AS – 11: Effects of changes in foreign exchange rates

Deals with

Transaction Exposure Translation Exposure

Accounting for transactions in Translating the financial statements

foreign currencies of foreign operations

AS-11 also deals with – Accounting for Foreign currency transactions in the nature
of Forward exchange contracts.

Go through the following examples to understand the scope of AS-11 and the
accounting treatment.

Example 1: Aryan Ltd. is a manufacturing company. It purchased Raw material from

a supplier in US on 1/5/09. The foreign currency payable is $ 5,000. On the date of
transaction the rate is 45 per $.
Ans: The amount to be recorded as creditors on 1/5/09 is $ 5,000 X 45
= 2,25,000

Any foreign currency transaction initially recognized by applying the exchange rate
on the date of transaction.

Note: Suppose if Aryan ltd. imports raw materials on different dates in a month
from various suppliers, then an average rate for that month can be taken to record
the transactions.

Example 2: The due date for payment of debt is 10/12/09 and on that date Aryan
Ltd. paid the amount to foreign supplier. The rate prevailing on that date is
51 per $.
Ans: The exchange loss 30,000 [i.e. ( 51 – 45) X5000$] has to be transferred
to P&L A/C.

Exchange differences arising due to settlement of monetary item (within the same
period or in subsequent financial periods) should be recognized as income or
expense in the period in which they arise.

Monetary Items: They are assets (to be received) or Liabilities (to be paid) in
fixed/determinable amounts of money Eg: Cash, Receivables and payables.
Example 3: The due date falls during the next financial year and Aryan Ltd. has to
carry the balance in the B/S as on 31/03/10. The rate on the B/S date is 50.50
per $.
Ans: The amount to be recorded as creditor on 31/03/10 is $5,000 X 50.50 =
2,52,500
And The exchange loss of 27,500 ( 2,52,500 – 2,25,000). In other words (
50.50 – 45) X $5,000 = 27,500 has to be transferred to P&L A/C.

Monetary items are to be recorded in the B/S at closing rate. The exchange
differences arising out of such reporting should be recognized as income or
expense.

Example 4: Aryan Ltd. settled the transaction on 5/01/2011. The exchange rate on
that date is 52 per $.
Ans: The exchange loss to the extent of 50.50 per $ is recognized on 31/03/10.
The excess over 50.50 should be recognized on the settlement date. Therefore
Exchange loss for the year 2011 is $5,000 X ( 52 – 50.50) = 7,500

When the transaction is not settled in the same accounting period in which it
occurred, the exchange difference is recognized in each intervening period upto
the period of settlement

Example 5: Aryan Ltd. has purchased machinery from a supplier in U.K on 1/06/09
for £ 25,000 and paid the amount. As on the date of purchase 1 £ = 75.
Ans: The machinery to be carried in B/S on 1/06/09 is £ 25,000 X 75 =
18,75,000.

Non monetary items which are carried at historical cost are to be recorded using
exchange rate at the date of transaction.

Non monetary items: Other than monetary items. Eg: land, building, stock,
investment in equity etc.,

Example 6: The B/S date is 31/03/10 and the rate on that date is 1 £ = 80. The
machine has to be depreciated at 20% WDV.
Ans: Machinery to be carried in B/S on 31/03/10 is 18,75,000
(-) 20% of 18,75,000 = 15,00,000.
Note: The rate of 1 £ = 80 is not relevant as the machinery has to be carried at
historical cost.

Example 7: Aryan Ltd. paid amount to the U.K supplier for purchase of machinery.
On the date of payment the exchange rate is 1 £ = 79.
Ans: The exchange loss of 1,00,000 [( 79 – 75) X 25,000 £] is to be reduced
from the carrying amount of asset.

Exchange difference on repayment of liabilities incurred for acquiring fixed assets

should be adjusted in the carrying amount of fixed assets on reporting date.

Example 8: Aryan Ltd. has purchased shares in Microsoft corporation Ltd. on

5/5/09. It purchased 500 shares @ $3,100 per share, which has to be carried in
the B/S at fair value. The rate on that date is 42.5 per $.
Ans: The shares to be carried in B/S is 500 shares X $3,100 X 42.5 =
6,58,75,000.

Non monetary items which are carried at Fair value are to be recorded using
exchange rate that existed when the fair value is determined.

Example 9: As on the date of B/S i.e. 31/03/10 the share is trading at $3150 per
share and exchange rate is 40 per $.
Ans: The shares to be carried in B/S on 31/03/10 is
500 shares X $3,150 X 42.5 = 6,30,00,000.
And The exchange loss of 28,75,000 ( 6,58,75,000 – 6,30,000) has to be
transferred to P&L A/C.

If fair value is determined as on the Balance sheet date, the Exchange rate on the
Balance sheet date (i.e. Closing rate) may be used. The exchange difference should
be recognized as income or expense in the period in which they arise.

Translation rules for foreign branch:

(1) Current Asset, Current Liabilities, Loans = Closing rate

(2) Fixed Assets = Actual rate

(3) Income & Expenses = Average rate

(Depreciation should not be converted by average rate because depreciation
is calculated on fixed assets which are converted into original cost by actual rate.)

(4) All the transactions between Head Office & Branch is not required to be
converted because these transaction can be used directly from Head office books.

(5) After conversion of branch trial balance, difference between debit side &
credit side should be transferred to P&L A/c assuming exchange profit or loss.
 Statement showing Conversion of Trial Balance
Dr. Cr. Working
Current Asset xxxx - Closing rate
Current Liability - xxxx Closing rate
Loan - xxxx Closing rate
Fixed Asset xxxx - Actual rate
Income - xxxx Average rate
Expense xxxx - Average rate
Depreciation xxxx - Actual rate
xxxx xxxx

Difference of Total of Debit side & Credit Side will be transferred to P&L A/c.

Disclosure under AS -11: An enterprise should disclose:

a) The amount of exchange difference included in the net profit or loss for the
period.
b) The amount of exchange difference adjusted in the carrying amount of fixed
assets during the accounting period.
c) The amount of exchange difference in respect of forward contracts to be
recognized in the profit/loss for one or more subsequent accounting period.
d) Foreign currency risk management policy.