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Accounting Standard (AS) 11 (Revised 2003)


THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
Mandatory for Accounting Periods commencing on or after 1st April, 2004

Contents
Sr. No. Particulars 1 Glossary 2 3 4 Need & Objective Coverage At A Glance Accounting of FC Transactions

5 6 7 8 9

Accounting of Foreign Operations Accounting of Forward Exchange Contracts Disclosure AS 11 & Schedule VI AS 11 & International AS 21

Glossary
AS RE FSs Ex. Diff. FC US $ A/c RC Rs. Accounting Standard Reporting Enterprise (GSL) Financial Statements (BS, P & L etc) Exchange Difference Foreign Currency (US $ etc) United States Dollar Account Reporting Currency (Rs.) Rupees

Need & Objective


Export Sales Expenses in FC Domestic Sales Galaxy Foreign Purchases Indian Purchases

Expenses in Rs.

US $ Borrowings

Rs. Borrowings

Galaxys financial reports are in Rs. All financial transactions are to be recorded in Rs.

Which Ex. Rate ?

How to treat Ex. Diff. in A/cs

Coverage At A Glance
Direct business dealings with Customers, Suppliers etc. from local point

Foreign Currency Activities Tax Effect of Ex. Diff.

Business dealings through foreign based branch, JV, Subsidiary, Associate etc.

Accounting

Disclosure

Transitional Provisions

Foreign Currency Transactions

Foreign Operations

Forward Exchange Contracts

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

a) b) c) d)

Classification of FO Conversion of FS Disposal of NFO Change in classification

Conversion of FC Transactions
Initially 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 Monetary Items Initial A/cing TDR / AR TDR / AR TDR / AR ----Conversion at BS Dt Closing Rate (CR)* TDR/AR Valuation Date Rate Closing Rate

Non Monetary Carried @


Historical Cost Fair Value Contingent Liabilities *CR = Rate on BS Date
Back to Glance

Eg. : Average Rate (AR) Policy


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

Customs Ex. Rates (Currently CBEC prescribes Customs Ex. Rates by Notification U/s. 14 (3) (a) of Customs Act, 1962) Other Transactions in FC are recorded at TDR i.e. Ex. Rates prevailing on Date of Transaction

Note :- AR should approximate to the TDR i.e. AR can not be used if Ex. Rates fluctuates significantly
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Recognition of Ex. Diff. - FCT


Settled after the BS Date

Purchase Agreement @ TDR / AR


Reported in BS @ Closing Rate Settled @ TDR / AR

Ex. Diff. arises EITHER on Settlement OR on Reporting in BS

The same should be recognized in P & L A/c for the period


Back to Glance

Eg. : 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/= Spot Rates (Rs./$) Current Asset A/c Vendor A/c DR DR
Purchase 01.12.04 Payment 31.01.05 BS Dt 31.03.05 Payment BS Dt 30.04.05 31.03.06

50/50.00

52/50.00

47/3.00

46/47.00

52/-

Ex. Loss A/c


Rs. Current A/c Vendor A/c Ex. Gain A/c

DR
CR CR CR 50.00

2.00
52.00 3.00 46.00

5.00
5.00 1.00
Back to Glance

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Classification of FO
Foreign 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 Definition Integral FO (IFO) Non Integral FO (NFO) FO whose activities are Negatively defined an integral part of the FO which is not an IFO activities of RE Extended arm of RE Selling Agent may just sell goods received from RE and remit proceeds back to RE Separate Entity Independent Branch Generates Income, Incurs Expenses, Accumulates Monetary Items, Borrows locally etc. etc.

Operates as Example

Effect of Rate Has immediate effect Do not have direct impact on Fluctuation on REs Cash Flows REs Cash Flows from from Operations Operations
View Indicators of NFO >>>>

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Indicators of NFO

Major factor : Impact on cash flows from operations Other indicators of NFO are a) High degree of autonomy in carrying operations b) Low proportion of transactions with RE c) No dependence on RE for finance d) COP or services settled on its own e) Sales are in currencies other than RC (Rs.) f) Cash flows of RE are insulated from day-to-day activities of FO g) Sales prices are not responsive to Ex. Rate Fluctuations h) Existence of local demand for the product If cant be classified clearly then judgment is necessary for determination.
Back to Glance

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


For Conversion IFO is treated as FC Transaction

Particulars
P & L Items Monetary Items Non Monetary carried @ Historical Cost Non Monetary carried @ Fair Value

Integral FO = FC Transaction
TDR / AR Closing Rate TDR / AR

Non Integral FO
TDR / AR Closing Rate Closing Rate

Valuation Date Rate

Closing Rate

Recognition of Recognized in P & Accumulated in FOREX Reserve Ex. Diff. L A/c as & when A/c (Accumulation will continue arise until disposal of NFO) Eg. >>

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Eg. : Conversion of NFO FS


Particulars Share Capital Reserves Assets / Liabilities Rate 40/40/40/200 8000 Dr $ Dr. Rs. Cr $ 100 50 50 Cr. Rs. 4000 2000 2000 Acquisition of Galaxy Chemicals Inc., USA on 31.03.04 (Spot = 40/-)

On next BS Dt 31.03.05 (Spot = Rs. 50/-, AR = Rs. 45/-) Share Capital Opening Reserves Current Profit Assets / Liabilities Total Original Original AR = 45/CR = 50/400 400 20000 20000 100 50 20 230 400 4000 2000 900 11500 1600 20000
Back to Glance

FOREX Reserve (Balancing Figure)

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Disposal of NFO
Particulars
Gain or Disposal Loss

Nature of Disposal 100% Disposal


on Recognize in P & L A/c

Part Disposal
Recognize in P & L A/c

Accumulated amt in 100% transfer Part amount transfer to FOREX Reserve A/c to P & L A/c P & L A/c on pro-rata basis When to trf FOREX Period in which gain or loss Reserve to P & L disposal is recognized in P & L A/c on

Back to Glance

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Change in Classification of FO
Particulars P & L Items Conversion Rate for IFO = FCT TDR / AR NFO TDR / AR

Monetary Items
Non Monetary carried @ Historical Cost (FC) Non Monetary carried @ Fair Value (FC)

Closing Rate
TDR / AR Valuation Date Rate

Closing Rate
Closing 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

Eg.>>

NFO reclassified as IFO FOREX Reserve is continued until actual disposal of FO Translated amounts for Non Monetary Items are treated as Eg.>> historical cost of those items, from that date.

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Eg. : Reclassification IFO to NFO


BS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-) Particulars Share Capital Op. Reserves Current Profit Ex. Gain Loss FOREX Reserve Monetary Liabilities Total Monetary Assets 230 400 300 50/50/11500 19500 15000 50/50/US $ 100 50 20 IFO Rate 40/40/45/Rs. 4000 2000 900 1100 500 11500 20000 15000 Rate 40/40/Original NFO Rs. 4000 2000 2000

Non Monetary @ Historical Cost


Total

100
400

45/-

4500
19500

50/-

5000
20000

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Eg. : Reclassification NFO to IFO


BS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-) Particulars Share Capital Op. Reserves Current Profit FOREX Reserve Liabilities Total 230 50/400 $ 50 20 Rate NFO Rs. 4000 2000 900 1600 11500 20000 15000 5000 40/45/IFO Rs. 4000 2000 900 1600 11500 20000 15000 5000 Treated as Historical Cost from date of reclassification 20000
Back to Glance

Remarks

100 40/-

Continued until disposal of FO

Monetary Assets 300 50/Non Monetary @ 100 50/Historical Cost Total 400

20000

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Forward Exchange Contract (FEC)


FEC is an agreement to exchange different currencies at Forward Rate # Particulars Hedging FEC Speculative FEC

1 Purpose
2 Eg.

Manage risks

Gain by calculated risks

Say Minimizing Ex. Rate Earn profit by trading in fluctuation risk associated FOREX with Accounts Receivable of USD 100K Purpose different hence different A/cting treatment
Premium/ Deferred over tenor of the Ignored Discount contract Ex. Diff.

3 Accounting

Recognize on the basis of Value of FEC is marked ex. rate movements to M.V. on BS Dt View Eg. >>>> View Eg. >>>>

4 Practical

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

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Eg. : 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 Premium (5/-) Ex. Gain Ex. Loss Ex. Loss Net Gain/ Year Amortization Rs. Calculation Rs. (Loss) 2004-05 2005-06 Total 5 * (4/5) 5 * (1/5) 4/1/5/43 45 45 - 47.50 (2/-) (2.50) 4.50 2/(1.50) 0.50

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Eg. : Speculative FEC


FEC Date Forward Purchase of Maturity Date Forward Rate Forward Rate available on BS date (31.03.05) for remaining maturity of the contract Ex. Loss in 2004-05 1st March, 2005 USD 1/30th June, 2005 Rs. 50/- per $ Rs. 48/- per $

Rs. 2/-

Back to Glance

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Tax Effects of Foreign Ex. Diff.



There will be some tax effects associated with the gain or loss from exchange rate fluctuation These tax effects shall be accounted for in accordance with AS 22 i.e. Accounting for Taxes on Income

Back to Glance

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Disclosure
An Enterprise shall specifically disclose 1. Ex. Diff. recognized in P & L A/c for the period 2. FOREX Reserve as part of Share Holders Funds 3. Reconciliation of Opening & Closing FOREX Reserve 4. Where RC is different from the currency of domiciled country, reasons thereof 5. Where RC currency has been changed from previous accounting period then reasons for such change 6. If classification of FO has been changed, then Nature & Reasons for Change Impact of change on Share Holders Funds Impact on Net Profit or Loss for each prior period, as if change is applicable from retrospective effect.

7. AS 11 encourages disclosure of Enterprises FC Risk Management Policy

Back to Glance

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Transition on 1st April, 2004


Revised AS 11 is applicable from 1st April, 2004. Old AS 11 used the term Foreign Branch
instead of Foreign Operation Also it did not classified FOs as IFO & NFO

On 1st time application, if a Foreign Branch is

classified as NFO then accounting treatment pertaining to change in classification of FO shall be applied i.e. Accumulate Ex. Diff. on conversion of Non Monetary Items in FC Translation Reserve

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AS 11 (2003) & Schedule VI


As per the announcement of ICAI # Particulars 1 Ex. Diff. on a/c of FC Liability linked to Fixed Asset Schedule VI Revised AS 11 (2003) Capitalize i.e. Recognize in P & L A/c adjust in carrying cost of Fixed Asset with Capitalization provision VI discontinued on revision in 2003 Until the revision of Schedule VI capitalization treatment will continue & it will still be considered to be complying with New AS 11 (2003)

2 Relation to old In line AS 11 (1994) Schedule provision 3 Implication

ICAI will be approaching Govt. for revision of Schedule VI

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AS 11 (2003) & IAS


Particulars Scope Indian AS 11 International AS 21 Covers accounting of Major aspects of FECs are FECs covered under IAS 39 (Financial Instruments : Recognition & Measurement) Preferring elimination of alternatives, IASs 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

Alternative A/cing in case of Severe Currency Devaluation Terminology w.r.t. FO

FOs are classified as FOs are classified as Integral & FOs that are integral to the Non Integral operations of RE & Foreign Entity

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