-monetary items are assets and liabilities other than monetary items.
Foreign currency transactions
- A foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.
- 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 transactions in each foreign currency occurring during that period.
- If exchange rates fluctuate significantly, the use of the average rate for a period is unreliable.
At each balance sheet date, various items are to be stated using the following rates:
- Foreign currency monetary items: Closing rate with an exception where the closing rate may not reflect the amount likely to be realised or disbursed
- Non-monetary items which are carried in terms of historical cost denominated in a foreign currency: Exchange rate prevailing on the date of transaction
- Non-monetary items which are carried at fair value or other similar valuation, eg, net realisable value denominated in a foreign currency: Exchange rates prevailing at the time values were determined
Recognition of exchange differences
- Exchange differences arising on the settlement of monetary items or on reporting an enterprise’s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognised as income or as expenses in the period in which they arise, with the following exception:
- Exchange differences arising on a monetary item that, in substance, forms part of an enterprise’s net investment in a non-integral foreign operation should be accumulated in a foreign currency translation reserve in the enterprise’s financial statements until the disposal of the net investment, at which time they should be recognised as income or as expenses.
- Integral Operation- A foreign operation, the activities of which are integral part of those of the reporting enterprise
- Non-Integral Operation– A foreign operation that is not an integral operation
Translation of Integral Operations
- Individual items: Translated as if all the integral foreign operation’s transactions had been entered into by the reporting enterprise itself
- Cost and depreciation of tangible fixed assets: Rate at the date of purchase of asset or Rate that existed on the date of valuation if if the asset is carried at fair value
- Costs of inventories: Rate existing on the date when the cost was incurred
- Recoverable amount or realisable value of an asset: Rate existing on the date when the recoverable amount or net realisable value was determined
Translation of Non-Integral Operations
- Assets and Liabilities (both monetary and non-monetary): Closing Rate
- Income and expense items: Rate at the date of transactions. For practical reasons, a rate that approximates the actual rate (e.g., an average rate for a period) is often used
- Contingent liability disclosed in the financial statements: Closing Rate
- Goodwill/capital reserve arising on acquisition: Closing Rate
Recognition of exchange differences
- Integral Operations- Same as prescribed for foreign currency transactions
- Non-integral operations- Accumulated in a foreign currency translation reserve until the disposal of the net investment
Relaxation given vide paragraph 46A: Option given to account for exchange differences arising on reporting of long-term foreign currency monetary items:
- Relating to the acquisition of a depreciable capital asset- Added to or deducted from the cost of the asset and depreciated over the balance life of the asset
- Other cases- Accumulated in a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s financial statements and amortised over the balance period of such long-term asset/liability.
Forward Exchange Contracts: AS 11 is not applicable to exchange difference arising on forward exchange contracts entered into to hedge the foreign currency risk of future transactions in respect of which firm commitments are made or which are highly probable forecast transactions.
Contract not intended for trading or speculation purposes
- The premium or discount arising at the inception of such a forward exchange contract should be amortised as expense or income over the life of the contract.
- Exchange differences on such a forward exchange contract should be recognised in the Statement of Profit and Loss in the reporting period in which the exchange rates change.
- Any profit or loss arising on cancellation or renewal of such a forward exchange contract should be recognised as income or expense for the period.
- A gain or loss should be computed by multiplying the foreign currency amount of the forward exchange contract by the difference between the forward rate available at the reporting date for the remaining maturity of the contract and the contracted forward rate (or the forward rate last used to measure again or loss on that contract for an earlier period).
- The gain or loss so computed should be recognised in the Statement of Profit and Loss for the period.
- The premium or discount on the forward exchange contract is not recognised separately.