1 Accounting Standard AS 11 Revised 2003 THE

1 Accounting Standard (AS) 11 (Revised 2003) THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Mandatory for Accounting Periods commencing on or after 1 st April, 2004

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

3 Glossary AS RE FSs Ex. Diff. FC US $ A/c RC Rs. Accounting Standard Reporting Enterprise (GSL) Financial Statements (BS, P & L etc) Exchange Difference Foreign Currency (US $ etc) United States Dollar Account Reporting Currency (Rs. ) Rupees

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

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

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 Items Initial A/cing Conversion at BS Dt TDR / AR Closing Rate (CR)* Historical Cost TDR / AR TDR/AR Fair Value TDR / AR Valuation Date Rate ----- Closing Rate Monetary Items Non Monetary Carried @ Contingent Liabilities *CR = Rate on BS Date Back to Glance

7 Eg. : Average Rate (AR) Policy § Accounting Policy for Initial Recognition : v 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) v 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 Recognition of Ex. Diff. - FCT Settled after the BS Date Purchase Agreement @ TDR / AR Reported in BS @ Closing Rate Settled @ TDR / AR Ex. Diff. arises EITHER on Settlement OR on Reporting in BS The same should be recognized in P & L A/c for the period Back to Glance

Eg. : Ex. Diff. on FC Transaction Accounting Year 2004 -05 9 2005 -06 Accounting of asset purchase as per revised AS 11 (2003) Spot Rates (Rs. /$) Current Asset A/c DR Purchase 01. 12. 04 Payment 31. 05 BS Dt 31. 03. 05 50/- Current Asset purchase worth US $ 1/= Payment BS Dt 30. 04. 05 31. 03. 06 52/- 47/- 46/- 3. 00 47. 00 52/- 50. 00 Vendor A/c DR 50. 00 Ex. Loss A/c DR 2. 00 Rs. Current A/c CR Vendor A/c CR Ex. Gain A/c CR 5. 00 52. 00 46. 00 50. 00 5. 00 3. 00 1. 00 Back to Glance

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 Particulars Integral FO (IFO) Non Integral FO (NFO) Definition FO whose activities are Negatively defined – an integral part of the FO which is not an IFO activities of RE Operates as Extended arm of RE Separate Entity Example Selling 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. Effect of Rate Has immediate effect Do not have direct impact on Fluctuation on RE’s Cash Flows from Operations View Indicators of NFO >>>> 10

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

Conversion of FSs of FO & Recognition of Ex. Diff. thereof For Conversion IFO is treated as FC Transaction Particulars Integral FO = FC Transaction Non Integral FO P & L Items TDR / AR Monetary Items Closing Rate Non Monetary carried @ Historical Cost TDR / AR Closing Rate Non Monetary carried @ Fair Value Valuation Date Rate Closing Rate Recognition of Recognized in P & Accumulated in FOREX Reserve Ex. Diff. L A/c as & when A/c (Accumulation will continue arise until disposal of NFO) Eg. >> 12

13 Eg. : Conversion of NFO FS Particulars Rate Dr $ Dr. Rs. Cr $ Cr. Rs. Acquisition of Galaxy Chemicals Inc. , USA on 31. 03. 04 (Spot = 40/-) Share Capital 40/- 100 4000 Reserves 40/- 50 2000 Assets / Liabilities 40/- 50 200 8000 On next BS Dt 31. 03. 05 (Spot = Rs. 50/-, AR = Rs. 45/-) Share Capital Original 100 4000 Opening Reserves Original 50 2000 Current Profit AR = 45/- 20 900 Assets / Liabilities CR = 50/- 230 11500 400 20000 FOREX Reserve (Balancing Figure) Total 1600 400 20000 Back to Glance

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

Change in Classification of FO Particulars Conversion Rate for IFO = FCT NFO TDR / AR Closing Rate Non Monetary carried @ Historical Cost (FC) TDR / AR Closing Rate Non Monetary carried @ Fair Value (FC) Valuation Date Rate Closing Rate P & L Items Monetary Items IFO reclassified as NFO n Ex. Diff. will arise on conversion of non-monetary items ; & n The same shall be accumulated in FOREX Reserve Eg. >> NFO reclassified as IFO § FOREX Reserve is continued until actual disposal of FO § Translated amounts for Non Monetary Items are treated as Eg. >> historical cost of those items, from that date. 15

Eg. : Reclassification IFO to NFO BS Dt 31. 03. 05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-) Particulars US $ IFO Rate Rs. Share Capital 100 40/- 4000 Op. Reserves 50 40/- 2000 Current Profit 20 45/- 900 Original 2000 Ex. Gain Loss NFO 1100 FOREX Reserve 500 Monetary Liabilities 230 Total 50/- 400 11500 50/- 11500 19500 20000 Monetary Assets 300 50/- 15000 Non Monetary @ Historical Cost 100 45/- 4500 50/- 5000 Total 400 19500 << Back 20000 16

Eg. : Reclassification NFO to IFO 17 BS Dt 31. 03. 05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-) Particulars $ Rate NFO Rs. IFO Rs. Share Capital 100 40/- 4000 Op. Reserves 50 40/- 2000 Current Profit 20 45/- 900 1600 230 50/- 11500 400 20000 Monetary Assets 300 50/- 15000 Non Monetary @ 100 50/Historical Cost 5000 Remarks FOREX Reserve Liabilities Total 400 20000 Continued until disposal of FO 5000 Treated as Historical Cost from date of reclassification 20000 Back to Glance

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

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 Premium (5/-) Ex. Gain Ex. Loss Net Gain/ Year Amortization Rs. Calculation Rs. (Loss) 2004 -05 5 * (4/5) 4/- 43 – 45 (2/-) 2/- 2005 -06 5 * (1/5) 1/- 45 - 47. 50 (2. 50) (1. 50) 4. 50 0. 50 Total 5/- << Back

20 Eg. : Speculative FEC Date Forward Purchase of Maturity Date Forward Rate available on BS date (31. 03. 05) for remaining maturity of the contract Ex. Loss in 2004 -05 1 st March, 2005 USD 1/30 th June, 2005 Rs. 50/- per $ Rs. 48/- per $ Rs. 2/- Back to Glance

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 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 Ø Ø Ø 7. 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. AS 11 encourages disclosure of Enterprise’s FC Risk Management Policy Back to Glance

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 AS 11 (2003) & Schedule VI As per the announcement of ICAI # Particulars Schedule VI 1 Ex. Diff. on a/c of FC Liability linked to Fixed Asset Capitalize i. e. Recognize in P & L A/c adjust in carrying cost of Fixed Asset 2 Relation to old In line AS 11 (1994) Schedule provision 3 Implication Revised AS 11 (2003) with Capitalization provision VI discontinued on revision in 2003 ICAI 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)

25 AS 11 (2003) & IAS Particulars Indian AS 11 International AS 21 Scope Covers accounting of Major aspects of FEC’s are FEC’s covered under IAS 39 (Financial Instruments : Recognition & Measurement) Alternative A/cing in case of Severe Currency Devaluation Preferringelimination 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’s are classified as FO Integral & “FO’s that are integral to the operations of RE” & Non Integral “Foreign Entity”

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