GROUP B 1 Applicability Revised in 2003 Applicable in respect of accounting periods commencing on or after 1-4-2004 2 Objective Which exchange rate to use? How to recognise effect of changes in exchange rates? 3 Scope 1. This Standard should be applied: in accounting for transactions in foreign currencies in translating the financial statements of foreign operations 2. Deals with accounting of foreign currency transaction in nature of forward exchange contracts
4 Definitions Average rate Closing rate Exchange difference Exchange rate Fair value Foreign currency Foreign operations Forward exchange contract 5 Forward rate Integral foreign operation Monetary items Net investment in integral foreign operation Non-integral foreign operation Non-monetary items Reporting currency Foreign Currency Transactions Initial Recognition 8. Foreign currency transaction denominated in or requires settlement in foreign country, including transactions arising when an enterprise either: Buys or sells goods or services in foreign currency Borrows or lends funds in foreign currency Becomes party to unperformed forward exchange contract Acquires or disposes of assets, or incurs or settles liabilities in foreign currency 6 Foreign Currency Transactions (continued) 9. Foreign currency transaction recorded on initial recognition in reporting currency (exchange rate at date of transaction) 10. Rates that approximates actual rate at date of transaction is used (If exchange rate fluctuate significantly, use of average rate for period is unreliable) 7 Reporting at Subsequent Balance Sheet Dates 11. At each balance sheet: a. foreign currency monetary item reported at closing rate b. non-monetary items carried in terms of historical cost reported using exchange rate at date of transaction c. Non-monetary items carried at fair value or similar valuation reported using exchange rates at time of value determination 12. Cash receivables and payables monetary items Fixed assets, inventories and investments in equity shares are non-monetary assets 8 Recognition of Exchange Differences 13. Exchange difference on settlement of monetary items or reporting an enterprises monetary items at different rates should be recognised as income or expense (exception exchange dealt in paragraph 15) 14. All exchange difference is recognised in same period if transactions are settled within same accounting period Different accounting periods exchange difference recognised in each intervening period up to period of settlement is determined by change in exchange rates during that period 9 Net Investment in a Non-integral Foreign Operation 15. Exchange difference arising from monetary item forms part of enterprises net investment should be accumulated in enterprises financial statement until disposal of net investment 16. Monetary items receivable from or payable to non-integral foreign operation extension to enterprises net investment in that operation 10 Classification of Foreign Operations 17. Foreign operations classified as integral foreign operations or non- integral foreign operations 18. Integral Foreign Operation extension of reporting enterprises operations (change in exchange rate has effect on cash flow from operations of reporting enterprise exchange rate affects individual monetary items held by foreign operations) 19. Change in exchange rate affects reporting enterprises net investment on non-integral foreign operation rather than individual monetary and non-monetary items held by foreign operation 11 Non-Integral Foreign Operation 20. Indicators for foreign operator to be a non-integral foreign operator: a. Degree of autonomy b. Transaction with reporting enterprise not high proportion of foreign operators activities c. Self-financed d. Activities and sales in local currency e. Cash flow of reporting enterprise insulated from day-to-day activities of foreign enterprise f. Sales prices determined more by local competition and regulations g. Presence of active local sales market
12 Integral Foreign Operations 21.
22. Actual rate at date of transaction is used for practical purposes 13 Item Rate Monetary items Closing rate Non-monetary items carried at historical cost Rate of date of transaction Non-monetary items carried at fair value Rate existing at time of determination of such value Contingent Liability Closing rate Non-Integral Foreign Operations 23. In translating financial statements, the reporting enterprise should use following procedure:
24. For practical reasons, rate that approximates actual exchange rates is used to translate income and expense items of foreign operation 25. Goodwill and capital reserve by acquisition translated at closing rate 26. Contingent liability translated at closing rate in financial statement
14 Items Exchange Rate Assets and Liabilities Monetary and Non-monetary Closing rate Income and Expenses At the date of transaction Disposal of Non-Integral Foreign Operation
27. Cumulative amount of deferred exchange differences which relate to that operation recognised as income or expense in same period in which gain or loss on disposal is recognised
28. Payment of a dividend forms part of a disposal only when it constitutes a return of the investment 15 Change in Classification of a Foreign Operation 29. Applicable translation procedures to revised classification should be applied from date of change of classification 30. Reclassification a. Integral to non-integral exchange difference due to translation of non-monetary assets at date of reclassification accumulated in foreign currency translational reserve b. Non-integral to integral translated amounts for non-monetary items at date of change are treated at historical cost in period of change and subsequent periods Deferred exchange differences not recognised as income or expense till disposal of operation
16 Tax Effects of Exchange Differences 31. Gains and losses on foreign currency transactions and exchange differences arising on translation of financial statements of foreign operations may have associated tax effects which are accounted for in accordance with AS 22, accounting for Taxes on Income 17 Forward Exchange Contracts 32.
33. Exchange differences on such a contract should be recognised in the statement of profit and loss in the reporting period in which the exchange rates change. Any profit or loss arising on cancellation or renewal of such a forward exchange contract should be recognised as income or as expense for the period. 18 Item Treatment Premium or Discount arising at inception of foreign exchange contract To be amortised as expense or income over life of contract Exchange Difference on such a contract To be recognised as income or loss in year in which exchange rates changes Disclosure 34. Enterprise must disclose: a. amount of exchange difference included b. net exchange differences in foreign currency translation reserve as separate component of shareholders fund and a reconciliation of the amount of such exchange differences at the beginning and end of the period 35. Difference in reporting currency reason for different currency should be disclosed along with reason of change 19 Disclosure
36. For change in classification: a. nature of change b. reason for change c. impact of change in classification of shareholders funds d. Impact on net profit and loss 20 THANK YOU 21