Accounting Standard 11 Effects of Changes in Foreign Exchange Rates

Transcription

1 Accounting Standard 11 Effects of Changes in Foreign Exchange Rates Ashish Makhija LL.B., AICWA, FCA 17/05/2008 1

2 Applicability Revised in 2003 Applicable in respect of accounting periods commencing on or after /05/2008 2

3 Objective Which exchange rate to use? How to recognise effect of changes in exchange rates? 17/05/2008 3

4 Scope To be applied in Accounting for transactions in foreign currencies Translating the financial statements of foreign operations 17/05/2008 4

5 Foreign Currency Transaction Initial Recognition Initial recognition to be done by applying exchange rate prevailing at the date of transaction 17/05/2008 5

6 Reporting at Subsequent Balance Sheet Dates Item Monetary items Non-monetary items carried at historical cost Non-monetary items carried at fair value Contingent Liability Exchange Rate Closing Rate Rate at the date of the transaction Rate existing at the time of determination of such values Closing Rate 17/05/2008 6

7 Recognition of Exchange Differences To be recognised as income or expense in the period in which they arise 17/05/2008 7

8 Example Purchases of US $ made on US $ rate on is Rs. 48/-. Transaction to be recorded at this rate. Payment made on at Rs. 47/- per US $ Difference of Rs /- to be recognised as income Payment not made till but US $ rate is Rs. 49/- Difference of Rs /- to be recognised as expense 17/05/2008 8

9 Financial Statements of Foreign Operations Integral foreign operations Non-integral foreign operations 17/05/2008 9

10 Integral Foreign Operations Carries on business as if it were an extension of the reporting enterprise s operations Foreign operation only sells goods of reporting enterprise only and remits the proceeds of reporting enterprise Change in the exchange rate has an immediate effect on the reporting enterprise s cash flow from operations 17/05/

11 Non-integral Foreign Operations Accumulates Cash & other monetary items, incurs expenses, generates income and borrows in local currency Change in exchange rate has little or no direct effect on the present and future cash flows from operations 17/05/

12 Non-integral Foreign Operations Indicators - Degree of Autonomy - % of transactions with reporting enterprise - Financing of activities from own operations - Sales are in local currency - Expenses are settled in local currency - Cash flows of reporting enterprise are not affected - Sale prices are determined by competition - Active local sales market for F.O. products 17/05/

13 Integral Foreign Operations Item Monetary items Non-monetary items carried at historical cost Non-monetary items carried at fair value Contingent Liability Exchange Rate Closing Rate Rate at the date of the transaction Rate existing at the time of determination of such values Closing Rate 17/05/

14 Non-integral Foreign Operations Item Assets & Liabilities- Monetary & Non-monetary Income & Expenses Exchange Rate Closing Rate At the date of transaction Exchange difference to be accumulated in a foreign currency translation reserve till net investment is disposed off 17/05/

15 Disposal of Non-integral Foreign Operation Cumulative exchange difference to be recognised as income or as expenses in which the gain or loss on disposal is recognised 17/05/

16 Forward Exchange Contracts Item Premium or Discount arising at inception of foreign exchange contract Exchange Difference on such a contract Treatment To be amortised as expense or income over the life of contract To be recognised as income or loss in the year in which the exchange rate changes 17/05/

17 Forward Exchange Contracts Item Profit or loss arising on cancellation or renewal of forward exchange contract Treatment To be recognised as income or as expense in the period 17/05/

18 Disclosure Amount of exchange differences in the net profit or loss for the period Net exchange differences accumulated in foreign exchange translation reserve as component of shareholders funds 17/05/

19 Disclosure Reconciliation of amount of exchange difference at the beginning and at end Reasons for using a different currency other than reporting currency 17/05/

20 Disclosure In case of change in classification of significant foreign operation Nature of change Reasons for change Impact of change on shareholders funds Impact on net profit or loss for each prior period 17/05/

21 Thank You 17/05/