1. 1 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

2. 2 Contents Sr. No.Particulars 1Glossary 2Need & Objective 3Coverage At A Glance 4Accounting of FC Transactions 5Accounting of Foreign Operations 6Accounting of Forward Exchange Contracts 7Disclosure 8AS 11 & Schedule VI 9AS 11 & International AS 21

3. 3 Glossary ASAccounting Standard REReporting Enterprise (GSL) FSsFinancial Statements (BS, P & L etc) Ex.Exchange Diff.Difference FCForeign Currency (US $ etc) US $United States Dollar A/cAccount RCReporting Currency (Rs.) Rs.Rupees

4. 4 Need & Objective Galaxy Export Sales Domestic Sales Foreign Purchases Indian Purchases Rs. Borrowings US $ Borrowings Expenses in FC Expenses in Rs. Galaxy’s financial reports are in Rs. All financial transactions are to be recorded in Rs. How to treat Ex. Diff. in A/csWhich Ex. Rate ?

5. 5 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

6. 6 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 Back to Glance

7. 7 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 <<<< Back

8. 8 Purchase Agreement @ TDR / AR Reported in BS @ Closing Rate Settled @ TDR / AR Settled after the BS Date Recognition of Ex. Diff. - FCT Back to Glance The same should be recognized in P & L A/c for the period Ex. Diff. arises EITHER on Settlement OR on Reporting in BS

9. 9 Eg. : Ex. Diff. on FC Transaction Accounting Year2004-052005-06 Accounting of asset purchase as per revised AS 11 (2003) Current Asset purchase worth US $ 1/= Purchase 01.12.04 Payment 31.01.05 BS Dt 31.03.05 Payment 30.04.05 BS Dt 31.03.06 Spot Rates (Rs./$)50/-52/-47/-46/-52/- Current Asset 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 Back to Glance

10. 10 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 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 View Indicators of NFO >>>>

11. 11 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. Back to Glance

12. 12 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 Rate Closing 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) Eg. >> Eg. >>

13. 13 Eg. : Conversion of NFO FS ParticularsRateDr $Dr. Rs.Cr $Cr. Rs. Acquisition of Galaxy Chemicals Inc., USA on 31.03.04 (Spot = 40/-) Share Capital40/-1004000 Reserves40/-502000 Assets / Liabilities40/-2008000502000 On next BS Dt 31.03.05 (Spot = Rs. 50/-, AR = Rs. 45/-) Share CapitalOriginal1004000 Opening ReservesOriginal502000 Current ProfitAR = 45/-20900 Assets / LiabilitiesCR = 50/-4002000023011500 FOREX Reserve (Balancing Figure)1600 Total4002000040020000 Back to Glance

14. 14 Disposal of NFO Back to Glance ParticularsNature of Disposal 100% DisposalPart Disposal Gain or Loss on Disposal Recognize in P & L A/c Recognize in P & L A/c Accumulated amt in FOREX Reserve A/c 100% transfer to P & L A/c Part amount transfer to P & L A/c on pro-rata basis When to trf FOREX Reserve to P & L Period in which gain or loss on disposal is recognized in P & L A/c

15. 15 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. Eg.>>

16. 16 Eg. : Reclassification IFO to NFO BS Dt 31.03.05 (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 << Back

17. 17 Eg. : Reclassification NFO to IFO BS Dt 31.03.05 (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 Back to Glance

18. 18 Forward Exchange Contract (FEC) FEC is an agreement to exchange different currencies at Forward Rate #ParticularsHedging FECSpeculative FEC 1PurposeManage risksGain by calculated risks 2Eg.Say Minimizing Ex. Rate fluctuation risk associated with Accounts Receivable of USD 100K Earn profit by trading in FOREX 3AccountingPurpose different hence different A/cting treatment Premium/ Discount Deferred over tenor of the contract Ignored Ex. Diff. Recognize on the basis of ex. rate movements Value of FEC is marked to M.V. on BS Dt 4PracticalView Eg. >>>> Profit or Loss on Cancellation/Renewal is recognized in P & L A/c

19. 19 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 Year Premium (5/-) Amortization Ex. Gain Rs. Ex. Loss Calculation Ex. Loss Rs. Net Gain/ (Loss) 2004-055 * (4/5)4/-43 – 45(2/-)2/- 2005-065 * (1/5)1/-45 - 47.50(2.50)(1.50) Total5/-4.500.50 << Back

20. 20 Eg. : Speculative FEC FEC Date1 st March, 2005 Forward Purchase ofUSD 1/- Maturity Date30 th June, 2005 Forward RateRs. 50/- per $ Forward Rate available on BS date (31.03.05) for remaining maturity of the contract Rs. 48/- per $ Ex. Loss in 2004-05Rs. 2/- Back to Glance

21. 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 Back to Glance

22. 22 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 Holder’s 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 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 Back to Glance

23. 23 Transition on 1 st April, 2004  Revised AS 11 is applicable from 1 st April, 2004.  Old AS 11 used the term “Foreign Branch” instead of “Foreign Operation” Also it did not classified FO’s as IFO & NFO  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

24. 24 As per the announcement of ICAI #ParticularsSchedule VIRevised AS 11 (2003) 1Ex. Diff. on a/c of FC Liability linked to Fixed Asset Capitalize i.e. adjust in carrying cost of Fixed Asset Recognize in P & L A/c 2Relation to old AS 11 (1994) In line with Schedule VI provision Capitalization provision discontinued on revision in 2003 3ImplicationICAI will be approaching Govt. for revision of Schedule VI Until the revision of Schedule VI capitalization treatment will continue & it will still be considered to be complying with New AS 11 (2003) AS 11 (2003) & Schedule VI

25. 25 AS 11 (2003) & IAS ParticularsIndian AS 11International AS 21 ScopeCovers accounting of FEC’s Major aspects of FEC’s are covered under IAS 39 (Financial Instruments : Recognition & Measurement) Alternative A/cing in case of Severe Currency Devaluation Preferring elimination of alternatives, IAS’s 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 Terminology w.r.t. FO FO’s are classified as Integral & Non Integral FO’s are classified as “FO’s that are integral to the operations of RE” & “Foreign Entity”

26. 26 Thank You