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Presentation on theme: "EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES RKEANS."— Presentation transcript:



3 Accounting Standard - 11  Originally Issued in the year 1989 & revised in 1994.  Again revised in 2003.  Revised Standard - Applicable in respect of Accounting periods commencing after 01-04-2004.  To be succeeded by Ind AS – 21. RKEANS

4 Coverage At A Glance Foreign Currency TransactionsForeign Operations Foreign Currency Activities a)ConversionConversion b)Recognition of Ex. Diff.Recognition of Ex. Diff. c)Eg. : FC TransactionEg. : FC Transaction a)Classification of FOClassification of FO b)Conversion of FSConversion of FS c)Disposal of NFODisposal of NFO d)Change in classificationChange in classification Direct business dealings with Customers, Suppliers etc. from local point Business dealings through foreign based branch, JV, Subsidiary, Associate etc. Forward Exchange Contracts Tax Effect of Ex. Diff. DisclosureTransitional Provisions Accounting RKEANS

5 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 ItemsInitial A/cingConversion at BS Dt Monetary ItemsTDR / ARClosing Rate (CR)* Non Monetary Carried @ Historical CostTDR / AR Fair ValueTDR / ARValuation Date Rate Contingent Liabilities-----Closing Rate * CR = Rate on BS Date RKEANS

6 Eg. : Average Rate (AR) Policy  Accounting Policy for Initial Recognition : -  Purchases & Sales in FC are recorded at rates prevailing on the Date of Transfer of Significant Risks & Rewards.  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 RKEANS

7 Transaction @ TDR / AR Reported in BS @ Closing Rate Settled @ TDR / AR Settled after the BS Date Recognition of Ex. Diff. - FCT The same should be recognized in P & L A/c for the period Ex. Diff. arises EITHER on Settlement OR on Reporting in BS RKEANS

8 Eg. : Ex. Diff. on FC Transaction Accounting Year2014-152015-16 Accounting of purchase as per revised AS 11 (2003) Purchase worth US $ 1/- Purchase 01.12.14 Payment 31.01.15 BS Dt 31.03.15 Payment 30.04.15 BS Dt 31.03.16 Spot Rates ( `/$)50/-52/-47/-46/-52/- Purchase A/c DR50.00 Vendor A/c DR50.003.0047.00 Ex. Loss A/c DR2.005.00 Rs. Current A/cCR52.0046.00 Vendor A/cCR50.005.00 Ex. Gain A/cCR3.001.00 RKEANS

9 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. Reporting Entity (RE) ParticularsIntegral FO (IFO)Non Integral FO (NFO) DefinitionFO whose activities are an integral part of the activities of RE Negatively defined – FO which is not an IFO Operates asExtended arm of RESeparate Entity ExampleSelling Agent may just sell goods received from RE and remit proceeds back to RE Independent Branch Generates Income, Incurs Expenses, Accumulates Monetary Items, Borrows locally etc. etc. Effect of Rate Fluctuation Has immediate effect on RE’s Cash Flows from Operations Do not have direct impact on RE’s Cash Flows from Operations RKEANS

10 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 it’s 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 can’t be classified clearly then judgment is necessary for determination. RKEANS

11 Conversion of FSs of FO & Recognition of Ex. Diff. thereof For Conversion, IFO is treated as FC Transaction ParticularsIntegral FO = FC Transaction Non Integral FO P & L ItemsTDR / AR Monetary ItemsClosing Rate Non Monetary carried @ Historical Cost TDR / ARClosing Rate Non Monetary carried @ Fair Value Valuation Date RateClosing Rate Recognition of Ex. Diff. Recognized in P & L A/c as & when arise Accumulated in FOREX Reserve A/c (Accumulation will continue until disposal of NFO) RKEANS

12 Eg. : Conversion of NFO FS ParticularsRateDr $Dr. ` Cr $Cr. ` Acquisition of Chemicals Inc., USA on 31.03.14 (Spot = 40/-) Share Capital40/-1004000 Reserves40/-502000 Assets / Liabilities40/-2008000502000 Total20080002008000 On next BS Dt 31.03.15 (Spot = ` 50/-, AR = ` 45/-) Share CapitalOriginal1004000 Opening ReservesOriginal502000 Current ProfitAR = 45/-20900 Assets / LiabilitiesCR = 50/-4002000023011500 Foreign Currency Translation Reserve (Balancing Figure)1600 Total4002000040020000 RKEANS

13 Disposal of NFO ParticularsNature of Disposal 100% DisposalPart Disposal Gain or Loss on Disposal Recognize in P & L A/c Recognize in P & L A/c Accumulated amount in FCT Reserve A/c 100% transfer to P & L A/c Part amount transfer to P & L A/c on pro-rata basis When to transfer FCT Reserve to P & L Period in which gain or loss on disposal is recognized in P & L A/c RKEANS

14 Change in Classification of FO ParticularsConversion Rate for IFO = FCTNFO P & L ItemsTDR / AR Monetary ItemsClosing Rate Non Monetary carried @ Historical Cost (FC) TDR / ARClosing Rate Non Monetary carried @ Fair Value (FC) Valuation Date RateClosing Rate IFO reclassified as NFO Ex. Diff. will arise on conversion of non-monetary items ;& The same shall be accumulated in FOREX Reserve NFO reclassified as IFO  FOREX Reserve is continued until actual disposal of FO  Translated amounts for Non Monetary Items are treated as historical cost of those items, from that date. RKEANS

15 Eg. : Reclassification IFO to NFO BS Dt 31.03.15 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-) ParticularsUS $ IFONFO RateRs.RateRs. Share Capital10040/-400040/-4000 Op. Reserves5040/-200040/-2000 Current Profit2045/-900Original2000 Ex. Gain Loss1100 FOREX Reserve500 Monetary Liabilities23050/-1150050/-11500 Total4001950020000 Monetary Assets30050/-1500050/-15000 Non Monetary @ Historical Cost 10045/-450050/-5000 Total4001950020000 RKEANS

16 Eg. : Reclassification NFO to IFO BS Dt 31.03.15 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-) Particulars$RateNFO Rs.IFO Rs.Remarks Share Capital10040/-4000 Op. Reserves5040/-2000 Current Profit2045/-900 FOREX Reserve1600 Continued until disposal of FO Liabilities23050/-11500 Total40020000 Monetary Assets30050/-15000 Non Monetary @ Historical Cost 10050/-5000 Treated as Historical Cost from date of reclassification Total40020000 RKEANS

17 Forward Exchange Contracts  AS 11 (revised 2003) orginally prescribed Accounting treatments for Forward Exchange Contracts entered for Both Hedging & Speculative purposes.  In 2004 Hedging of Firm Commitments & Highly Probable forecasts were eliminated. Between 2006 to 2008 several clarifications were given for accounting & disclosure of Hedges & Derivatives which were postponed till 2008.  In 2011 when AS 30 was supposed to be effective ICAI brought Limited revision to AS 11 to eliminate all Hedging & Derivative Transactions & relevant portions.  AS 30,31& 32 not notified till date. Ind AS 32, 39 & 107 yet to be applicable. RKEANS

18 Forward Exchange Contract (FEC) FEC is an agreement to exchange different currencies at Forward Rate in respect of Existing Assets & Liabilities. #Particulars FEC 1PurposeManage risks 2Eg.Say Minimizing Ex. Rate fluctuation risk associated with Accounts Receivable of USD 100K 3AccountingPurpose different hence different A/cting treatment Premium/ Discount Deferred over tenor of the contract Ex. Diff. Recognize on the basis of ex. rate movements 4PracticalView Eg. >>>> Profit or Loss on Cancellation/Renewal is recognized in P & L A/c RKEANS

19 Eg. : Accounting FEC Accounts Payable US $ Sale Dt 01.12.14FEC Dt 01.12.14 BS Dt 31.03.15 Settlement Dt 30.04.15 1/=Spot = 43/-FR = 48/-Spot = 45/-Spot = 47.50 Accounting as per Revised AS 11 (2003) Accounting Year Premium (5/-) Amortization Exp. Rs. Ex. Loss Calculation Ex. Diff Rs. Net (Gain) / Loss 2014-155 * (4/5)4/-43 – 45(2/-)2/- 2015-165 * (1/5)1/-45 - 47.50(2.50)(1.50) Total5/-4.500.50 RKEANS

20 Eg. : Speculative Other FEC FEC Date1 st March, 2015 Forward Purchase ofUSD 1/- Maturity Date30 th June, 2015 Forward Rate ` 50/- per $ Forward Rate available on BS date (31.03.15) for remaining maturity of the contract ` 48/- per $ Ex. Loss in 2014-15 ` 2/- RKEANS

21 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 RKEANS

22 Disclosure An Enterprise shall specifically disclose – 1.Ex. Diff. recognized in P & L A/c for the period 2.FCT Reserve as part of Share Holder’s Funds 3.Reconciliation of Opening & Closing FCT 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 Holder’s 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 Enterprise’s FC Risk Management Policy RKEANS

23 Transition on 1 st April, 2004  Revised AS 11 is applicable from 1 st April, 2004.  On 1 st 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 RKEANS

24 AS 11 & Rev Schedule VI Background Schedule VI of the Companies Act provided for capitalisation of increase or decrease of a Liability (loan) due to fluctuation of exchange rates. GSR 129 Dt. 03/01/1968 As per AS – 11, any gains/losses arising in such valuation are required to be recognised in the statement of profit and loss. In 2003, ICAI had made an announcement stating that Auditors need not Qualify in case adoption of Schedule VI. MCA issued the Companies (Accounting Standards) Rules, 2006, by way of Notification in the Official Gazette dated 7th December, 2006. In Rules it was clarified by MCA that accounting treatment of exchange differences will be made as per AS 11 and further categorically mentioned that provisions of AS-11 is required to be followed irrespective of the relevant provision of Schedule-VI to the Companies Act, 1956. RKEANS

25 AS 11 & Rev Schedule VI On July 18, 2007, ICAI withdrew the Announcement on ‘Treatment of exchange differences under Accounting Standard (AS) 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates vis-à-vis Schedule VI to the Companies Act, 1956’. MCA introduced Clause 46 to AS -11 on 31-03-09, giving an option to accumulate FC gains/losses on LT FC Monetary Items to FC Monetary Item Translation Diff A/c or adjust to Asset value and amortise upto 31.03.2011 and also permitted retrospective application from 7-12-06. RKEANS

26 AS 11 & Rev Schedule VI MCA introduced Clause 46A to AS -11 on 29-12-11, extending the period of amortisation upto the Balance life of the Asset / Liability. There is no specific mention about the treatments in Revised Schedlue VI. Guidance Note issued by ICAI on Rev-Sh VI only speaks about manner of disclosure of such items under “Other Adjustments” in the Reconciliation of Gross & Net Carrying amounts of Assets. ICAI Announcement on 26/03/2013 gives the disclosure treatment for FC Monetary Item Translation Diff A/c. RKEANS

27 Ind AS 21 Vs AS 11  Functional Currency Concept.  Does not deal with Forward Exchange Contracts covered under Ind As 39.  FEV on Long Term Monetary Items accumulated to Equity & transferred to P&L over the term.  Clarity on ERV arising on Inventory valuation & Impairment of Assets. RKEANS

28 Ind AS 21 Vs IAS 21  FEV on Long Term Monetary Items accumulated to Equity & transferred to P&L over the term – not in IFRS.  Change in Functional currency required disclosure of FACT & Reason – not in Ind AS.  “Statement of Financial Position” used in IFRS instead of “Balance Sheet”. RKEANS

29 PRACTICAL ISSUES  Accounting for Advances.  Previous years Figures in Consolidation.  Effect on Depreciation.  Forex Accounts  Postponement of recognition due to Uncertainty of Realisation. RKEANS

30 Eg. : Ex. Diff. on FC Transaction Accounting Year2014-15 Accounting of Sales as per revised AS 11 (2003) Sales worth US $ 2/- Payment 1 $ 01.12.14 Sale 2$ 31.01.15 Payment 1$ 02.02.15 Sale 2$ 31.01.15 Payment 1$ 02.02.15 Spot Rates ( `/$)50/-52/- Sales A/c Cr104/-102/- Vendor A/c DR104/-102/- Ex. Loss A/c DR2/- Rs. Current A/c Dr50/-52/- Vendor A/c CR50/-54/-52/- Ex. Gain A/c CR RKEANS

31 Eg. : Conversion of NFO FS ParticularsRateDr $Dr. ` Acquisition of Chemicals Inc., USA on 31.03.14 (Spot = 40/-, AR = 42/-) Fixed Assets40/-1004000 Depreciation42/-502100 Closing Balance40/-501900 40 X 50 = 2000 ParticularsRateDr $Dr. ` On next BS Dt 31.03.15 (Spot = ` 50/-, AR = ` 45/-) Fixed Assets50/-5025001900 Depreciation45/-502250 Closing Balance0250-350 RKEANS

32 Eg. : Conversion of Forex Bal ParticularsRate$ ` Sale Realisation40/-1004000 Payment for Purchases42/-- 50- 2100 Closing Balance44/-501900 44 X 50 = 2200 RKEANS



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