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Accounting Standard 11

(Effects of Change in Foreign Exchange Rates)

Revised in 2003
Applicable in respect of accounting periods commencing on or
after 1-4-2004
Which exchange rate to use?
How to recognise effect of changes in exchange rates?
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

Average rate
Closing rate
Exchange difference
Exchange rate
Fair value
Foreign currency
Foreign operations
Forward exchange
Forward rate
Integral foreign operation
Monetary items
Net investment in integral
foreign operation
Non-integral foreign
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
Foreign Currency Transactions
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)
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
Recognition of Exchange
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
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
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
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

Integral Foreign Operations

22. Actual rate at date of transaction is used for practical purposes
Item Rate
Monetary items Closing rate
Non-monetary items carried at
historical cost
Rate of date of transaction
Non-monetary items carried at fair
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
26. Contingent liability translated at closing rate in financial statement

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

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
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

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
Forward Exchange Contracts

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.
Item Treatment
Premium or Discount arising at
inception of foreign exchange
To be amortised as expense or
income over life of contract
Exchange Difference on such a
To be recognised as income or
loss in year in which exchange
rates changes
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

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