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Galaxy Surfactants Ltd., Navi Mumbai
Accounting Standard (AS) 11 (Revised 2003)
THE EFFECTS OF CHANGES INFOREIGN EXCHANGE RATES
Mandatory for Accounting Periodscommencing on or after 1st April, 2004
Presented by Sumit on 30/9/04
Galaxy Surfactants Ltd., Navi Mumbai
Contents
AS 11 & International AS 219
AS 11 & Schedule VI8
Accounting of Forward Exchange Contracts6
Accounting of Foreign Operations5
Disclosure7
Coverage At A Glance3
Accounting of FC Transactions4
Need & Objective2
Glossary1
ParticularsSr. No.
Galaxy Surfactants Ltd., Navi Mumbai
Glossary
Accounting StandardAS
AccountA/c
United States DollarUS $
Reporting Currency (Rs.)RC
RupeesRs.
DifferenceDiff.
Foreign Currency (US $ etc)FC
ExchangeEx.
Financial Statements (BS, P & L etc)FSs
Reporting Enterprise (GSL)RE
Galaxy Surfactants Ltd., Navi Mumbai
Need & Objective
Galaxy
Export Sales Domestic Sales Foreign Purchases
Indian Purchases
Rs. BorrowingsUS $ Borrowings
Expenses in FC
Expenses in Rs.
Galaxy’s financial reports are in Rs.
All financial transactions are to be recorded in Rs.
How to treat Ex. Diff. in A/cs
Which Ex. Rate ?
Galaxy Surfactants Ltd., Navi Mumbai
Coverage At A Glance
Foreign Currency Transactions Foreign Operations
Foreign Currency Activities
1. Conversion2. Recognition of Ex. Diff.3. Eg. : FC Transaction
1. Classification of FO2. Conversion of FS3. Disposal of NFO4. Change in classification
Direct business dealings with Customers, Suppliers etc. from local point
Business dealings through foreign based branch, JV, Subsidiary, Associate etc.
ForwardExchangeContracts
Tax Effect ofEx. Diff.
Disclosure TransitionalProvisions
Accounting
Galaxy Surfactants Ltd., Navi Mumbai
Conversion of FC Transactions
Initially FC transactions shall be recorded at TDR * / ARFor practical purpose Average Rate (AR) can be used in place of TDR. Appropriate Accounting Policy shall be established for the purpose.View Eg. AR Policy >>>>>>>*TDR = Spot Rate on Transaction Date
Conversion Rate Table for FC Transactions (FCT)
*CR = Rate on BS Date
Closing Rate-----Contingent Liabilities
Valuation Date RateTDR / AR Fair Value
TDR/ARTDR / AR Historical Cost
Non Monetary Carried @
Closing Rate (CR)*TDR / ARMonetary Items
Conversion at BS DtInitial A/cingClassification of BS Items
Back to Glance
Galaxy Surfactants Ltd., Navi Mumbai
Eg. : Average Rate (AR) Policy
• Accounting Policy for Initial Recognition : -o Purchases & Sales in FC are recorded at
Customs Ex. Rates (Currently CBEC prescribes Customs Ex.
Rates by Notification U/s. 14 (3) (a) of Customs Act, 1962)
o Other Transactions in FC are recorded at TDR i.e. Ex. Rates prevailing on Date of Transaction
Note :- AR should approximate to the TDRi.e. AR can not be used if Ex. Rates fluctuates significantly
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Galaxy Surfactants Ltd., Navi Mumbai
Purchase Agreement@ TDR / AR
Reported in BS @
Closing Rate
Settled @ TDR / AR
Settled after the BS Date
Recognition of Ex. Diff. - FCT
Back to Glance
The same should be recognized in P & L A/c for the period
Ex. Diff. arises EITHER on Settlement OR on Reporting in BS
Galaxy Surfactants Ltd., Navi Mumbai
Eg. : Ex. Diff. on FC Transaction
Accounting of asset purchase as per revised AS 11 (2003)
2005-062004-05Accounting Year
52.00
2.00
50.00
52/-
Payment 31.01.05
5.0050.00Vendor A/c CR
47.003.00Vendor A/c DR
1.003.00Ex. Gain A/c CR
46.00Rs. Current A/c CR
5.00Ex. Loss A/c DR
50.00Current Asset A/c DR
52/-
BS Dt 31.03.06
46/-
Payment 30.04.05
47/-50/-Spot Rates (Rs./$)
BS Dt 31.03.05
Purchase 01.12.04
Current Asset purchase worth US $ 1/=
Back to Glance
Galaxy Surfactants Ltd., Navi Mumbai
Classification of FO
Negatively defined –FO which is not an IFO
FO whose activities are an integral part of the activities of RE
Definition
View Indicators of NFO >>>>
Particulars
Classified : Way in which financed & operates w.r.t. RE
Do not have direct impact on RE’s Cash Flows from Operations
Has immediate effect on RE’s Cash Flows from Operations
Effect of Rate Fluctuation
Independent Branch Generates Income, Incurs Expenses, Accumulates Monetary Items, Borrows locally etc. etc.
Selling Agent may just sell goods received from RE and remit proceeds back to RE
Example
Separate EntityExtended arm of REOperates as
Non Integral FO (NFO)Integral FO (IFO)
Foreign Operation (FO) is defined as a subsidiary, associate, joint venture or branch based in a foreign country.
Galaxy Surfactants Ltd., Navi Mumbai
Indicators of NFO• Major factor : Impact on cash flows from operations• Other indicators of NFO are –
1.High degree of autonomy in carrying operations• Low proportion of transactions with RE• No dependence on RE for finance• COP or services settled on it’s own• Sales are in currencies other than RC (Rs.)• Cash flows of RE are insulated from day-to-day
activities of FO• Sales prices are not responsive to Ex. Rate
Fluctuations• Existence of local demand for the product
If can’t be classified clearly then judgment is necessary for determination.
Back to Glance
Galaxy Surfactants Ltd., Navi Mumbai
Conversion of FSs of FO &Recognition of Ex. Diff. thereof
For Conversion IFO is treated as FC Transaction
TDR / ARTDR / ARP & L Items
Closing RateClosing RateMonetary Items
Closing RateTDR / ARNon Monetary carried @ Historical Cost
Closing RateValuation Date Rate
Non Monetary carried @ Fair Value
Particulars
Accumulated in FOREX Reserve A/c (Accumulation will continue until disposal of NFO)
Recognized in P & L A/c as & when arise
Recognition of Ex. Diff.
Non Integral FOIntegral FO =FC Transaction
Eg. >>
Galaxy Surfactants Ltd., Navi Mumbai
Eg. : Conversion of NFO FSCr. Rs.Cr $Dr. Rs.Dr $RateParticulars
40/-
40/-
40/-
Acquisition of Galaxy Chemicals Inc., USA on 31.03.04 (Spot = 40/-)
200 2000508000Assets / Liabilities
200050Reserves
4000100Share Capital
1600FOREX Reserve (Balancing Figure)
On next BS Dt 31.03.05 (Spot = Rs. 50/-, AR = Rs. 45/-)
400
400CR = 50/-
AR = 45/-
Original
Original
1150023020000Assets / Liabilities
2000040020000Total
90020Current Profit
200050Opening Reserves
4000100Share Capital
Back to Glance
Galaxy Surfactants Ltd., Navi Mumbai
Disposal of NFO
Back to Glance
Nature of Disposal
Part amount transfer to P & L A/c on pro-rata basis
100% transfer to P & L A/c
Accumulated amt in FOREX Reserve A/c
Particulars
Period in which gain or loss on disposal is recognized in P & L A/c
When to trf FOREX Reserve to P & L
Recognize in P & L A/cRecognize inP & L A/c
Gain or Loss on Disposal
Part Disposal100% Disposal
Galaxy Surfactants Ltd., Navi Mumbai
Change in Classification of FO
TDR / ARTDR / ARP & L Items
Conversion Rate for
NFO reclassified as IFO• FOREX Reserve is continued until actual disposal of FO• Translated amounts for Non Monetary Items are treated as historical
cost of those items, from that date.
IFO reclassified as NFO• Ex. Diff. will arise on conversion of non-monetary items ;&• The same shall be accumulated in FOREX Reserve
Closing RateTDR / ARNon Monetary carried @ Historical Cost (FC)
Closing RateValuation Date RateNon Monetary carried @ Fair Value (FC)
Closing RateClosing RateMonetary Items
NFOIFO = FCT
Particulars
Eg.>>
Eg.>>
Galaxy Surfactants Ltd., Navi Mumbai
Eg. : Reclassification IFO to NFO
NFOIFOUS$
50/-
50/-
50/-
Original
40/-
40/-
Rate
500FOREX Reserve
1100Ex. Gain Loss
150001500050/-300Monetary Assets
2000019500400Total
4500100
400
Non Monetary @ Historical Cost
230
20
50
100
Rs.Rs.Rate
Particulars
500045/-
BS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)
19500
11500
900
2000
4000
50/-
45/-
40/-
40/-
11500Monetary Liabilities
20000Total
2000Current Profit
2000Op. Reserves
4000Share Capital
<< Back
Galaxy Surfactants Ltd., Navi Mumbai
Eg. : Reclassification NFO to IFO
Continued until disposal of FO
16001600FOREX Reserve
150001500050/-300Monetary Assets
2000020000400Total
5000100
400
Non Monetary @ Historical Cost
230
20
50
100
$ RemarksIFO Rs.NFO Rs.RateParticulars
Treated as Historical Cost from date of reclassification
500050/-
BS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)
20000
11500
900
2000
4000
50/-
45/-
40/-
40/-
11500Liabilities
20000Total
900Current Profit
2000Op. Reserves
4000Share Capital
Back to Glance
Galaxy Surfactants Ltd., Navi Mumbai
Forward Exchange Contract (FEC)
Profit or Loss on Cancellation/Renewal is recognized in P & L A/c
Practical
Ex. Diff.
Premium/ Discount
Accounting
Eg.
Purpose
Particulars
IgnoredDeferred over tenor of the contract
Gain by calculated risksManage risks1
View Eg. >>>>View Eg. >>>> 4
FEC is an agreement to exchange different currencies at Forward Rate
Value of FEC is marked to M.V. on BS Dt
Recognize on the basis of ex. rate movements
Purpose different hence different A/cting treatment3
Earn profit by trading in FOREX
Say Minimizing Ex. Rate fluctuation risk associated with Accounts Receivable of USD 100K
2
Speculative FECHedging FEC#
Galaxy Surfactants Ltd., Navi Mumbai
Eg. : Hedging FEC
Spot = 47.50
Settlement Dt 30.04.05
1/=
Accounts Receivable
US $
FR = 48/-
FEC Dt 01.12.04
Spot = 45/-Spot = 43/-
BS Dt 31.03.05
Sale Dt 01.12.04
0.50
(1.50)
2/-
Net Gain/ (Loss)
4.505/-Total
Ex. Loss Rs.
Ex. Loss Calculation
Ex. Gain Rs.
Premium (5/-) Amortization
Accounting Year
(2.50)45 - 47.501/-5 * (1/5)2005-06
(2/-)43 – 454/-5 * (4/5)2004-05
Accounting as per Revised AS 11 (2003)
<< Back
Galaxy Surfactants Ltd., Navi Mumbai
Eg. : Speculative FEC
30th June, 2005Maturity Date
Rs. 48/- per $Forward Rate available on BS date (31.03.05) for remaining maturity of the contract
Rs. 50/- per $Forward Rate
USD 1/-Forward Purchase of
Rs. 2/-Ex. Loss in 2004-05
1st March, 2005FEC Date
Back to Glance
Galaxy Surfactants Ltd., Navi Mumbai
Tax Effects of Foreign Ex. Diff.
• There will be some tax effects associated with the gain or loss from exchange rate fluctuation
• These tax effects shall be accounted for in accordance with AS 22 i.e. Accounting for Taxes on Income
Back to Glance
Galaxy Surfactants Ltd., Navi Mumbai
DisclosureAn Enterprise shall specifically disclose –1. Ex. Diff. recognized in P & L A/c for the period2. FOREX Reserve as part of Share Holder’s Funds3. Reconciliation of Opening & Closing FOREX Reserve4. Where RC is different from the currency of domiciled
country, reasons thereof5. Where RC currency has been changed from previous
accounting period then reasons for such change6. If classification of FO has been changed, then -
Nature & Reasons for Change1.Impact of change on Share Holder’s Funds2.Impact on Net Profit or Loss for each prior period, as if change
is applicable from retrospective effect.7. AS 11 encourages disclosure of Enterprise’s FC Risk
Management Policy
Back to Glance
Galaxy Surfactants Ltd., Navi Mumbai
Transition on 1st April, 2004
• Revised AS 11 is applicable from 1st April, 2004.
• Old AS 11 used the term “Foreign Branch” instead of “Foreign Operation”
Also it did not classified FO’s as IFO & NFO
• On 1st time application, if a Foreign Branch is classified as NFO then accounting treatment pertaining to change in classification of FO shall be applied
i.e. Accumulate Ex. Diff. on conversion of Non Monetary Items in FC Translation Reserve
Galaxy Surfactants Ltd., Navi Mumbai
Implication
Relation to old AS 11 (1994)
Ex. Diff. on a/c of FC Liability linked to Fixed Asset
Particulars
Recognize in P & L A/cCapitalize i.e. adjust in carrying cost of Fixed Asset
1
Until the revision of Schedule VI capitalization treatment will continue & it will still be considered to be complying with New AS 11 (2003)
ICAI will be approaching Govt. for revision of Schedule VI
3
As per the announcement of ICAI
Capitalization provision discontinued on revision in 2003
In line with Schedule VI provision
2
Revised AS 11 (2003)Schedule VI#
AS 11 (2003) & Schedule VI
Galaxy Surfactants Ltd., Navi Mumbai
AS 11 (2003) & IAS
FO’s are classified as“FO’s that are integral to the operations of RE” &“Foreign Entity”
FO’s are classified as Integral &Non Integral
Terminology w.r.t. FO
Permits alternative :Ex. Diff. on severe devaluation of currency can be included in carrying amt of asset s.t. conditions
Preferring elimination of alternatives, IAS’s alternative treatment is not recognized
Alternative A/cing in case ofSevere Currency Devaluation
Major aspects of FEC’s are covered under IAS 39 (Financial Instruments : Recognition & Measurement)
Covers accounting of FEC’s
Scope
International AS 21Indian AS 11Particulars
Galaxy Surfactants Ltd., Navi Mumbai
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