Vous êtes sur la page 1sur 13

Visit allmbastuff.blogspot.

for more project reports,
presentations etc.

K.J. Somaiya Institute of

Management Studies and

International Financial

Project on

Accounting Implication on
Foreign Currency transaction

Accounting Issues on foreign
currency transaction..............5
Accounting for foreign currency transaction...................................................................5
Accounting for foreign operation.....................................................................................5

Problem of market determined

foreign exchange value..........6
Translation Method..........................................................................................................6
Translation at Balance sheet Date....................................................................................7

Approaches to Accounting
Two transactions – recognize approach...........................................................................8
Two transaction – defer....................................................................................................9
One transaction – recognize.............................................................................................9

Accounting implication of
Foreign Exchange Forward
Case Study: Infosys
Technologies Limited (Annual
Report 2008)........................12


In the globalization environment business empire are growing across the

borders, entire world is single market for company. Indian business
enterprises spreading their activities across the world. Being the part of the
world market is not going to be easy there are cultural difference, legal issues
and currency and settlement issues.

In 1973 International Monetary Fund permitted member of countries to select

and maintain an exchange arrangement of their choice. Indian exchange
rates were controlled by RBI (Reserve Bank of India) and at the end of 1992, a
dual exchange rate system was introduced and a year later, India moved to a
unified market determined exchange rate. In terms of fiscal control we are in
the process of moving full convertibility from the present regime of partial
convertibility. These changes will force Indian enterprises to face the full
impact of exchange risk. This paper deals with accounting implication on
foreign exchange transaction.

Definition of Foreign currency transaction As per Accounting

Standard -11

A foreign currency transactions is a transactions which is denominated in or

requires settlement in foreign currency, including transactions arising when
an enterprise either.

a. buys or sells goods or services whose price is denominated in a

foreign currency,
b. borrows or lends funds when the amounts payable or receivable are
denominated in a foreign currency,
c. becomes a party to an unperformed forward exchanges contracts:
d. Otherwise acquires or disposes of assets or incurs or settles
liabilities, denominated in a foreign currency.

In simple word a transaction that requires settlement in a foreign currency is

a called foreign currency transaction.

Accounting Issues on foreign currency transaction

If foreign currency transaction is settled in on the date of transaction one can

easily record the transaction as per current spot price of foreign exchange
but when transaction is carried forward there we need to study the effects of
foreign transaction due to changes in foreign currency valuation.

In India for the accounting purpose foreign activities of an Indian enterprise

are divided in to two categories.

Accounting for foreign currency transaction

It may enter into transactions which are denominated in foreign
currency like import and export of goods or services borrowing or
lending of money, acquisitions and sale of securities outside India and
subscription by foreign firms to shares issued by Indian companies.

Accounting for foreign operation

It may have foreign operations conducted through branches,
subsidiaries, associates, etc. The feature of a foreign operation is that
it maintains its own accounting records and prepares financial
statements in the local currency.

The two principal accounting issues common to both types of activities relate
to the choice of the rate of exchange to be issued and the manner of dealing
with the loss or gain arising from the differences in the exchange rates.

Foreign exchange differences arises because companies record transactions

on accruals basis, as per Indian tax law a firm can record entry on received or
accrual basis. The companies can avoid the problem of foreign exchanges
differences by:

a. Settlement in only one currency

b. Recording accounting entries of foreign currency transaction when
they are converted in to local currency.
c. Fixed exchange rate of exchange to be used.

However, this solution is not feasible because these options are not available
when company purchase or sales in foreign exchange transactions.

Problem of market determined foreign exchange value.

Assume an Indian company agrees to sells 100 items to a U.S. Company at

$100 each. The item cost Rs. 3,000 each to make. The exchange rate when
the sale is recorded is Rs.50 = $ 1. The Indian company records show:

Sales 500,000
Cost 300,000
Profit 200,000

And the balance sheet shows debtors of Rs. 500,000

The customer pays after two month later when the rate is $ 1 = Rs. 45 and
the company received Rs. 450,000. It has therefore lost of Rs. 50,000, not
from trading, but from the decision to hold a dollar asset (the debt) while the
value of the dollar decreased.

When a foreign currency transaction takes place it has to be accounted by

using a rate of exchange rate and if the transaction is not settled by that day
then we have exchange rate difference situation. Suppose this monetary item
is settled partly on some other date but in same financial period then we can
book trading gain or loss for that financial period. Further if the transaction is
carried forward to the next financial year then we will express these
monetary items as outstanding items on date balance sheet date with foreign
exchange rate for the given date for example foreign exchange rate declared
by RBI on 31st march. These processes will continue till the transaction is
settled down. The main issues in this process are

a. Fixing the exchange rate for initially accounting for the transaction.
b. Accounting with the exchange rate gain or loss arising on partial or full
settlement during the same financial year
c. Dealing with the exchange gain or loss on conversion of the foreign
currency monetary item on the date of balance sheet.

Translation Method

A foreign currency transaction is required to be accounted and Indian

company as at the date on which the transaction occurs by translating the
foreign currency into Indian rupees by using the spot rate at that date. A spot
rate is a quotation for delivery of foreign currency within two business days.
When selling and buying rates quoted separately the corresponding rate
should be used. It is also permissible to use a rate which is close to the actual
rate. For example when there are several transactions in a given foreign
currency an average rate for week or month should be considered. When
there are wide range of fluctuations in exchange rates, then care has to be
taken to ensure that single rate used is an appropriate substitute for the host
of actual rates which is supposed to represent. In India Reserve Bank of India
declares official rate for foreign exchange on daily basis..

A transaction in foreign currency may be settled either partly or fully, on a
date later than the date of transaction, by converting rupees in to foreign
currency or vice versa, at a rate different from the transaction rate. This will
result in exchanges difference and such difference either gain or loss is
recognized in the revenue statement of the financial statement in which the
settlement takes place.

Translation at Balance sheet Date

When Indian companies submit their balance sheet they translate their
foreign currency items into rupees on balance sheet date by using closing
rate and the resultant exchange difference is recognized in the profit and loss

The aspects of accounting for initial transaction, conversion and translation at

the balance sheet date are illustrated in the following example.

A computer provider company in India on credit from US company 60

numbers of computer printers at US$350 each on January 31, 2008. The
terms are that the amount should be settled by payment of US$10,500 each
on February 27, 2008 and April 30, 2008. The financial year of the Indian
company ends March 31. The stock of these computers held as on March 31,

The spot exchange rates on various dates are as follows. For US$ 1.

January 31, 2008 Rs.46.04

February 27, 2008 Rs.46.09
March 31, 2008 Rs.46.06
April 30, 2008 Rs.45.96

Approaches to Accounting Transactions

Two transactions – recognize approach

Under this approach the transaction is divided into two aspects one is
purchase aspects and other one is settlement aspects. The second one is
treated as a method of financing and hence, the gain or loss on account of
exchange difference on this monetary component of the transaction is
recognized in the income statement in the manner similar to treatment of
interest. The non-monetary component of the transaction, the inventory is
not distributed for the change in exchange rates. The notional exchange gain
or loss arising on restating the monetary item at the rate prevailing on
balance sheet date is also recognized in the income statement.

The accounting entries will be appears in the accounting book is as follows.

Date Particulars Debit Credit

Jan 31, Purchases (Printers) 966,840.00
2008 To Account payable (US firm) 966,840.00
(60 * 350* 46.04))

Feb 27, Accounts Payable (US Firms) 483,420.00

2008 Exchange Loss 525.00
(10,500* (46.09 – 46.04)
To Bank 483,945.00

Mar 31, Exchange Loss 210.00

2008 To Accounts payable c/f next year 210.00
(10,500 * (46.06-46.04))

Apr 30, Accounts payable 483,420.00

2008 Exchange loss b/f from last year 210.00
To Bank 482,580.00
To Exchange gain 1,050.00
(10500 * (46.06-45.96))

Two transaction – defer

Under this method the gain or loss on translation on balance sheet date is
deferred and recognized on the date of settlement. Only realized exchange
gain or loss recognized under this method.

The accounting entries will be appears in the accounting book is as follows.

Date Particulars Debit Credit

Jan 31, Purchases (Printers) 966,840.00
2008 To Account payable (US firm) 966,840.00
(60 * 350* 46.04))

Feb 27, Accounts Payable (US Firms) 483,420.00

2008 Exchange Loss 525.00
(10,500* (46.09 – 46.04)
To Bank 483,945.00

Apr 30, Accounts payable 483,420.00

2008 To Bank 482,580.00
To Exchange gain 840.00
(10500 * (46.04-45.96))

One transaction – recognize

Under the third method all events subsequent to the initial transaction are
treated as part of such initial transaction. Hence the loss on February 28 and
March 31 would be adjusted to inventory or cost of goods sold. The again on
April 30 would also be adjusted as above. If the goods are not in stock, the
adjustment will be to retained earnings.

Visit allmbastuff.blogspot.com
for more project reports,
presentations etc.

Accounting implication of Foreign Exchange Forward Contracts
In open market the spot exchange for a given currency is dependent on the
supply and demand for that currency which in turn is influenced by
international movements involving goods, services and investments and in
some measures currency speculation. To reduce the exchange rate loss risk
many enterprises enter into foreign currency transaction which serves as
hedges. Hedging transactions have a cost either explicit or implicit, the
enterprises has to evaluate the gain and loss from foreign currency due to
non-hedging and cost due to hedging.

A foreign currency hedge may be in the form of a foreign currency

transaction involving acquisition of foreign currency asset like making foreign
currency deposit or incurring foreign currency liability by taking foreign
currency loan. The hedging cost incurred is normally recorded in the income
statement. When a foreign currency liability is accounted for as a hedge of a
net investment in an independent foreign operation, the exchange difference
on the hedge item is adjusted to the retained earnings of the parent and is
recognized in the income statement only on the sale of the investment which
is hedge.

A forward exchange contract is a contract to deliver or receive at a specified

forward rate and on a stipulated future date. The forward exchange rate
usually differs from the spot rate because of different economics factors. By
and large this difference is attributable to the difference between the interest
rates obtaining in the countries of the currencies under consideration. If the
forward rate is more than the spot rate, the difference is called a “Premium”
and when forward rate is less than the spot rate the difference is called a

Forward contracts can be used for hedging or speculative purposes. As a

hedging device, forward contracts cover an exposed net asset or liability
position, or a net investment in a foreign operation, or an ideal foreign
currency commitment. In forward contracts, the accounting issues relate to
treatment premium and discounts. Since the forward contract are executory
contracts, that is, they are yet to performed on the date the contract is
entered into, they need not be accounted like any other transaction.

The aspects of accounting for forward exchange are illustrated in the

following example.

An Indian company sold goods to a company in the USA on February 1, 2008

for an invoice price of US$ 10,000 when the spot rate was Rs. 45.70 per US
dollar. Payment is to be received in three months on May 1, 2008. To avoid
the risk of loss from decline in exchange rate on the date of receipt the Indian
exporter acquired a forward contract to Sell US dollar 10,000 at Rs. 45.20 per
dollar on May 1, 2008. The company accounting year end on March 31, 2008
and the spot rate on this date was Rs. 44.70 per US dollar. The spot rate on
May 1, 2008 the date of receipt of money by the Indian exporter was Rs.
44.20 per dollar.

Accounting entries in the books of Indian company

Date Particulars Debit Credit

Feb 1, 2008 Sunday Debtors (US Firm) 457,000.00
To Sales (10,000 * 45.7) 457,000.00
(initial accounting entry at the time of sale)

Feb 1, 2008 Forward contract receivable 452,000.00

Deferred Discount 5,000.00
To Forward contract payable 457,000.00
(Indian company sign the forward contract
forward rate is lower than spot rate (45.70 -
45.20) so difference amount is treated as
deferred discount and will be write-off in three

Mar 31, Exchange Loss 10,000.00

2008 To sundry debtors 10,000.00
(10,000 * (45.7 – 44.7)) exchange loss due to
decline in dollar value

Mar 31, Forward Contract payable 10,000.00

2008 To Exchange Gain 10,000.00
(10,000 * (45.7-44.7)) firms sign the forward
contract and due to decline in dollar vale on
march, Indian firms need to pay less rupees.

Mar 31, Discount Expenses 3,334.00

2008 To Deferred Discount 3,334.00
(Amortization of discount expenses for 2
months (5000*2/3)

Next financial year when Indian firm received final payment from US firm
May 1, 2008 Cash 442,000.00
Exchange Loss 5,000.00
To sundry debtors 447,000.00
(payment received from US firm at the spot
rate of Rs. 44.2)

May 1, 2008 Forward Contract payable 447,000.00

To Exchange Gain 5000.00
To Cash 442,000.00
(exchange gain due to difference between
spot rate on May (44.7 -44.2))

May 1, 2008 Cash 452,000.00

To Forward contract 452,000.00
(Indian firm received money from forward
contract on forward rate)

May 1, 2008 Discount Expenses 1,666.00

To Deferred Discount 1,666.00
(Amortization of discount expenses for 1

months (5000/3)

Case Study: Infosys Technologies Limited (Annual Report 2008)

Infosys one of the giant software company in India who has diversified across
the world. Infosys has its business in Asia, Australia, North America and
Europe. Foreign exchange plays major role in Infosys revenue. Infosys
entered in to forward contracts and hedged contracts to reduce the exchange

We have analyzed Infosys annual report for 2008 and figured out how this
company shows foreign exchange accounting in the report.

1. Any income of losses by the forward contract had shown under the
head “Other income” in Profit and Loss account. It also showed
average rate as well as period rate for different currency.

2. Foreign Currency account balance had shown under the head “Cash
and Bank Balance”.

Visit allmbastuff.blogspot.com
for more