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Accounting Standard 11(Effects of Change in Foreign Exchange Rates)

GROUP B

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Applicability

Revised in 2003 Applicable in respect of accounting periods commencing on or

after 1-4-2004

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Objective

Which exchange rate to use? How to recognise effect of changes in exchange rates?

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Scope

1. This Standard should be applied: in accounting for transactions in foreign currencies in translating the financial statements of foreign

operations

2. Deals with accounting of foreign currency transaction in nature of forward exchange contracts

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Definitions

Average rate Closing rate Exchange difference Exchange rate Fair value Foreign currency Foreign operations Forward exchange contract

Forward rate Integral foreign operation Monetary items Net investment in integral

foreign operation Non-integral foreign

operation Non-monetary items Reporting currency

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Foreign Currency Transactions

Initial Recognition8. Foreign currency transaction denominated in or requires settlement in foreign country, including transactions arising when an enterprise either:

Buys or sells goods or services in foreign currency

Borrows or lends funds in foreign currency

Becomes party to unperformed forward exchange contract

Acquires or disposes of assets, or incurs or settles liabilities in foreign currency

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Foreign Currency Transactions (continued)

9. Foreign currency transaction recorded on initial recognition in reporting currency (exchange rate at date of transaction)

10. Rates that approximates actual rate at date of transaction is used (If exchange rate fluctuate significantly, use of average rate for period is unreliable)

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Reporting at Subsequent Balance Sheet Dates

11. At each balance sheet:

a. foreign currency monetary item – reported at closing rate

b. non-monetary items – carried in terms of historical cost – reported using exchange rate at date of transaction

c. Non-monetary items – carried at fair value or similar valuation reported using exchange rates at time of value determination

12. Cash receivables and payables – monetary items

Fixed assets, inventories and investments in equity shares are non-monetary assets

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Recognition of Exchange Differences

13. Exchange difference on settlement of monetary items or reporting an enterprise’s monetary items at different rates should be recognised as income or expense (exception – exchange dealt in paragraph 15)

14. All exchange difference is recognised in same period if transactions are settled within same accounting period

Different accounting periods – exchange difference recognised in each intervening period up to period of settlement is determined by change in exchange rates during that period

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Net Investment in a Non-integral Foreign Operation

15. Exchange difference arising from monetary item – forms part of enterprise’s net investment – should be accumulated in enterprise’s financial statement until disposal of net investment

16. Monetary items – receivable from or payable to non-integral foreign operation – extension to enterprises net investment in that operation

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Classification of Foreign Operations

17. Foreign operations classified as integral foreign operations or non- integral foreign operations

18. Integral Foreign Operation – extension of reporting enterprise’s operations (change in exchange rate has effect on cash flow from operations of reporting enterprise – exchange rate affects individual monetary items held by foreign operations)

19. Change in exchange rate affects reporting enterprise’s net investment on non-integral foreign operation rather than individual

monetary and non-monetary items held by foreign operation

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Non-Integral Foreign Operation

20. Indicators for foreign operator to be a non-integral foreign operator:

a. Degree of autonomy

b. Transaction with reporting enterprise – not high proportion of foreign operators activities

c. Self-financed

d. Activities and sales in local currency

e. Cash flow of reporting enterprise – insulated from day-to-day activities of foreign enterprise

f. Sales prices determined more by local competition and regulations

g. Presence of active local sales market

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Integral Foreign Operations

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22. Actual rate at date of transaction is used for practical purposes

Item Rate

Monetary items Closing rate

Non-monetary items carried at historical cost

Rate of date of transaction

Non-monetary items carried at fair value

Rate existing at time of determination of such value

Contingent Liability Closing rate

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Non-Integral Foreign Operations

23. In translating financial statements, the reporting enterprise should use following procedure:

24. For practical reasons, rate that approximates actual exchange rates is used to translate income and expense items of foreign operation

25. Goodwill and capital reserve – by acquisition – translated at closing rate

26. Contingent liability – translated at closing rate in financial statement

Items Exchange Rate

Assets and Liabilities – Monetary and Non-monetary

Closing rate

Income and Expenses At the date of transaction

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Disposal of Non-Integral Foreign Operation

27. Cumulative amount of deferred exchange differences which relate to that operation – recognised as income or expense in same period in which gain or loss on disposal is recognised

28. Payment of a dividend forms part of a disposal only when it constitutes a return of the investment

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Change in Classification of a Foreign Operation

29. Applicable translation procedures to revised classification should be applied from date of change of classification

30. Reclassification

a. Integral to non-integral – exchange difference due to translation of non-monetary assets at date of reclassification – accumulated in foreign currency translational reserve

b. Non-integral to integral – translated amounts for non-monetary items at date of change are treated at historical cost in

period of change and subsequent periods

Deferred exchange differences not recognised as income or expense till disposal of operation

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Tax Effects of Exchange Differences

31. Gains and losses on foreign currency transactions and exchange differences arising on translation of financial statements of foreign operations may have associated tax effects which are accounted for in accordance with AS 22, accounting for Taxes on Income

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Forward Exchange Contracts

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33. Exchange differences on such a contract should be recognised in the statement of profit and loss in the reporting period in which the exchange rates change. Any profit or loss arising on cancellation or renewal of such a forward exchange contract should be recognised as income or as expense for the period.

Item Treatment

Premium or Discount arising at inception of foreign exchange contract

To be amortised as expense or income over life of contract

Exchange Difference on such a contract

To be recognised as income or loss in year in which exchange rates changes

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Disclosure

34. Enterprise must disclose:

a. amount of exchange difference included

b. net exchange differences in foreign currency translation reserve as separate component of shareholders’ fund and a reconciliation of the amount of such exchange differences at the beginning and end of the period

35. Difference in reporting currency – reason for different currency should be disclosed along with reason of change

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Disclosure

36. For change in classification:

a. nature of change

b. reason for change

c. impact of change in classification of shareholders’ funds

d. Impact on net profit and loss

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