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Statements of Accounting Standards
(AS 11)
Accounting for the Effects of Changes
in Foreign Exchange Rates
(In this Accounting Standard, the
Standard portions have been set in bold italic type. These
should be read in the context of the background material which
has been set in normal type, and in the context of the 'Preface
to the Statements of Accounting Standards'.)
The following is the text of Accounting
Standard (AS) 11, 'Accounting for the Effects of Changes in Foreign
Exchange Rates', issued by the Council of the Institute of Chartered
Accountants of India.
This Standard will come into effect
in respect of accounting periods commencing on or after 1.4.1995
and will be mandatory in nature.
Objective
An enterprise may have transactions
in foreign currencies or it may have foreign branches. Foreign
currency transactions should be expressed in the enterprise's
reporting currency and the financial statements of foreign branches
should be translated into the enterprise's reporting currency
in order to include them in the financial statements of the enterprise.
The principal issues in accounting
for foreign currency transactions and foreign branches are to
decide which exchange rate to use and how to recognise in the
financial statements the financial effect of changes in exchange
rates.
Scope
1. This Statement should be applied
by an enterprise :
(a) in accounting for transactions in foreign
currencies; and
(b) in translating the financial statements of
foreign branches for inclusion in the financial statements of
the enterprise.
Definitions
2. The following terms are used
in this Statement with the meanings specified :
Reporting currency is the currency
used in presenting the financial statements.
Foreign currency is a currency other
than the reporting currency of an enterprise.
Exchange rate is the ratio for exchange
of two currencies as applicable to the realisation of a specific
asset or the payment of a specific liability or the recording
of a specific transaction or a group of inter-related transactions.
Average rate is the mean of the exchange
rates in force during a period.
Forward rate is the exchange rate established
by the terms of an agreement for exchange of two currencies at
a specified future date.
Closing rate is the exchange rate at
the balance sheet date.
Monetary items are money held and assets
and liabilities to be received or paid in fixed or determinable
amounts of money, e.g., cash, receivables, payables.
Non-monetary items are assets and liabilities
other than monetary items e.g. fixed assets, inventories, investments
in equity shares.
Settlement date is the date at which
a receivable is due to be collected or a payable is due to be
paid.
Recoverable amount is the amount which
the enterprise expects to recover from the future use of an asset,
including its residual value on disposal.
Foreign Currency Transactions
Exchange Rate
3. A multiplicity of foreign exchange
rates is possible in a given situation. In such a case, the term
'exchange rate' refers to the rate which is applicable to the
particular transaction.
4. The term 'exchange rate' is defined
in this Statement with reference to a specific asset, liability
or transaction or a group of inter-related transactions. For the
purpose of this Statement, two or more transactions are considered
inter-related if, by virtue of being set off against one another
or otherwise, they affect the net amount of reporting currency
that will be available on, or required for, the settlement of
those transactions. Although the exchange rates applicable to
realisations and disbursements in a foreign currency may be different,
an enterprise may, where legally permissible, partly use the receivables
to settle the payables directly, in which case the payables and
receivables are reported at the exchange rate as applicable to
the net amount of receivable or payable. Further, where realisations
are deposited into, and disbursements made out of, a foreign currency
bank account, all the transactions during a period (e.g. a month)
are reported at a rate that approximates the actual rate during
that period. However, where transactions cannot be considered
inter-related as stated above, by set-off or otherwise, the receivables
and payables are reported at the rates applicable to the respective
amounts even where these are receivable from, or payable to, the
same foreign party.
Recording Transactions on Initial Recognition
5. A transaction in a foreign
currency should be recorded 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,
except as stated in para 4 above in respect of inter-related transactions.
6. A transaction in a foreign currency
is recorded in the financial records of an enterprise as at the
date on which the transaction occurs, normally using the exchange
rate at that date. This exchange rate is often referred to as
the spot rate. For practical reasons, a rate that approximates
the actual rate is often used, for example, an average rate for
all transactions during the week or month in which the transactions
occur. However, if exchange rates fluctuate significantly, the
use of the average rate for a period is unreliable.
Reporting Effects of Changes in Exchange Rates
Subsequent to Initial Recognition
7. At each balance sheet date
:
(a) monetary items denominated
in a foreign currency (e.g. foreign currency notes, balances in
bank accounts denominated in a foreign currency, and receivables,
payables and loans denominated in a foreign currency) should be
reported using the closing rate. However, in certain circumstances,
the closing rate may not reflect with reasonable accuracy the
amount in reporting currency that is likely to be realised from,
or required to disburse, a foreign currency monetary item at the
balance sheet date, e.g., where there are restrictions on remittances
or where the closing rate is unrealistic and it is not possible
to effect an exchange of currencies at that rate at the balance
sheet date. In such circumstances, the relevant monetary item
should be reported in the reporting currency at the amount which
is likely to be realised from, or required to disburse, such item
at the balance sheet date;
(b) non-monetary items other
than fixed assets, which are carried in terms of historical cost
denominated in a foreign currency, should be reported using the
exchange rate at the date of the transaction;
(c) non-monetary items other
than fixed assets, which are carried in terms of fair value or
other similar valuation, e.g. net realisable value, denominated
in a foreign currency, should be reported using the exchange rates
that existed when the values were determined (e.g. if the fair
value is determined as on the balance sheet date, the exchange
rate on the balance sheet date may be used); and
(d) the carrying amount of fixed
assets should be adjusted as stated in paragraphs 10 and 11 below.
Recognition of Exchange Differences
8. Paragraphs 9 to 11 set out the
accounting treatment required by this Statement in respect of
exchange differences on foreign currency transactions.
9. Exchange differences arising
on foreign currency transactions should be recognised as income
or as expense in the period in which they arise, except as stated
in paragraphs 10 and 11 below.
10. Exchange differences arising
on repayment of liabilities incurred for the purpose of acquiring
fixed assets, which are carried in terms of historical cost, should
be adjusted in the carrying amount of the respective fixed assets.
The carrying amount of such fixed assets should, to the extent
not already so adjusted or otherwise accounted for, also be adjusted
to account for any increase or decrease in the liability of the
enterprise, as expressed in the reporting currency by applying
the closing rate, for making payment towards the whole or a part
of the cost of the assets or for repayment of the whole or a part
of the monies borrowed by the enterprise from any person, directly
or indirectly, in foreign currency specifically for the purpose
of acquiring those assets.
11. The carrying amount of fixed
assets which are carried in terms of revalued amounts should also
be adjusted in the manner described in paragraph 10 above. However,
such adjustment should not result in the net book value of a class
of revalued fixed assets exceeding the recoverable amount of assets
of that class, the remaining amount of the increase in liability,
if any, being debited to the revaluation reserve, or to the profit
and loss statement in the event of inadequacy or absence of the
revaluation reserve.
12. An exchange difference results
when there is a change in the exchange rate between the transaction
date and the date of settlement of any monetary items arising
from a foreign currency transaction. When the transaction is settled
within the same accounting period as that in which it occurred,
the entire exchange difference arises in that period. However,
when the transaction is not settled in the same accounting period
as that in which it occurred, the exchange difference arises over
more than one accounting period.
Forward Exchange Contracts
13. An enterprise may enter
into a forward exchange contract, or another financial instrument
that is in substance a forward exchange contract, to establish
the amount of the reporting currency required or available at
the settlement date of a transaction. The difference between the
forward rate and the exchange rate at date of the transaction
should be recognised as income or expense over the life of the
contract, except in respect of liabilities incurred for acquiring
fixed assets, in which case, such difference should be adjusted
in the carrying amount of the respective fixed assets.
14. The difference between the forward
rate and the exchange rate at the inception of a forward exchange
contract is recognised as income or expense over the life of the
contract. The only exception is in respect of forward exchange
contracts related to liabilities in foreign currency incurred
for acquisition of fixed assets.
15. Any profit or loss arising
on cancellation or renewal of a forward exchange contract should
be recognised as income or as expense for the period, except in
case of a forward exchange contract relating to liabilities incurred
for acquiring fixed assets, in which case, such profit or loss
should be adjusted in the carrying amount of the respective fixed
assets.
Depreciation
16. Where the carrying amount
of a depreciable asset has undergone a change in accordance with
paragraph 10 or paragraph 11 or paragraph 13 or paragraph 15 of
this Statement, the depreciation on the revised unamortised depreciable
amount should be provided in accordance with Accounting Standard
(AS) 6, Depreciation Accounting.
Translation of the Financial Statements of Foreign
Branches
17. The need for foreign currency
translation arises in respect of the financial statements of foreign
branches of the parent enterprise.
18. The financial statements
of a foreign branch should be translated using the procedures
in paragraphs 19 to 25 of this Statement.
19. Revenue items, except opening
and closing inventories and depreciation, should be translated
into reporting currency of the reporting enterprise at average
rate. In appropriate circumstances, weighted average rate may
be applied, e.g., where the income or expenses are not earned
or incurred evenly during the accounting period (such as in the
case of seasonal businesses) or where there are exceptionally
wide fluctuations in exchange rates during the accounting period.
Opening and closing inventories should be translated at the rates
prevalent at the commencement and close respectively of the accounting
period. Depreciation should be translated at the rates used for
the translation of the values of the assets on which depreciation
is calculated.
20. Monetary items should be
translated using the closing rate. However, in circumstances where
the closing rate does not reflect with reasonable accuracy the
amount in reporting currency that is likely to be realised from,
or required to disburse, the foreign currency item at the balance
sheet date, a rate that reflects approximately the likely realisation
or disbursement as aforesaid should be used.
21. Non-monetary items other
than inventories and fixed assets should be translated using the
exchange rate at the date of the transaction.
22. Fixed assets should be translated
using the exchange rate at the date of the transaction. Where
there has been an increase or decrease in the liability of the
enterprise, as expressed in Indian rupees by applying the closing
rate, for making payment towards the whole or a part of the cost
of a fixed asset or for repayment of the whole or a part of monies
borrowed by the enterprise from any person, directly or indirectly,
in foreign currency specifically for the purpose of acquiring
a fixed asset, the amount by which the liability is so increased
or reduced during the year, should be added to, or reduced from,
the historical cost of the fixed asset concerned.
23. Balance in 'head office
account', whether debit or credit, should be reported at the amount
of the balance in the 'branch account' in the books of the head
office after adjusting for unresponded transactions.
24. The net exchange difference
resulting from the translation of items in the financial statements
of a foreign branch should be recognised as income or as expense
for the period, except to the extent adjusted in the carrying
amount of the related fixed assets in accordance with paragraph
22 above.
25. Contingent liabilities should
be translated into the reporting currency of the enterprise at
the closing rate. The translation of contingent liabilities does
not result in any exchange difference as defined in this Statement.
Disclosures
26. An enterprise should disclose -
(i) the amount of exchange differences
included in the net profit or loss for the period;
(ii) the amount of exchange
differences adjusted in the carrying amount of fixed assets during
the accounting period; and
(iii) the amount of exchange
differences in respect of forward exchange contracts to be recognised
in the profit or loss for one or more subsequent accounting periods,
as required by paragraph 13.
27. Disclosure is also encouraged of an enterprise's
foreign currency risk management policy.
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