ARTICLE ASSISTANT

ASA & ASSOCIATES

BANGALORE

Accounting Standards

BACKGROUND Need For Standards

Business activities are varied. Strenuous task to present the facts intelligibly, in a summarized form. Methods & Principles adopted by various reporting enterprise are cohernt, not

misleading. Information to the extent possible Uniform & Comparable– Standards are

evolved.

It Provides Discipline Guidelines [i.e Uniform practices & Common techniques]. Yardsticks for evaluation [i.e Comparative analysis].

Objective It greatly enhances the users of FS like

• Investor {AS 13},Employees, Lenders, Creditors, Suppliers, Governments. To eliminate confusing variations in the treatment of several accounting aspects. To bring Feasibility & Uniformity in presentation.

Other Factors AS is an authoritative pronouncement of code of practice. It intend to apply only to material items.

Compilation with Companies Act 1956

As per section 211 of Co’s Act 1956 Sub sec (3A) Every P&L a/c, and Balance Sheet should comply with AS. Sub sec (3B) if not complied then following should be disclosed:

Deviation from AS Reason for such deviation {AS1} Financial effect, if any arising.

Sub sec (3C) AS means as recommended by ICAI

As per section 217 of Co’s Act 1956 sub sec (2AA) Board’s report shall also include a Directors Responsibility Statement,

indicating : The preparation of Annual Accounts are in compilation of applicable

AS’s

As per section 227(3) Powers & Duties Of Auditors Auditors report shall also state that in his opinion, P&L and Balance

Sheet are complied.

EFFECTIVE DATE 01ST APRIL,2004

Why Foreign Currency transaction (FCT) arises?

OR

Lack of Technology

Cheap Manpower

Able to see this picture? No?

Because of following reasons FCT arises;

Dealings of an entity with clients who is in other currency country.Activity undertaken through Branch Business with Associates (AS -23)Holding/Subsidiary relationshipBusiness with Joint Ventures (AS -27)

Globalization Holding/Subsidiary/Branches/JV’s/Associate

OR

This AS address two principal issues;

Selection of an appropriate rate to be used for

a transaction

Manner in which financial effect of change in

exchange rates should be recognized in the

separate financial statement of an enterprise,

and also in the Consolidated Financial

Statements (AS -21)

•Effects in Changes in Forex Rates

FOREIGN CURRENCY TRANSACTIONS

TRANSLATING FINANCIAL STATEMENTS OF FOREIGN OPERATIONS

FORWARD EXCHANGE CONTRACTS TAX EFFECTS OF EXCHANGE DIFFERENCES DISCLOSURE

1.INITIAL RECOGNITION.

2.REPORTING AT SUBSEQUENT BALANCE SHEET DATES.

3.RECOGNITION OF EXCHANGE DIFFERENCES.

1.CLASSIFICATION INTO INTEGRAL & NON INTEGRAL.

2.DISPOSAL OF NON INTEGRAL OPERATIONS.

3. CHANGE IN CLASSIFICAION.

4.TRANSLATION PROVISIONS.

Note: AS 11 does not deal with the re-statement of the Financial Statements in different currency

Required because of Required because of following Transactions;-following Transactions;-

Buying & Selling of Goods & Services

Borrowing & Lending Money.

Acquiring or Disposing of Fixed Assets.

The above Transactions should be recorded by applying Exchange Rates. In some cases Average Rates are also applied. Reporting Entity should normally establish an appropriate accounting policy and disclose the same in Financial Statements.

For Reporting at the end of the each accounting period, items in Balance Sheet required to be classified into following:-

Monetary Items

Money held and assets and liabilities to be received or paid in fixed or determinable amounts of money.

Non Monetary Items

Assets and Liabilities other than monetary items.

Examples ; Cash, Debtors, Creditors.

Examples ; Fixed Assets, Inventories and Investments in Equity Shares.

FOR TRANSLATION OF BALANCE SHEET ITEMS THAT ARE DENOMINATED IN FOREIGN CURRENCY, THE FOLLOWING PRINCIPLES APPLY:

CLOSING RATE FOR THE FOLLOWING:-

1.Monetary Items, excepting that restrictions on remittances etc.

TRANSCTION –DATE RATE OR RATE EXISTED ON FAIR VALUE ESTIMATION:-

1.For Non- Monetary Items

SELECTION OF RATES FOR TRANSLATION IS BASED ON THE FOLLOWING PRINCIPLE

Grouping of Non Monetary Items Stipulation Regarding Exchange Rate

Those that are carried at Historical Cost

Rates applicable on the date on which transaction was originally concluded

Those that are carried in terms of Fair Value or similar valuation

Rates applicable on the date on which Fair value or similar valuation was determined.

MANOJ P DESAI

The rule of “CAPITALISING THE EXCHANGE DIFFERENCE HAS BEEN WITHDRAWN after companies act adopted AS 11 as its Accounting Standard from Effective Date 07th December,2006.” ‘The Exchange difference should be charged to Profit & Loss account.’

Three reasons for the change:-

1.RBI’s ability to bring about a turn around in the forex reserves position .

2. Availability of a variety of derivative instruments to enterprises which enable them to hedge their open positions effectively with little strain on managing transaction risk.

3.Need to realign accounting practices in India with International practices.

Important Note.

SPACE BARSPACE BAR

Z X C V B N M < > ?Z X C V B N M < > ?

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A B S D F G H J K LA B S D F G H J K L

OBSERVE THIS PICTURE

EXCHANGE DIFFERENCE IS THE DIFFERENCE RESULTING FROM REPORTING THE SAME NUMBER OF UNITS OF A FOREIGN CURRENCY IN THE REPORTING CURRENCY AT DIFFERENT EXCHANGE RATES.

A Transaction relating to a monetary item

being settled at the rate different from the rate at which it was initially

recorded (initial recognition)

A Transaction being reported at a rate

different from the rate at which it was either

initially recorded (balance sheet

reporting)

A Transaction being settled at a rate

different from the one taken for reporting in

the last financial statement (settlement)

AS-R LAYS DOWN THE FOLLOWING PRINCIPLE FOR RECOGNITION OF EXCHANGE DIFFERENCES:-

“INCOME or EXPENSE” in the “PERIOD” in which they arise Exchange Difference should be

transferred to FCTR - “ NON- INTEGRAL OPERATIONS”

Transaction Date

Intervening Reporting Date

Settlement Date

“Period” in which

Exchange Difference

arise

12th January

31st March 24th April

a) 12th Jan to

31st Mar.

b) 1st Apr to

24th Apr.

15th September

NIL 10th January

15th Sept to 10th Jan since it is in same year.

02nd October

30th November

20th December

a) 2nd Oct to

30th Nov.

b) 1st Dec to

20th Dec.

Example

Where an entity has non- integral foreign operations, the exchange differential attributable to some monetary items having specific characteristics should be accumulated in “FOREIGN CURRENCY TRANSLATION RESERVE ACCOUNT”

Note

NOW WE ARE ENTERING INTO A NEW CONCEPTS WHICH IS INCLUDED IN REVISED AS-11

FOREIGN OPERATIONS

Foreign operations is a subsidiary, Associate, Joint Venture, or Branch of the reporting enterprise, the activities of which based or conducted in a country other than the country of the reporting enterprise.

Can any body give the examples which we are doing audits

INTEGRAL FOREIGN OPERATIONS

An Integral Foreign Operations is a foreign operation, the activities of which are an integral part of those of the reporting enterprise.

Can any body give the examples which we are doing audits

NON-INTEGRAL FOREIGN

OPERATIONS

This term is defined negatively. It is an operation that is not an integral foreign operation.

Can any body give the examples which we are doing audits

IMPORTANT TO NOTE;Indian company having foreign branch has been brought into ambit of FOREIGN OPERATIONS.

It is essential to an enterprise to classify all its operations – be it a branch, an associate, a joint venture or a subsidiary. Into either INTEGRAL OR NON INTEGRAL FOREIGN OPERATIONS.

The objective of this classification into IFO or NIFO is to get the financial statements to produce results, that are compatible results with effect of the rate changes on company’s cash flows and on its equity.

Classification in the manner will lead to selection of an appropriate method for translation of foreign operations of an entity for the purpose of reporting.

MANOJ P DESAI

Changes in exchange rates can have a direct effect on the cash flows of reporting entity. If they do, then they will be “IFO”

Points to be noted in this regard;

1. Nature of overseas operations.

2. Foreign branch carries on its operations as if it were an extended arm of the reporting entity.

3. Forex impact is directly related to on cash flows of reporting entity.

4. Such an impact will arise from and will be relatable to all monetary items.

EXAMPLES FOR IFO’S ARE GIVEN BELOW;

1. Entity Produces raw material or component, and transfers the goods for inclusion in the ultimate product being manufactured by investing company.

2. Entity acts as a Selling Agents

3. Entity setup to Raise a Finance to help investing entity or for Tax reasons

Translation of FINANCIAL STATEMENTS OF IFO’S;-

ITEMS SELECTION OF RATE

Initial Recognition Rate applicable on the date of transaction

Cost and Depreciation of Tangible Fixed Assets Date of Purchase.

Assets carried at fair value Date on which fair value determined

Assets that are shown at realizable value or recoverable amount Date on which such value or amunt was determined (closing rate)

Contingent liability Closing Rate

Resulting exchange difference to be “RECOGNISED IN THE PROFIT AND LOSS ACCOUNT.”

An NFO accumulates cash and other monetary items, incurs expenses, generates income and arranges borrowings, all substantially in “local currency”.

Change in forex will not have direct impact on cash flows of reporting entity.

The effect if any would be traceable to a change in the “Net Investment in Foreign Operations” of reporting entity.

Point to be noted in this regard;

The reporting entity to exercise “CONTROL” over foreign operations, is not necessarily a determinant factor.

Indications to test whether the entity is an NFO:

1. Nature, Size, Frequency and materiality of transactions of foreign entity with reporting entity.

2. Extent of Autonomy (Dependent/Independent)

3. Mode of Financing (Local currency borrowings rather from reporting entity)

4. Cost of Production or services being incurred and settled in its local currency.

5. Sales being in currencies other than reporting currency.

The above are indications but still we need to exercise our judgment to decide it as NFO or IFO.

Translation of FINANCIAL STATEMENTS OF NFO’S;-

ITEMS SELECTION OF RATE

Assets and Liabilities (Balance Sheet items) both monetary and non-monetary

Apply “Closing Rate”

Income and Expenses Apply the Rate relevant on the date of Transactions

Resulting Forex should be accumulated in “FOREIGN CURRENCY TRANSLATION RESERVE (FCTR), UNTIL DISPOSAL OF NET INVESTMENT OF THAT NFO”.

Goodwill or Capital Reserve arising on acquisition of NFO (Subsidiary) should be translated at Closing Rate

Points to be noted in this regard

1. Normal consolidation procedures such as elimination of intra-group transactions of subsidiary, associate, JV, Etc should be applied.

2. Exchange differences attributable to monetary items should be recognized as INCOME OR EXPENSE in case of IFO and to be accumulated in FCTR in case of NFO.

3. Financial Statements of different reporting dates can be used subject to conditions laid down in AS 21.

4. Principles laid down in AS 23 and AS 27 should also be applied.

TAX EFFECTS OF FOREIGN EXCHANGE RATES:-

Here comes relation to AS 22 (Timing Difference) when a foreign branch is changed its identity from IFO (Forex recognized in P&L account) to NFO (where Forex is accumulated in FCTR account)

There are two types of transactions as given below;-

ENTERED FOR HEDGING PURPOSES ENTERED FOR SPECULATIVE PURPOSES

This is done in the intention of managing or minimizing risks a risk associated with changes in Forex

Premium (Loss)/Discount (Gain) arising out of contract should be recognized over the tenor of the contract period.

But any “Profit or Loss” arising on “Cancellation or Renewal” of contract to be recognized as “Income or Expense” for the “Period”

The “Gain/Loss” arising out of “Speculative Contract” to be computed and should be recognized on the “Reporting Date" (Balance Sheet Date)

1. Amount of “Forex” differences included in the “Net Profit or Loss” for the “Period”.

2. Net “Forex” differences “accumulated in FCTR” (as owner’s equity)

3. If the reporting currency is different from the currency of the country in which the reporting entity is domiciled (registered office), this should be disclosed with explanatory notes.

4. Reconciliation between opening and closing balance in the said reserve account to be highlighted.

5. A change in classification of significant foreign operation, additional disclosures are called for in the following areas;-

a. Nature of change in classification

b. Reasons

c. Impact of such change on shareholders funds

d. Impact on P&L account for the period.

Change in Forex occurring after balance sheet date is disclosed in accordance with AS 4.

RELATED IAS IS GIVEN BELOW

MUJHKO PARKHNE KA NATEEJA KYA NIKLA, ZAKHM-E-DIL NAZRON SE BHI GEHRA NIKLA TOD KE DEKH HI LIYA

TUNE AAINA MERE DILKA BAATA TERI SOORAT KE SIVA KYA NIKLA

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