Changes in Foreign Exchange Rates 157
Accounting Standard (AS) 11
(revised 2003)
The Effects of Changes in
Foreign Exchange Rates
Scope
1. This Standard should be applied:
(a) in accounting for transactions in foreign currencies; and
(b) in translating the financial statements of foreign operations.
2. This Standard also deals with accounting for foreign currency
transactions in the nature of forward exchange contracts.2
3. This Standard does not specify the currency in which an enterprise
presents its financial statements. However, an enterprise normally uses the
currency of the country in which it is domiciled. If it uses a different
currency, this Standard requires disclosure of the reason for using that
currency. This Standard also requires disclosure of the reason for any
change in the reporting currency.
4. This Standard does not deal with the restatement of an enterprise’s
financial statements from its reporting currency into another currency for
the convenience of users accustomed to that currency or for similar
purposes.
5. This Standard does not deal with the presentation in a cash flow
statement of cash flows arising from transactions in a foreign currency and
the translation of cash flows of a foreign operation (see AS 3, Cash Flow
Statements).
6. This Standard does not deal with exchange differences arising from
foreign currency borrowings to the extent that they are regarded as
an adjustment to interest costs (see paragraph 4(e) of AS 16, Borrowing
Costs).
Definitions
7. The following terms are used in this Standard with the meanings
specified:
7.1 Average rate is the mean of the exchange rates in force during a
period.
7.2 Closing rate is the exchange rate at the balance sheet date.
7.3 Exchange difference is the difference resulting from reporting the
same number of units of a foreign currency in the reporting currency at
different exchange rates.
7.4 Exchange rate is the ratio for exchange of two currencies.
7.5 Fair value is the amount for which an asset could be exchanged,
or a liability settled, between knowledgeable, willing parties in an arm’s
length transaction.
7.6 Foreign currency is a currency other than the reporting currency
of an enterprise.
7.7 Foreign operation is a subsidiary3
, associate4
, joint venture5 or
branch of the reporting enterprise, the activities of which are based or
conducted in a country other than the country of the reporting enterprise.
7.8 Forward exchange contract means an agreement to exchange
different currencies at a forward rate.
7.9 Forward rate is the specified exchange rate for exchange of two
currencies at a specified future date.
7.10 Integral foreign operation is a foreign operation, the activities of
which are an integral part of those of the reporting enterprise.
7.11 Monetary items are money held and assets and liabilities to be
received or paid in fixed or determinable amounts of money.
7.12 Net investment in a non-integral foreign operation is the reporting
enterprise’s share in the net assets of that operation.
7.13 Non-integral foreign operation is a foreign operation that is not
an integral foreign operation.
7.14 Non-monetary items are assets and liabilities other than monetary
items.
7.15 Reporting currency is the currency used in presenting the financial
statements.
Foreign Currency Transactions
Initial Recognition
8. A foreign currency transaction is a transaction which is denominated
in or requires settlement in a foreign currency, including transactions arising
when an enterprise either:
(a) buys or sells goods or services whose price is denominated in a
foreign currency;
(b) borrows or lends funds when the amounts payable or receivable
are denominated in a foreign currency;
(c) becomes a party to an unperformed forward exchange contract;
or
(d) otherwise acquires or disposes of assets, or incurs or settles
liabilities, denominated in a foreign currency.
9. A foreign currency transaction should be recorded, on initial
recognition in the reporting currency, by applying to the foreign currency
amount the exchange rate between the reporting currency and the foreign
currency at the date of the transaction.
10. For practical reasons, a rate that approximates the actual rate at the
date of the transaction is often used, for example, an average rate for a
week or a month might be used for all transactions in each foreign currency
occurring during that period. However, if exchange rates fluctuate
significantly, the use of the average rate for a period is unreliable.
Reporting at Subsequent Balance Sheet Dates
11. At each balance sheet date:
(a) foreign currency monetary items should be reported using
the closing rate. However, in certain circumstances, the closing
rate may not reflect with reasonable accuracy the amount in
reporting currency that is likely to be realised from, or required
to disburse, a foreign currency monetary item at the balance
sheet date, e.g., where there are restrictions on remittances or
where the closing rate is unrealistic and it is not possible to
effect an exchange of currencies at that rate at the balance
sheet date. In such circumstances, the relevant monetary item
should be reported in the reporting currency at the amount
which is likely to be realised from, or required to disburse,
such item at the balance sheet date;
(b) non-monetary items which are carried in terms of historical
cost denominated in a foreign currency should be reported
using the exchange rate at the date of the transaction; and
(c) non-monetary items which are carried at fair value or other
similar valuation denominated in a foreign currency should
be reported using the exchange rates that existed when the
values were determined.
12. Cash, receivables, and payables are examples of monetary items.
Fixed assets, inventories, and investments in equity shares are examples
of non-monetary items. The carrying amount of an item is determined in
accordance with the relevant Accounting Standards. For example, certain
assets may be measured at fair value or other similar valuation (e.g., net
realisable value) or at historical cost. Whether the carrying amount is
determined based on fair value or other similar valuation or at historical
cost, the amounts so determined for foreign currency items are then reported
in the reporting currency in accordance with this Standard. The contingent
liability denominated in foreign currency at the balance sheet date is
disclosed by using the closing rate.
Recognition of Exchange Differences
13. Exchange differences arising on the settlement of monetary items
or on reporting an enterprise’s monetary items at rates different from
those at which they were initially recorded during the period, or reported
in previous financial statements, should be recognised as income or as
expenses in the period in which they arise, with the exception of exchange
differences dealt with in accordance with paragraph 15.
14. An exchange difference results when there is a change in the exchange
rate between the transaction date and the date of settlement of any monetary
items arising from a foreign currency transaction. When the transaction is
settled within the same accounting period as that in which it occurred, all
the exchange difference is recognised in that period. However, when the
transaction is settled in a subsequent accounting period, the exchange
difference recognised in each intervening period up to the period of
settlement is determined by the change in exchange rates during that period.
Net Investment in a Non-integral Foreign Operation
15. Exchange differences arising on a monetary item that, in substance,
forms part of an enterprise’s net investment in a non-integral foreign
operation should be accumulated in a foreign currency translation
reserve in the enterprise’s financial statements until the disposal of the
net investment, at which time they should be recognised as income or as
expenses in accordance with paragraph 31.
16. An enterprise may have a monetary item that is receivable from, or
payable to, a non-integral foreign operation. An item for which settlement
is neither planned nor likely to occur in the foreseeable future is, in
substance, an extension to, or deduction from, the enterprise’s net
investment in that non-integral foreign operation. Such monetary items
may include long-term receivables or loans but do not include trade
receivables or trade payables.
Financial Statements of Foreign Operations
Classification of Foreign Operations
17. The method used to translate the financial statements of a foreign
operation depends on the way in which it is financed and operates in
Changes in Foreign Exchange Rates 165
relation to the reporting enterprise. For this purpose, foreign operations
are classified as either “integral foreign operations” or “non-integral foreign
operations”.
18. A foreign operation that is integral to the operations of the reporting
enterprise carries on its business as if it were an extension of the reporting
enterprise’s operations. For example, such a foreign operation might only
sell goods imported from the reporting enterprise and remit the proceeds
to the reporting enterprise. In such cases, a change in the exchange rate
between the reporting currency and the currency in the country of foreign
operation has an almost immediate effect on the reporting enterprise’s
cash flow from operations. Therefore, the change in the exchange rate
affects the individual monetary items held by the foreign operation rather
than the reporting enterprise’s net investment in that operation.
19. In contrast, a non-integral foreign operation accumulates cash and
other monetary items, incurs expenses, generates income and perhaps
arranges borrowings, all substantially in its local currency. It may also
enter into transactions in foreign currencies, including transactions in the
reporting currency. When there is a change in the exchange rate between
the reporting currency and the local currency, there is little or no direct
effect on the present and future cash flows from operations of either the
non-integral foreign operation or the reporting enterprise. The change in
the exchange rate affects the reporting enterprise’s net investment in the
non-integral foreign operation rather than the individual monetary and
non-monetary items held by the non-integral foreign operation.
20. The following are indications that a foreign operation is a nonintegral foreign operation rather than an integral foreign operation:
(a) while the reporting enterprise may control the foreign operation,
the activities of the foreign operation are carried out with a
significant degree of autonomy from those of the reporting
enterprise;
(b) transactions with the reporting enterprise are not a high
proportion of the foreign operation’s activities;
(c) the activities of the foreign operation are financed mainly from
its own operations or local borrowings rather than from the
reporting enterprise;
(d) costs of labour, material and other components of the foreign
operation’s products or services are primarily paid or settled in
the local currency rather than in the reporting currency;
(e) the foreign operation’s sales are mainly in currencies other
than the reporting currency;
(f) cash flows of the reporting enterprise are insulated from the
day-to-day activities of the foreign operation rather than being
directly affected by the activities of the foreign operation;
(g) sales prices for the foreign operation’s products are not primarily
responsive on a short-term basis to changes in exchange rates
but are determined more by local competition or local
government regulation; and
(h) there is an active local sales market for the foreign operation’s
products, although there also might be significant amounts of
exports.
The appropriate classification for each operation can, in principle, be
established from factual information related to the indicators listed above.
In some cases, the classification of a foreign operation as either a nonintegral foreign operation or an integral foreign operation of the reporting
enterprise may not be clear, and judgement is necessary to determine the
appropriate classification.
Integral Foreign Operations
21. The financial statements of an integral foreign operation should
be translated using the principles and procedures in paragraphs 8 to 16
as if the transactions of the foreign operation had been those of the
reporting enterprise itself.
22. The individual items in the financial statements of the foreign
operation are translated as if all its transactions had been entered into by
the reporting enterprise itself. The cost and depreciation of tangible fixed
assets is translated using the exchange rate at the date of purchase of the
asset or, if the asset is carried at fair value or other similar valuation,
using the rate that existed on the date of the valuation. The cost of
inventories is translated at the exchange rates that existed when those costs were incurred. The recoverable amount or realisable value of an
asset is translated using the exchange rate that existed when the recoverable
amount or net realisable value was determined. For example, when the net
realisable value of an item of inventory is determined in a foreign currency,
that value is translated using the exchange rate at the date as at which the
net realisable value is determined. The rate used is therefore usually the
closing rate. An adjustment may be required to reduce the carrying amount
of an asset in the financial statements of the reporting enterprise to its
recoverable amount or net realisable value even when no such adjustment
is necessary in the financial statements of the foreign operation.
Alternatively, an adjustment in the financial statements of the foreign
operation may need to be reversed in the financial statements of the
reporting enterprise.
23. For practical reasons, a rate that approximates the actual rate at the
date of the transaction is often used, for example, an average rate for a
week or a month might be used for all transactions in each foreign currency
occurring during that period. However, if exchange rates fluctuate
significantly, the use of the average rate for a period is unreliable.
Non-integral Foreign Operations
24. In translating the financial statements of a non-integral foreign
operation for incorporation in its financial statements, the reporting
enterprise should use the following procedures:
(a) the assets and liabilities, both monetary and non-monetary,
of the non-integral foreign operation should be translated at
the closing rate;
(b) income and expense items of the non-integral foreign
operation should be translated at exchange rates at the dates
of the transactions; and
(c) all resulting exchange differences should be accumulated in
a foreign currency translation reserve until the disposal of
the net investment.
25. For practical reasons, a rate that approximates the actual exchange
rates, for example an average rate for the period, is often used to translate
income and expense items of a foreign operation.
26. The translation of the financial statements of a non-integral foreign
operation results in the recognition of exchange differences arising from:
(a) translating income and expense items at the exchange rates at
the dates of transactions and assets and liabilities at the closing
rate;
(b) translating the opening net investment in the non-integral foreign
operation at an exchange rate different from that at which it
was previously reported; and
(c) other changes to equity in the non-integral foreign operation.
These exchange differences are not recognised as income or expenses for
the period because the changes in the exchange rates have little or no
direct effect on the present and future cash flows from operations of either
the non-integral foreign operation or the reporting enterprise. When a nonintegral foreign operation is consolidated but is not wholly owned,
accumulated exchange differences arising from translation and attributable
to minority interests are allocated to, and reported as part of, the minority
interest in the consolidated balance sheet.
27. Any goodwill or capital reserve arising on the acquisition of a nonintegral foreign operation is translated at the closing rate in accordance
with paragraph 24.
28. A contingent liability disclosed in the financial statements of a nonintegral foreign operation is translated at the closing rate for its disclosure
in the financial statements of the reporting enterprise.
29. The incorporation of the financial statements of a non-integral foreign
operation in those of the reporting enterprise follows normal consolidation
procedures, such as the elimination of intra-group balances and intragroup transactions of a subsidiary (see AS 21, Consolidated Financial
Statements, and AS 27, Financial Reporting of Interests in Joint Ventures).
However, an exchange difference arising on an intra-group monetary item,
whether short-term or long-term, cannot be eliminated against a
corresponding amount arising on other intra-group balances because the
monetary item represents a commitment to convert one currency into
another and exposes the reporting enterprise to a gain or loss through
currency fluctuations. Accordingly, in the consolidated financial statements
of the reporting enterprise, such an exchange difference continues to be
recognised as income or an expense or, if it arises from the circumstances
described in paragraph 15, it is accumulated in a foreign currency
translation reserve until the disposal of the net investment.
30. When the financial statements of a non-integral foreign operation
are drawn up to a different reporting date from that of the reporting
enterprise, the non-integral foreign operation often prepares, for purposes
of incorporation in the financial statements of the reporting enterprise,
statements as at the same date as the reporting enterprise. When it is
impracticable to do this, AS 21, Consolidated Financial Statements, allows
the use of financial statements drawn up to a different reporting date
provided that the difference is no greater than six months and adjustments
are made for the effects of any significant transactions or other events that
occur between the different reporting dates. In such a case, the assets and
liabilities of the non-integral foreign operation are translated at the exchange
rate at the balance sheet date of the non-integral foreign operation and
adjustments are made when appropriate for significant movements in
exchange rates up to the balance sheet date of the reporting enterprises in
accordance with AS 21. The same approach is used in applying the equity
method to associates and in applying proportionate consolidation to joint
ventures in accordance with AS 23, Accounting for Investments in Associates
in Consolidated Financial Statements and AS 27, Financial Reporting of
Interests in Joint Ventures.
Disposal of a Non-integral Foreign Operation
31. On the disposal of a non-integral foreign operation, the cumulative
amount of the exchange differences which have been deferred and which
relate to that operation should be recognised as income or as expenses
in the same period in which the gain or loss on disposal is recognised.
32. An enterprise may dispose of its interest in a non-integral foreign
operation through sale, liquidation, repayment of share capital, or
abandonment of all, or part of, that operation. The payment of a dividend
forms part of a disposal only when it constitutes a return of the investment.
In the case of a partial disposal, only the proportionate share of the related
accumulated exchange differences is included in the gain or loss. A writedown of the carrying amount of a non-integral foreign operation does not
constitute a partial disposal. Accordingly, no part of the deferred foreign
exchange gain or loss is recognised at the time of a write-down.
Change in the Classification of a Foreign Operation
33. When there is a change in the classification of a foreign operation,
the translation procedures applicable to the revised classification should
be applied from the date of the change in the classification.
34. The consistency principle requires that foreign operation once
classified as integral or non-integral is continued to be so classified.
However, a change in the way in which a foreign operation is financed
and operates in relation to the reporting enterprise may lead to a change in
the classification of that foreign operation. When a foreign operation that
is integral to the operations of the reporting enterprise is reclassified as a
non-integral foreign operation, exchange differences arising on the
translation of non-monetary assets at the date of the reclassification are
accumulated in a foreign currency translation reserve. When a non-integral
foreign operation is reclassified as an integral foreign operation, the
translated amounts for non-monetary items at the date of the change are
treated as the historical cost for those items in the period of change and
subsequent periods. Exchange differences which have been deferred are
not recognised as income or expenses until the disposal of the operation.
All Changes in Foreign Exchange Rates
Tax Effects of Exchange Differences
35. Gains and losses on foreign currency transactions and exchange
differences arising on the translation of the 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
36. An enterprise may enter into a forward exchange contract or
another financial instrument that is in substance a forward exchange
contract, which is not intended for trading or speculation purposes, to
establish the amount of the reporting currency required or available at
the settlement date of a transaction. The premium or discount arising at the inception of such a forward exchange contract should be amortised
as expense or income over the life of the contract. 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.
37. The risks associated with changes in exchange rates may be mitigated
by entering into forward exchange contracts. Any premium or discount
arising at the inception of a forward exchange contract is accounted for
separately from the exchange differences on the forward exchange contract.
The premium or discount that arises on entering into the contract is
measured by the difference between the exchange rate at the date of the
inception of the forward exchange contract and the forward rate specified
in the contract. Exchange difference on a forward exchange contract is the
difference between (a) the foreign currency amount of the contract
translated at the exchange rate at the reporting date, or the settlement date
where the transaction is settled during the reporting period, and (b) the
same foreign currency amount translated at the latter of the date of inception
of the forward exchange contract and the last reporting date.
38. A gain or loss on a forward exchange contract to which paragraph
36 does not apply should be computed by multiplying the foreign currency
amount of the forward exchange contract by the difference between the
forward rate available at the reporting date for the remaining maturity
of the contract and the contracted forward rate (or the forward rate last
used to measure a gain or loss on that contract for an earlier period).
The gain or loss so computed should be recognised in the statement of
profit and loss for the period. The premium or discount on the forward
exchange contract is not recognised separately.
39. In recording a forward exchange contract intended for trading or
speculation purposes, the premium or discount on the contract is ignored
and at each balance sheet date, the value of the contract is marked to its
current market value and the gain or loss on the contract is recognised.
Disclosure
40. An enterprise should disclose:
(a) the amount of exchange differences included in the net profit
or loss for the period; and
(b) net exchange differences accumulated in foreign currency
translation reserve as a separate component of shareholders’
funds, and a reconciliation of the amount of such exchange
differences at the beginning and end of the period.
41. When the reporting currency is different from the currency of the
country in which the enterprise is domiciled, the reason for using a
different currency should be disclosed. The reason for any change in
the reporting currency should also be disclosed.
42. When there is a change in the classification of a significant foreign
operation, an enterprise should disclose:
(a) the nature of the change in classification;
(b) the reason for the change;
(c) the impact of the change in classification on shareholders’
funds; and
(d) the impact on net profit or loss for each prior period presented
had the change in classification occurred at the beginning of
the earliest period presented.
43. The effect on foreign currency monetary items or on the financial
statements of a foreign operation of a change in exchange rates occurring
after the balance sheet date is disclosed in accordance with AS 4,
Contingencies and Events Occurring After the Balance Sheet Date.
44. Disclosure is also encouraged of an enterprise’s foreign currency
risk management policy.
Transitional Provisions
45. On the first time application of this Standard, if a foreign branch
is classified as a non-integral foreign operation in accordance with the
requirements of this Standard, the accounting treatment prescribed in
paragraphs 33 and 34 of the Standard in respect of change in the
classification of a foreign operation should be applied.
Paragraphs 46 and 46A for Companies
46.7 In respect of accounting periods commencing on or after 7th
December, 2006 and ending on or before 31st March, 2011,8
at the option
of the enterprise (such option to be irrevocable and to be excercised
retrospectively for such accounting period, from the date this transitional
provision comes into force or the first date on which the concerned foreign
currency monetary item is acquired, whichever is later, and applied to all
such foreign currency monetary items), exchange differences arising on
reporting of long-term foreign currency monetary items at rates different
from those at which they were initially recorded during the period, or
reported in previous financial statements, in so far as they relate to the
acquisition of a depreciable capital asset, can be added to or deducted
from the cost of the asset and shall be depreciated over the balance life of
the asset, and in other cases, can be accumulated in a “Foreign Currency
Monetary Item Translation Difference Account”9
in the enterprise’s
financial statements and amortized over the balance period of such longterm asset/liability but not beyond 31st March, 2011, by recognition as
income or expense in each of such periods, with the exception of exchange
differences dealt with in accordance with paragraph 15. For the purposes
of exercise of this option, an asset or liability shall be designated as a
long-term foreign currency monetary item, if the asset or liability is
expressed in a foreign currency and has a term of 12 months or more at
the date of origination of the asset or liability. Any difference pertaining
to accounting periods which commenced on or after 7th December, 2006,
previously recognized in the profit and loss account before the exercise of
the option shall be reversed in so far as it relates to the acquisition of a
depreciable capital asset by addition or deduction from the cost of the
asset and in other cases by transfer to “Foreign Currency Monetary Item
Translation Difference Account” in both cases, by debit or credit, as the
case may be, to the general reserve. If the option stated in this paragraph
is exercised, disclosure shall be made of the fact of such exercise of such
option and of the amount remaining to be amortized in the financial
statements of the period in which such option is exercised and in every
subsequent period so long as any exchange difference remains
unamortized.”
46A.10 (1) In respect of accounting periods commencing on or after
the 1st April, 2011, for an enterprise which had earlier exercised the
option under paragraph 46 and at the option of any other enterprise (such
option to be irrevocable and to be applied to all such foreign currency
monetary items), the exchange differences arising on reporting of longterm foreign currency monetary items at rates different from those at
which they were initially recorded during the period, or reported in previous financial statements, in so far as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset, and in other cases, can be accumulated in a ‘‘Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s financial statements and amortized over the balance period of such long term asset or liability, by recognition as income or expense in each of such periods, with the exception of exchange differences dealt with in accordance with the provisions of paragraph 15 of the said rules.
(2) To exercise the option referred to in sub-paragraph (1), an asset or liability shall be designated as a long-term foreign currency monetary item, if the asset or liability is expressed in a foreign currency and has a term of twelve months or more at the date of origination of the asset or the liability:
Provided that the option exercised by the enterprise shall disclose the fact of such option and of the amount remaining to be amortized in the financial statements of the period in which such option is exercised and in every subsequent period so long as any exchange difference remains unamortized.”
10 Ministry of Corporate Affairs, Government of India, inserted this paragraph by Notification dated 29th December, 2011, which is relevant for companies.
Paragraph 46 for entities other than Companies
4611 (1) In respect of accounting periods commencing on or after the 7th December 2006, (such option to be irrevocable and to be applied to all such foreign currency monetary items), the exchange differences arising on reporting of long-term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and should be depreciated over the balance life of the asset, and in other cases, can be accumulated in a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s financial statements and amortised over the balance period of such long term asset or liability, by recognition as income or expense in each of such periods, with the exception of exchange differences dealt with in accordance with the provisions of paragraph 15.
(2) To exercise the option referred to in sub-paragraph (1), an asset or liability should be designated as a long term foreign currency monetary item, if the asset or liability is expressed in a foreign currency and has a term of twelve months or more at the date of origination of the asset or the liability:
Provided that the option exercised by the enterprise should disclose the fact of such option and of the amount remaining to be amortised in the financial statements of the period in which such option is exercised and in every subsequent period so long as any exchange difference remains unamortised.