Presentation Topic:

Accounting for Effects of Changes in Foreign

Exchange Rates

( Accounting Standard 11)

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 Contents:

1. Introduction

2. Main provisions of the AS 11

3. Disclosure under AS 11

4. Numerical

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 Introduction :

Accounting standards in India:

• Given by the Institute of Chartered Accountants of India

(ICAI).

• There are 32 accounting standards issued by the ICAI.

• AS 11 was issued in 1976 and revised in 1994 and 2003.

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 Introduction continued:
Accounting standards in other countries:
• International Financial Reporting Standards (IFRS) are
adopted by the International Accounting Standards Board
(IASB).

• European Union, Hong Kong, Australia, Malaysia,

Pakistan, Russia, South Africa, Singapore and Turkey.

• The ICAI has announced that IFRS will be mandatory in

India for financial statements for the periods beginning on
or after 1 April 2011.

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 Introduction continued:

1) Accounting – Book keeping or recording of

transactions.

2) For Effects of Changes – Non regularity or

Fluctuations.

3) In Foreign Exchange Rates

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 Implications of AS 11:

• This statement is applicable to all enterprises.

• The standard contains provisions with respect to:

a) Foreign currency transactions.

b) Translation of financial statements of foreign branches.

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 Main Provisions:

a) A transaction in a foreign currency should be recorded normally at the

agreed rate.

b) Two or more transactions are considered to be interrelated, it is

translated with reference to the amount on the date of transaction.

c) After initial recognition, the exchange difference on the reporting

date of the financial statement should be treated accordingly.
• Monetary items - rate likely to be realized
• Non monetary (fixed assets) - rate on the date of transaction
• Non- monetary items(inventories, investments in equity shares, etc.) -
closing rate

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 Main Provisions continued:

d) Exchange differences from the repayment of liabilities of fixed assets,

then the difference should be adjusted to the book value of the fixed
assets on the reporting date.
 
e) Any exchange difference other than that arising from fixed assets
should be recognized as income or expense in the period in which
they arise.

f) Depreciation should be provided on the unamortised book value of the

depreciable assets after considering the exchange difference.

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 Disclosures:
a) The exchange difference should be included in the profit or
loss during that period.

b) The amount of exchange difference that is adjusted in the

carrying amount of the fixed assets during that accounting
period.

c) The amount of exchange difference in respect of the forward

contracts to be recognized in the profit or loss of one or more
subsequent accounting period.

d) The foreign currency risk management policy.

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 Risk management of NBV

• Nava Bharat Ventures Limited (NBV)

• The objectives of the Company are subject to risks that are

external and internal.

• The focus is on three key elements:

Risk Assessment
Risk Management
Risk Monitoring

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 Risk management of NBV continued:

A) External risk include:

• Economic Environment and Market conditions
• Fluctuations in Foreign Exchange
• Political environment
• Competition

B) Internal Risks:
• Financial reporting risks
• Quality and Project management
• Environmental management
• Human resource management

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 Risk management of NBV continued:

• A major portion of their business is in Yen and in

U.S. dollars.

• Manage risk on account of foreign currency

fluctuations through hedging.

• Forward foreign exchange contracts to mitigate the

risk of changes in foreign exchange rates.

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 Numerical:
Alpha Ltd furnishes the following information:

Particulars Exchange rate (Rs)

Goods purchased on 24.3.2009 of US $

1,00,000 46.60

Exchange rate on 31.3.2009

47.00

Date of actual payment on 5.6.2009 47.50

Calculate the loss/ gain for the financial year 2008-09 and
2009-10 as per AS-11.

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 Solution:

• As per AS-11, all foreign currency transactions should

be recorded by applying the exchange rate at the date of
transaction.

Particulars Calculations Amount

Goods purchased on 24.3.2009 and $ 1.00,000 * 46.60 = 46,60,000

corresponding creditor would be
recorded at 46.60.

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 Solution continued:
• As per AS-11, at the Balance Sheet date all monetary items
should be reported using the closing rate.

Particulars Calculations Amount(Rs)

Creditors of US $1,00.000 $ 1.00,000 * 47 = 47,00,000

outstanding on 31.3.2009 will be
reported at Rs. 47.00

Exchange loss should be debited 47,00,000 - 46,60,000 40,000

to Profit and Loss Account for
the year 2008-09.

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 Solution continued:

• As per AS-11, exchange difference on settlement on monetary

items should be transferred to Profit and Loss account as gain
or loss thereof:

Particulars Calculations Amount (Rs)

Exchange difference should be debited to $ 1.00,000 * 47.50 = 50,000

Profit and Loss Account for the year
47,50,000 – 47,00,000
2009-10.

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 Thank You

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