AS 11 - Accounting for the Effects of Changes in
Foreign Exchange Rates
Purpose: This statement should
be applied by an enterprise in 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.
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 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 other than non-monetary items e.g. fixed assets, inventories,
investments in equity shares.
- 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.
Explanations for Foreign Currency Transactions
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.
At each balance sheet date:
- 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 amount which is likely to
be realised.
- Non-Monetary Items other than fixed assets, which
are carried in terms of historical cost should be reported using the exchange
rate at the date of the transaction.
- 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.
- The Carrying Amount of Fixed Assets should be adjusted for the exchange differences
arising on 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. Similarly adjustment should be made in the carrying amount of
fixed asset in respect of long-term liability on the basis of the changes in exchange
rate. In case the fixed assets are revalued the necessary adjustments stated above should
be given effect to relating to the particular asset.
The Exchange Difference resulting from change in
the exchange rate between the transaction date and the date of settlement of
any monetary item arising from a foreign currency transaction, should be
recognised as income or as expense in the period in which they
arise.
In the case of Forward Exchange Contracts, the difference between the forward rate and
the exchange rate at the date of the transaction should be recognised as income or
expense over the life of the contract and the profit or loss arising on cancellation or
renewal of such contract should be recognised as an income or as expense for the
period.
Translation of the Financial Statements of Foreign Branches
Revenue items, except opening and closing
inventories and depreciation, should be translated by applying average rate.
Sometimes weighted average rate may also be applied. Opening inventory should
be translated at the rate prevalent at the commencement of the accounting
period and closing inventory at the rate prevalent at the closing
date.
Depreciation to be translated at the rates used for the translation of the values of
the assets on which depreciation is calculated.
Monetary items should be translated using the closing rate.
Non-monetary items other than inventories and fixed assets should be translated using
the exchange rate at the date of the transaction.
Fixed assets should be translated using the exchange rate at the date of the
transaction. Increase or decrease in the liability should be adjusted in the same way as
explained above for foreign currency transactions.
Balance in head office account, 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.
Contingent liabilities should be translated using the closing rate.
Disclosures
- An enterprise should disclose the amount of
exchange differences adjusted in the carrying amount of fixed assets, included
in the net profit or loss for the period and in respect of forward exchange
contracts.
- Foreign currency risk management policy of the
enterprise should also be disclosed.