AS-11

SEGMENT 1
- Accounting for transactions in foreign currencies

SEGMENT 2
- Translating the financial statements of foreign operations.

SEGMENT 3
- Accounting for forward exchange contracts.
 FOREX TRANSACTIONS – CATEGORY 1

TRANSACTIONS INVOLVING FOREIGN CURRENCY CAN

ARISE FROM:

Buying or selling of goods and services.

Borrowing and lending money.

Acquiring or disposing of assets or incurring and settling liabilities.

Incurs or settles liabilities denominated in foreign currency.

 FOREX TRANSACTIONS – CATEGORY 2
TRANSACTIONS OF FOREIGN OPERATIONS

Foreign branch.

An associate.

Joint venture.

Foreign subsidiary.

Such operations can be further classified as

Integral operations

Non integral operations

 FOREX TRANSACTIONS – CATEGORY 3

FORWARD EXCHANGE CONTRACTS

For managing risk/hedging.

For trading and speculation.

SEGMENT 1 - FOREIGN CURRENCY TRANSACTIONS

INITIAL RECOGNITION

REPORTING AT SUBSEQUENT BALANCE SHEET

DATES.

RECOGNITION OF EXCHANGE DIFFERENCES

TREATMENT FOR FOREIGN CURRENCY TRANSACTIONS
(CATEGORY 1)

INITIAL RECOGNITION

REPORTING AT SUBSEQUENT BALANCE SHEET

DATES.

RECOGNITION AND TREATMENT OF EXCHANGE

DIFFERENCES
FOREX TRANSACTIONS – INITIAL RECOGNITION

For initial recognition AS-11 prescribes that a

foreign exchange transaction should be recorded
by applying the exchange rate between the
reporting currency and the foreign currency at the
date of the transaction.

In some cases an average rate is also used if there

is no significant fluctuation in exchange rates.
(Eg., average rate may be moving average of
closing rates obtained in the immediately 30
preceeding days.)
REPORTING AT SUBSEQUENT BALANCE SHEET DATES

For reporting at the end of each

accounting period, items in the
balance sheet are required to be
classified into monetary and non-
monetary items.
 REPORTING –MONETARY ITEMS/NON MONETARY ITEMS

MONETARY ITEMS are money held and assets and

liabilities to be received or paid in fixed or determinable
amounts of money
Eg., Cash balance, Receivable, Payable.

NON-MONETARY ITEMS are assets and liabilities other

than monetary items
Eg., Fixed assets, Inventories, Investments in shares
 REPORTING –MONETARY ITEMS/NON MONETARY ITEMS

MONETARY ITEMS – CLOSING RATE

NON-MONETARY ITEMS –
CARRIED AT RATES ON THE DATE ON WHICH
HISTORICAL COST TRANSACTION WAS ORIGINALLY
CONCLUDED, E.g., Fixed assets

CARRIED IN TERMS RATES APPLICABLE ON THE DATE ON WHICH

OF FAIR VALUE OR FAIR VALUE WAS DETERMINED. USUALLY
SIMILAR FAIR VALUE IS DETERMINED ON THE BS DATE.
VALUATION E.g., Current investments.

FOR REVENUE EARNED AVERAGE RATE IS

ADOPTED
 RECOGNISING EXCHANGE DIFFERENCE

Exchange differences can arise on account of;

Transaction relating to a monetary item being

settled at a rate different from the rate at which it
was initially recorded.

Transaction being settled at a rate different from

the one taken for reporting in the last financial
statement
 RECOGNISING EXCHANGE DIFFERENCE

AS 11 lays down the following principle for recognition of exchange

difference:
“RECOGNISE AS INCOME OR EXPENSE IN THE PERIOD IN
WHICH THEY ARISE.”

Where initial recognition date and settlement date fall within the
same accounting period, exchange differential would have to be
recognised in that period.

In case where a reporting date intervenes between transaction and

settlement date, each period preceeding or following the reporting
date is the period in which the exchange difference is said to arise.
RECOGNISING EXCHANGE DIFFERENCE
RECOGNISING EXCHANGE DIFFERENCE-EXAMPLE

L ltd buys two items of raw materials on 01-01-

2011, one from Manama, Bahrain and another from
Sheffield, UK. The cost was Bahrain dinar 1000
and pound sterling 4,000 respectively on the date of
purchase. Bankers selling rate on that date was 1BD
= Rs 128.25 and 1PS = Rs 76.50. Creditors credit
period is 30 days. The rate after 30 days as on the
date of settlement was 1BD = Rs 129.00 and 1PS =
Rs 75.00.
RECOGNISING EXCHANGE DIFFERENCE-EXAMPLE
Initial recognition
Cost of purchase
Bahrain dinar 1,000 * Rs 128.25 = Rs 1,28,250
Pound sterling 4,000 * Rs 76.50 = Rs 3,06,000
Total purchase value = Rs 4,34,250

Settlement
Bahrain dinar (128.25 – 129) * 1,000 = Rs 750
Exchange Loss
Pound sterling (76.50 – 75) * 4,000 = Rs 6,000
Exchange gain
Net on settlement – Exchange gain of Rs 5,250
RECOGNISING EXCHANGE DIFFERENCE-EXAMPLE

X ltd borrowed in US $ 5,00,000 ON 31-12-2010

which will be repaid as on 30-06-2010. X ltd
prepares financial statements as on 31-03-2011.
Rate of exchange between the reporting currency
and foreign currency is as follows:
31-12-2010 – Rs 44/$
31-03-2011 – Rs 44.50/$
30-06-2011 – Rs 44.75/$
 RECORDING OF TRANSACTIONS

Initial recognition
31-12-2010 Bank a/c…Dr 2,20,00,000
To Foreign currency loan 2,20,00,000
Reporting date
31-03-2011 Exchange difference… Dr 2,50,000
To Foreign currency loan 2,50,000
For transferring the exchange difference to P&L
31-03-2011 Profit and loss a/c …Dr 2,50,000
To Exchange difference 2,50,000
On settlement
30.06.2011 Foreign currency loan…Dr 2,22,50,000
Exchange difference… Dr 1,25,000
To Bank 2,23,75,000
For transferring the exchange difference to P&L
30.06.2011 Profit and loss a/c …Dr 1,25,000
To Exchange difference 1,25,000
 SEGMENT 2- TRANSLATING FINANCIAL
STATEMENTS OF FOREIGN OPERATIONS

ISSUES DEALT WITH

CLASSIFICATION INTO INTEGRAL AND NON

INTEGRAL OPERATIONS

DISPOSAL OF NON INTEGRAL OPERATIONS

CHANGE IN CLASSIFICATION
 TRANSLATING FINANCIAL STATEMENTS OF FOREIGN OPERATIONS

FOREIGN OPERATIONS
It 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.

INTEGRAL FOREIGN OPERATIONS

The activities of which are an integral part of those of the reporting
enterprise.

NON INTEGRAL OPERATIONS

Defined negatively. An operation that is not an integral foreign
operation.
 INTEGRAL & NON – INTEGRAL FOREIGN OPERATIONS

The classification into integral and non-integral

foreign operations revolves around one core
question –

“what are the cash-flow consequences of

exchange rate movements for the reporting
entities with reference to foreign operations”
 INTEGRAL FOREIGN OPERATIONS
Where the foreign operation is such that it carries on business
as if it were an extended arm of the reporting entity, any change
in the foreign exchange rate will have an immediate impact on
the cash flow of reporting entity.
E.g.:
A foreign operation will sell only goods imported from the
reporting entity and remit back the proceeds to the reporting
entity.
Acts as a selling agency receiving stocks of goods from and
remitting proceeds back to the investing company.
Produces raw materials or components and transfers goods for
inclusion in the ultimate product being manufactured by
reporting company.
 NON-INTEGRAL FOREIGN OPERATIONS
A non integral foreign operation accumulates cash and other monetary
items, incurs expenses, generates income, arranges borrowings all
substantially in local currency.

In the situation cited above – will a change in the exchange rate between
reporting currency and currency in which foreign operation is conducted
have a effect on the cash flows of reporting entity? – NO

Indicators to foreign operations being non-integral

Mode of financing undertaken – local borrowing rather than from reporting
enterprise.
Cost of production or services being incurred and settled in local currency.

Effect to be traced to a change in the net investment in

foreign operations of reporting entity.
TRANSLATION OF FINANCIAL STATEMENTS OF INTEGRAL
FOREIGN OPERATIONS

Financial statements of integrated operations

should be translated using the same principles
as if foreign operations had been those of the
reporting entity itself.

The same rules of initial recognition, reporting

on balance sheet date, recognizing exchange
difference in statement of profit and loss
account should be followed.
 TRANSLATION OF FINANCIAL STATEMENTS OF NON-
INTEGRAL FOREIGN OPERATIONS

Exchange difference arising from translating balance

sheet items and income and expenses items should be
accumulated in a foreign currency translation reserve.

Exchange difference rather than being recognized in

P&L a/c gets accumulated in reserve until net
investment in foreign operation is disposed of.
 DISPOSAL OF NON-INTEGRAL FOREIGN OPERATIONS

In case of N-FO exchange differences are deferred and

accumulated from time to time in Foreign Currency
Translation Reserve until the disposal of such N – FO.

When the N-FO is disposed, gain or loss that was deferred

should be recognised as income or expense, in the same
period in which gain or loss on disposal is also recognised.
 FORWARD EXCHANGE CONTRACTS

AS -11 distinguishes between forward contracts

entered into for hedging purposes and other
forward contracts entered merely for speculative
purposes.
Premium or discount arising at the inception of the
contract should be recognized over the tenor of the
contract period.
Premium or discount means the difference between
exchange rate applicable on the date of inception of
the contract and the rate specified in the contract.
 FORWARD EXCHANGE CONTRACTS

On 01.01.2011, a company entered into a foreign currency

transaction by taking a loan of US$ 1 lakh. The amount of loan
is required to be paid on 30th June 2011. On 1st January itself
the company entered into a forward contract for the transaction
to mitigate the risks associated with changes in exchange rates.
The exchange rates are as follows:

Period 01.01.2011 31.03.2011 30.06.2011

Spot rate 45 47 52
6m forward rate 48 - -
3m forward rate - 51 -
 FORWARD EXCHANGE CONTRACTS

For taking foreign currency loan

01-01-2011 Bank a/c…Dr 45,00,000
To Foreign currency loan 45,00,000
For entering into forward exchange contract
01-01-2011 Foreign currency receivable ...Dr 45,00,000
Deferred premium …Dr 3,00,000
To Amount payable to bank 48,00,000
For amortization of premium for three months
31.03.2011 Profit and loss a/c …Dr 1,50,000
To deferred premium 1,50,000
For booking loss on foreign currency loan on balance sheet date
31.03.2011 Profit and loss a/c … Dr 2,00,000
To foreign currency loan 2,00,000
For booking exchange gain on forward contract
31.03.2011 Foreign currency receivable a/c…Dr 2,00,000
To profit and loss a/c 2,00,000
 FORWARD EXCHANGE CONTRACTS

For amortization of premium for three months

30.06.2011 Profit and loss a/c …Dr 1,50,000
To deferred premium 1,50,000
For booking loss on foreign currency loan on balance sheet date
30.06.2011 Profit and loss a/c … Dr 5,00,000
To foreign currency loan 5,00,000
For booking exchange gain on forward contract
30.06.2011 Foreign currency receivable a/c…Dr 5,00,000
To profit and loss a/c 5,00,000
For settlement of foreign exchange contract
30.06.2011 Amount payable to bank a/c…Dr 48,00,000
To bank a/c 48,00,000
For valuing forward at spot rate and settling foreign exchange loan
30.06.2011 Foreign exchange loan…Dr 52,00,000
To foreign currency receivable 52,00,000
 FORWARD EXCHANGE CONTRACTS

In respect of forward contract entered into as

a speculative activity, AS prescribes that the
contract should be marked to market and
gain/or loss computed as under should be
recognized on the reporting date.
 FORWARD EXCHANGE CONTRACTS - SPECULATIVE

For entering into forward contract

01.01.2009 Foreign currency receivable ...Dr 48,00,000
To Amount payable to bank 48,00,000

For marking the forward contract to market

31.03.2009 Foreign currency receivable a/c…Dr 3,00,000
To exchange gain 3,00,000

For marking the forward contract to market

30.06.2009 Foreign currency receivable a/c…Dr 1,00,000
To exchange gain 1,00,000

The settling the forward contract

30.06.2009 Bank a/c…Dr 4,00,000
Amount payable to bank…Dr 48,00,000
To foreign currency receivable a/c 52,00,000
 DISCLOSURE REQUIREMENTS

An enterprise should disclose

The amount of exchange differences included in the net

profit or loss for the period.

Net exchange differences accumulated in foreign

currency translation reserve account.

Reconciliation between the opening and closing balances

in the said reserve, to highlight the movements.
 SAMPLE ANNUAL REPORT

Annual report\HDFC_Bank_Annual_Report_0809_II.pdf

Annual report\Infosys-AR-09.pdf

Annual report\TVS MOTORS.pdf

Annual report\Reliance Industries Limited.pdf

Annual report\HUL_Annual_Report_2008.pdf
 ANSWER 4 (Integral Operation)
Particulars Rate Debit Credit

Transfer from HO H O Balance 200

 Expenses Actual rate 141.76

Tangible fixed assets 45 90

Accumulated depreciation 45 22.5

HO Account H O Balance 82.25

Bank balance 47.50 23.75

Sales Actual rate 330.85

Exchange fluctuation gain balance 19.91

455.51 455.51
 ANSWER 4 ( Consolidated TB)
Particulars Debit Credit
Share capital 100
General reserve 500
P & L a/c 10
 
Foreign currency loan 475
Sales 930.85
Expenses 141.76
Purchases 1000
Opening stock 20
Tangible fixed assets 590
Accumulated depreciation 67.5
debtors 300
Cash and bank balance 46.5
Exchange fluctuation gain 14.91
2098.26 2098.26
 ANSWER 4 ( P & L )
Particulars Credit
SALES 930.85
STOCK ADJUSTMENT 52.47
 EXCHANGE FLUCTUATION 14.91
REVENUE 998.23
PURCHASES 1000
EXPENSES 141.76
DEPRECIATION 25
EXPENSES 1166.76
LOSS 168.53
BALANCE B/FD 10
LOSS ADJUSTED IN BS 158.53
 ANSWER 4 ( BS )
Particulars Credit
SHARE CAPITAL 100
GENERAL RESERVE 341.47
 PROFIT AND LOSS A/C 0
FOREIGN CURRENCY LOAN ($10M) 475
916.47
TANGIBLE ASSETS 590
ACCUMULATED DEPRECIATION (92.5)
CURRENT ASSETS 497.5
STOCK 72.47
DEBTORS 300
CASH AND BANK 46.5
916.47
 ANSWER 4 ( BS )
Particulars Credit
SHARE CAPITAL 100
GENERAL RESERVE 341.47
 PROFIT AND LOSS A/C 0
FOREIGN CURRENCY LOAN ($10M) 475
916.47
TANGIBLE ASSETS 590
ACCUMULATED DEPRECIATION (92.5)
CURRENT ASSETS 497.5
STOCK 72.47
DEBTORS 300
CASH AND BANK 46.5
916.47
 ANSWER 5

LIABILITIES AMOUNT (000’S) ASSETS AMOUNT(000’S)

CAPITAL 4,000 ASSETS 8,000
RESERVES 2,000
 OTHER 2,000
LIABILITIES
8,000 8,000

LIABILITIES AMOUNT (000’S) ASSETS AMOUNT(000’S)

CAPITAL 4,000 ASSETS 20,000
RESERVES 2,900
OTHER 11,500
LIABILITIES
EXCHANGE 1,600
FLUCTUATION
RESERVE
20,000 20,000
 ANSWER 5

LIABILITIES AMOUNT (000’S) ASSETS AMOUNT(000’S)

CAPITAL 4,000 ASSETS 20,000
RESERVES
  2,900
OTHER 11,500
LIABILITIES
EXCHANGE 1,600
FLUCTUATION
RESERVE
20,000 20,000

Opening net assets of 150 (in 000’s ) at exchange difference of Rs

10 and current year profits at exchange difference of Rs 5
Net assets – Rs 1,500
Profits – Rs 100
Total exchange difference – Rs 1,600
 ANSWER 6
SYDNEY BRANCH TRIAL BALANCE - integral operation
Plant and machinery 18 3,600
Depreciation reserve 18 2,340
Debtors and creditors 24 1,440 740
 Opening stock 20 400
Cash and bank balances 24 240
Purchases/sales 22 440 2,706
Goods received from HO 100
Wages and salaries 22 990
Rent 22 264
Office expenses 22 396
Commission receipts 22 2,200
HO Current account 120
7,870 8,086
Exchange loss (as per AS-11) 216
Charged to P & L Account
 ANSWER 6
SYDNEY BRANCH TRIAL BALANCE -non integral operation
Plant and machinery 24 4,800
Depreciation reserve 24 3,120
Debtors and creditors 24 1,440 740
 Opening stock 20 400
Cash and bank balances 24 240
Purchases/sales 22 440 2,706
Goods received from HO 100
Wages and salaries 22 990
Rent 22 264
Office expenses 22 396
Commission receipts 22 2,200
HO Current account 120
7,870 8,086
Exchange profit (as per AS-11) 204
Credited to FCTR (Foreign currency translation
reserve)
IFRS - IAS 21 – Effect of change in FOREX Rates
 IAS 21 – Effect of change in FOREX Rates

Entity may carry on foreign activities in two ways:

1.Entering directly into transactions which are

denominated in foreign currencies.

2.By conducting foreign operations through a

foreign entity (subsidiary, associates or joint
venture)
 IAS 21 – Effect of change in FOREX Rates
IAS 21 requires that the entity should translate its
results and financial position from its functional
currency into a presentation currency.

Functional currency is the currency of the primary

economic environment in which the entity operates
i.e., generates cash and expends cash.

Presentation currency is the currency in which the

financial statements are presented.
 IAS 21 – Effect of change in FOREX Rates
Initial recognition – using functional currency.

Subsequent recognition – using functional

currency.

Translation of foreign operations.

The results and financial position of an entity
whose functional currency is not the currency of a
hyperinflationary economy shall be translated into a
different presentation currency
 IAS 21 – Effect of change in FOREX Rates
Translation of foreign operations – Procedure

Assets and liabilities for each statement of financial

position presented shall be translated at the closing rate at
the date of that statement of financial position.

Income and expenses for each statement of comprehensive

income shall be translated at the exchange rates at the dates
of the transactions.

All resulting exchange differences shall be recognized in

the comprehensive income.
 ANSWER 7

Euro 1.5 = 1$

Revenue 48
  Cost of sales -15

Gross profit 33

Distribution costs -12

Administrative expenses -3

PBT 18

Tax expenses -6

Profit for the period 12

 ANSWER 7

Euro 2 = $

Share capital 4

  Retained earnings 12

Exchange difference 4

Trade payable 8

Total equity and liabilities 28

Land (non –depreciable) acquired in December 2011 16

Inventories 8

Trade receivables 4

Total assets 28