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ACCOUNTING STANDARD - 11
ACCOUNTING FOR THE EFFECTS
OF CHANGES IN FOREIGN
EXCHANGE RATES
J.P., KAPUR & UBERAI
PURPOSE

Accounting for transactions in foreign currencies and in
translating the financial statements of foreign branches
for inclusion in the financial statements of the reporting
enterprise
J.P., KAPUR & UBERAI
RELEVANT DEFINITIONS

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.

Average rate is the mean of the exchange rates.

Forward rate is the exchange rate established by the terms of an
agreement for exchange of two currencies
J.P., KAPUR & UBERAI
RELEVANT DEFINITIONS

Closing rate is the exchange rate at the balance sheet date.

Monetary items include foreign currency notes, balances in bank
accounts denominated in a foreign currency, receivables, payables and
loans denominated in a foreign currency.

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, to be recovered from the future use
of an asset, including its residual value on disposal.
J.P., KAPUR & UBERAI
RECORDING A FOREIGN
EXCHANGE TRANSACTION
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. For practical reasons, a rate that
approximates the actual rate is often used.
J.P., KAPUR & UBERAI
CHANGES IN EXCHANGE RATE
SUBSEQUENT TO INITIAL RECOGNITION
Exchange differences on settlement of foreign currency
transactions
during
an
accounting
period
as
income/expense of the period except exchange differences
arising on repayment of the amount borrowed in foreign
currency for the purpose of acquiring fixed assets is
adjusted to the carrying amount of the fixed assets. In case
the fixed assets are revalued the necessary adjustments
should be given effect to the revalued asset.
J.P., KAPUR & UBERAI
CHANGES IN EXCHANGE RATE
SUBSEQUENT TO INITIAL RECOGNITION CONTD.
Monetary items denominated in a foreign currency
should be reported using the closing rate but in the
circumstances where the closing rate is unrealistic or
where there are restrictions on remittances etc. the
relevant monetary item should be reported at the
realisable value.
Non-monetary items i.e. investment in equity shares
listed on a foreign stock exchange have to be valued at
the lower of cost and fair value. Fair value is determined
with reference to the closing rate. Exchange difference,
if any, on the above should be treated as income/expense
for the period.
J.P., KAPUR & UBERAI
ACCOUNTING TREATMENT- FORWARD
EXCHANGE CONTRACTS
In case of a forward exchange contract with regard to a foreign
exchange transaction other than liabilities incurred for acquiring
fixed assets:
Difference between the forward rate and the exchange rate at the date
of the transaction should be recognised as income/expense over the
life of the contract
Any profit or loss on cancellation or renewal should be recognised as
income/expense for the period.
If the forward exchange contract relates to liabilities incurred for
acquiring fixed assets such difference should be adjusted in the
carrying amount of the respective fixed assets.
J.P., KAPUR & UBERAI
TRANSLATION OF FINANCIAL
STATEMENTS OF FOREIGN BRANCHES
-Revenue items, except opening and closing inventories and
depreciation- average rates.
-Opening inventories – rate prevalent at the commencement of the
accounting period.
-Monetary items, Closing inventories- closing rate or realisable value.
-Non monetary items other than inventories and fixed assets- rate
prevalent at the date of the transaction.
-Fixed assets- rate prevalent at the date of the transaction as adjusted for
exchange difference arising on settlement or restatement of liabilities
incurred for acquiring those assets.
-Balance in Head office account- balance in the branch account in head
office books after adjusting for unresponded transactions.
-Net exchange difference should be recognised as income/expense for
the period.
-Contingent Liabilities- closing rate, translation does not result in any
exchange difference.
J.P., KAPUR & UBERAI
DISCLOSURE
Amount of exchange difference
- Included in the net profit or loss for the period.
- Adjusted in the carrying amount of fixed assets during the
accounting period.
- In respect to the outstanding forward exchange contract relating to
one or more subsequent accounting periods.
J.P., KAPUR & UBERAI