11

Accounting Standard (AS) 11 Accounting Standard (AS) 11 (Revised 2003)(Revised 2003)

THE EFFECTS OF CHANGES INTHE EFFECTS OF CHANGES IN

FOREIGN EXCHANGE RATESFOREIGN EXCHANGE RATESMandatory for Accounting PeriodsMandatory for Accounting Periods

commencing on or after 1st April, 2004commencing on or after 1st April, 2004

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ContentsContents

Sr. No. Particulars

1 Glossary

2 Need & Objective

3 Coverage At A Glance

4 Accounting of FC Transactions

5 Accounting of Foreign Operations

6 Accounting of Forward Exchange Contracts

7 Disclosure

8 AS 11 & Schedule VI

9 AS 11 & International AS 21

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GlossaryGlossary

AS Accounting Standard

RE Reporting Enterprise (GSL)

FSs Financial Statements (BS, P & L etc)

Ex. Exchange

Diff. Difference

FC Foreign Currency (US $ etc)

US $ United States Dollar

A/c Account

RC Reporting Currency (Rs.)

Rs. Rupees

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Need & ObjectiveNeed & 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 ?

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Coverage At A GlanceCoverage At A Glance

Foreign Currency Transactions Foreign Operations

Foreign Currency Activities

a) Conversionb) Recognition of Ex. Diff.c) Eg. : FC Transaction

a) Classification of FOb) Conversion of FSc) Disposal of NFOd) 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

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Conversion of FC TransactionsConversion of FC TransactionsInitially FC transactions shall be recorded at TDR * / AR

For 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)

Classification of BS Items Initial A/cing Conversion at BS Dt

Monetary Items TDR / AR Closing Rate (CR)*

Non Monetary Carried @

Historical Cost TDR / AR TDR/AR

Fair Value TDR / AR Valuation Date Rate

Contingent Liabilities ----- Closing Rate

*CR = Rate on BS Date

Back to Glance

77

Eg. : Average Rate (AR) PolicyEg. : Average Rate (AR) Policy

Accounting Policy for Initial Recognition : -Accounting Policy for Initial Recognition : - Purchases & Sales in FC are recorded at Purchases & Sales in FC are recorded at

Customs Ex. RatesCustoms Ex. Rates(Currently CBEC prescribes Customs Ex. (Currently CBEC prescribes Customs Ex. Rates by Notification U/s. 14 (3) (a) of Customs Rates by Notification U/s. 14 (3) (a) of Customs Act, 1962)Act, 1962)

Other Transactions in FC are recorded at TDR Other Transactions in FC are recorded at TDR i.e. Ex. Rates prevailing on Date of Transactioni.e. Ex. Rates prevailing on Date of Transaction

Note :-Note :- AR should approximate to the TDRAR should approximate to the TDRi.e. AR can not be used if Ex. Rates fluctuates i.e. AR can not be used if Ex. Rates fluctuates significantly significantly

<<<< Back

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Purchase Agreement@ TDR / AR

Reported in BS @Closing

Rate

Settled @ TDR / AR

Settled after the BS Date

Recognition of Ex. Diff. - FCTRecognition 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

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Eg. : Ex. Diff. on FC TransactionEg. : Ex. Diff. on FC Transaction

Accounting Year 2004-05 2005-06

Accounting of asset purchase as per revised AS 11 (2003)

Current Asset purchase worth US $ 1/=

Purchase 01.12.04

Payment 31.01.05

BS Dt 31.03.05

Payment 30.04.05

BS Dt 31.03.06

Spot Rates (Rs./$) 50/- 52/- 47/- 46/- 52/-

Current Asset A/c DR 50.00

Vendor A/c DR 50.00 3.00 47.00

Ex. Loss A/c DR 2.00 5.00

Rs. Current A/c CR 52.00 46.00

Vendor A/c CR 50.00 5.00

Ex. Gain A/c CR 3.00 1.00

Back to Glance

1010

Classification of FOClassification of FOForeign Operation (FO) is defined as a subsidiary, associate, joint venture or branch based in a foreign country.

Classified : Way in which financed & operates w.r.t. RE

Particulars Integral FO (IFO) Non Integral FO (NFO)

Definition FO whose activities are an integral part of the activities of RE

Negatively defined –

FO which is not an IFO

Operates as Extended arm of RE Separate Entity

Example Selling Agent may just sell goods received from RE and remit proceeds back to RE

Independent Branch Generates Income, Incurs Expenses, Accumulates Monetary Items, Borrows locally etc. etc.

Effect of Rate Fluctuation

Has immediate effect on RE’s Cash Flows from Operations

Do not have direct impact on RE’s Cash Flows from Operations

View Indicators of NFO >>>>

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Indicators of NFOIndicators of NFO Major factor : Impact on cash flows from operationsMajor factor : Impact on cash flows from operations Other indicators of NFO are –Other indicators of NFO are –

a)a) High degree of autonomy in carrying operationsHigh degree of autonomy in carrying operationsb)b) Low proportion of transactions with RELow proportion of transactions with REc)c) No dependence on RE for financeNo dependence on RE for financed)d) COP or services settled on it’s ownCOP or services settled on it’s owne)e) Sales are in currencies other than RC (Rs.)Sales are in currencies other than RC (Rs.)f)f) Cash flows of RE are insulated from day-to-day Cash flows of RE are insulated from day-to-day

activities of FOactivities of FOg)g) Sales prices are not responsive to Ex. Rate Sales prices are not responsive to Ex. Rate

FluctuationsFluctuationsh)h) Existence of local demand for the productExistence of local demand for the product

If can’t be classified clearly then judgment is necessary If can’t be classified clearly then judgment is necessary for determination.for determination.

Back to Glance

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Conversion of FSs of FO &Conversion of FSs of FO &Recognition of Ex. Diff. thereofRecognition of Ex. Diff. thereof

For Conversion IFO is treated as FC Transaction

Particulars Integral FO =

FC Transaction

Non Integral FO

P & L Items TDR / AR TDR / AR

Monetary Items Closing Rate Closing Rate

Non Monetary carried @ Historical Cost

TDR / AR Closing Rate

Non Monetary carried @ Fair Value

Valuation Date Rate

Closing Rate

Recognition of Ex. Diff.

Recognized in P & L A/c as & when arise

Accumulated in FOREX Reserve A/c (Accumulation will continue until disposal of NFO)Eg. >>Eg. >>

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Eg. : Conversion of NFO FSEg. : Conversion of NFO FSParticulars Rate Dr $ Dr. Rs. Cr $ Cr. Rs.

Acquisition of Galaxy Chemicals Inc., USA on 31.03.04 (Spot = 40/-)

Share Capital 40/- 100 4000

Reserves 40/- 50 2000

Assets / Liabilities 40/- 200 8000 50 2000

On next BS Dt 31.03.05 (Spot = Rs. 50/-, AR = Rs. 45/-)

Share Capital Original 100 4000

Opening Reserves Original 50 2000

Current Profit AR = 45/- 20 900

Assets / Liabilities CR = 50/- 400 20000 230 11500

FOREX Reserve (Balancing Figure) 1600

Total 400 20000 400 20000

Back to Glance

1414

Disposal of NFODisposal of NFO

Back to Glance

Particulars Nature of Disposal

100% Disposal Part Disposal

Gain or Loss on Disposal

Recognize in

P & L A/c

Recognize in P & L A/c

Accumulated amt in FOREX Reserve A/c

100% transfer to P & L A/c

Part amount transfer to P & L A/c on pro-rata basis

When to trf FOREX Reserve to P & L

Period in which gain or loss on disposal is recognized in P & L A/c

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Change in Classification of FOChange in Classification of FOParticulars Conversion Rate for

IFO = FCT NFO

P & L Items TDR / AR TDR / AR

Monetary Items Closing Rate Closing Rate

Non Monetary carried @ Historical Cost (FC)

TDR / AR Closing Rate

Non Monetary carried @ Fair Value (FC)

Valuation Date Rate Closing Rate

IFO reclassified as NFO Ex. Diff. will arise on conversion of non-monetary items ;& The same shall be accumulated in FOREX Reserve

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.

Eg.>>

Eg.>>

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Eg. : Reclassification IFO to NFOEg. : Reclassification IFO to NFOBS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)

Particulars US

$

IFO NFO

Rate Rs. Rate Rs.

Share Capital 100 40/- 4000 40/- 4000

Op. Reserves 50 40/- 2000 40/- 2000

Current Profit 20 45/- 900 Original 2000

Ex. Gain Loss 1100

FOREX Reserve 500

Monetary Liabilities 230 50/- 11500 50/- 11500

Total 400 19500 20000

Monetary Assets 300 50/- 15000 50/- 15000

Non Monetary @ Historical Cost

100 45/- 4500 50/- 5000

Total 400 19500 20000<< Back

1717

Eg. : Reclassification NFO to IFOEg. : Reclassification NFO to IFOBS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)

Particulars $ Rate NFO Rs. IFO Rs. Remarks

Share Capital 100 40/- 4000 4000

Op. Reserves 50 40/- 2000 2000

Current Profit 20 45/- 900 900

FOREX Reserve 1600 1600 Continued until disposal of FO

Liabilities 230 50/- 11500 11500

Total 400 20000 20000

Monetary Assets 300 50/- 15000 15000

Non Monetary @ Historical Cost

100 50/- 5000 5000 Treated as Historical Cost from date of reclassification

Total 400 20000 20000Back to

Glance

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Forward Exchange Contract (FEC)Forward Exchange Contract (FEC)FEC is an agreement to exchange different currencies at Forward Rate

# Particulars Hedging FEC Speculative FEC

1 Purpose Manage risks Gain by calculated risks

2 Eg. Say Minimizing Ex. Rate fluctuation risk associated with Accounts Receivable of USD 100K

Earn profit by trading in FOREX

3 Accounting Purpose different hence different A/cting treatment

Premium/ Discount

Deferred over tenor of the contract

Ignored

Ex. Diff. Recognize on the basis of ex. rate movements

Value of FEC is marked to M.V. on BS Dt

4 Practical View Eg. >>>> View Eg. >>>>

Profit or Loss on Cancellation/Renewal is recognized in P & L A/c

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Eg. : Hedging FECEg. : Hedging FEC

Accounts Receivable

US $

Sale Dt 01.12.04

FEC Dt 01.12.04

BS Dt 31.03.05

Settlement Dt 30.04.05

1/= Spot = 43/- FR = 48/- Spot = 45/- Spot = 47.50

Accounting as per Revised AS 11 (2003)

Accounting Year

Premium (5/-) Amortization

Ex. Gain Rs.

Ex. Loss Calculation

Ex. Loss Rs.

Net Gain/ (Loss)

2004-05 5 * (4/5) 4/- 43 – 45 (2/-) 2/-

2005-06 5 * (1/5) 1/- 45 - 47.50 (2.50) (1.50)

Total 5/- 4.50 0.50

<< Back

2020

Eg. : Speculative FECEg. : Speculative FEC

FEC Date 1st March, 2005

Forward Purchase of USD 1/-

Maturity Date 30th June, 2005

Forward Rate Rs. 50/- per $

Forward Rate available on BS date (31.03.05) for remaining maturity of the contract

Rs. 48/- per $

Ex. Loss in 2004-05 Rs. 2/-

Back to Glance

2121

Tax Effects of Foreign Ex. Diff.Tax Effects of Foreign Ex. Diff.

There will be some tax effects associated with There will be some tax effects associated with the gain or loss from exchange rate fluctuationthe gain or loss from exchange rate fluctuation

These tax effects shall be accounted for in These tax effects shall be accounted for in accordance with AS 22 i.e. Accounting for accordance with AS 22 i.e. Accounting for Taxes on IncomeTaxes on Income

Back to Glance

2222

DisclosureDisclosureAn Enterprise shall specifically disclose –An Enterprise shall specifically disclose –1.1. Ex. Diff. recognized in P & L A/c for the periodEx. Diff. recognized in P & L A/c for the period2.2. FOREX Reserve as part of Share Holder’s FundsFOREX Reserve as part of Share Holder’s Funds3.3. Reconciliation of Opening & Closing FOREX ReserveReconciliation of Opening & Closing FOREX Reserve4.4. Where RC is different from the currency of domiciled Where RC is different from the currency of domiciled

country, reasons thereofcountry, reasons thereof5.5. Where RC currency has been changed from previous Where RC currency has been changed from previous

accounting period then reasons for such changeaccounting period then reasons for such change6.6. If classification of FO has been changed, then -If classification of FO has been changed, then -

Nature & Reasons for ChangeNature & Reasons for Change Impact of change on Share Holder’s FundsImpact of change on Share Holder’s Funds Impact on Net Profit or Loss for each prior period, as if change Impact on Net Profit or Loss for each prior period, as if change

is applicable from retrospective effect.is applicable from retrospective effect.

7.7. AS 11 encourages disclosure of Enterprise’s FC Risk AS 11 encourages disclosure of Enterprise’s FC Risk Management PolicyManagement Policy Back to

Glance

2323

Transition on 1Transition on 1stst April, 2004 April, 2004

Revised AS 11 is applicable from 1Revised AS 11 is applicable from 1stst April, 2004. April, 2004.

Old AS 11 used the term “Foreign Branch” Old AS 11 used the term “Foreign Branch” instead of “Foreign Operation”instead of “Foreign Operation”Also it did not classified FO’s as IFO & NFOAlso it did not classified FO’s as IFO & NFO

On 1On 1stst time application, if a Foreign Branch is time application, if a Foreign Branch is classified as NFO then accounting treatment classified as NFO then accounting treatment pertaining to change in classification of FO shall pertaining to change in classification of FO shall be appliedbe applied

i.e. Accumulate Ex. Diff. on conversion of Non i.e. Accumulate Ex. Diff. on conversion of Non Monetary Items in FC Translation ReserveMonetary Items in FC Translation Reserve

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As per the announcement of ICAI

# Particulars Schedule VI Revised AS 11 (2003)

1 Ex. Diff. on a/c of FC Liability linked to Fixed Asset

Capitalize i.e. adjust in carrying cost of Fixed Asset

Recognize in P & L A/c

2 Relation to old AS 11 (1994)

In line with Schedule VI provision

Capitalization provision discontinued on revision in 2003

3 Implication ICAI will be approaching Govt. for revision of Schedule VI

Until the revision of Schedule VI capitalization treatment will continue & it will still be considered to be complying with New AS 11 (2003)

AS 11 (2003) & Schedule VIAS 11 (2003) & Schedule VI

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AS 11 (2003) & IASAS 11 (2003) & IASParticulars Indian AS 11 International AS 21

Scope Covers accounting of FEC’s

Major aspects of FEC’s are covered under IAS 39 (Financial Instruments : Recognition & Measurement)

Alternative A/cing in case of

Severe Currency Devaluation

Preferring elimination of alternatives, IAS’s alternative treatment is not recognized

Permits alternative :

Ex. Diff. on severe devaluation of currency can be included in carrying amt of asset s.t. conditions

Terminology w.r.t. FO

FO’s are classified as Integral &

Non Integral

FO’s are classified as

“FO’s that are integral to the operations of RE” &

“Foreign Entity”

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Thank You