Transcript Accounting Standard (AS) 11 (Revised 2003)

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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
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Contents
Sr. No. Particulars
1
2
3
Glossary
Need & Objective
Coverage At A Glance
4
5
6
Accounting of FC Transactions
Accounting of Foreign Operations
Accounting of Forward Exchange Contracts
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8
9
Disclosure
AS 11 & Schedule VI
AS 11 & International AS 21
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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
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Need & Objective
Export Sales
Expenses in FC
Expenses in Rs.
Domestic Sales
Foreign Purchases
Galaxy
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
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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
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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
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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
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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
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Eg. : Ex. Diff. on FC Transaction
Accounting Year
2004-05
2005-06
Accounting
of
asset
purchase as per revised
AS 11 (2003)
Current Asset purchase
worth US $ 1/=
Spot Rates (Rs./$)
Current Asset A/c
DR
Purchase
01.12.04
Payment
31.01.05
BS Dt
31.03.05
50/-
52/-
47/-
46/-
3.00
47.00
DR
50.00
Ex. Loss A/c
DR
2.00
CR
Vendor A/c
CR
Ex. Gain A/c
CR
52/-
50.00
Vendor A/c
Rs. Current A/c
Payment BS Dt
30.04.05 31.03.06
5.00
52.00
46.00
50.00
5.00
3.00
1.00
Back to Glance
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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. etc.
Effect of Rate Has immediate effect Do not have direct impact on
Fluctuation
on RE’s Cash Flows RE’s
Cash
Flows
from
from Operations
Operations
View Indicators of NFO >>>>
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Indicators of NFO
 Major factor : Impact on cash flows from operations
 Other indicators of NFO are –
a)
b)
c)
d)
e)
f)
High degree of autonomy in carrying operations
Low proportion of transactions with RE
No dependence on RE for finance
COP or services settled on it’s own
Sales are in currencies other than RC (Rs.)
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
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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
TDR / AR
Monetary Items
Closing Rate
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. >>
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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
2000
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
400
20000
Back to Glance
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Disposal of NFO
Particulars
Nature of Disposal
100% Disposal
Gain or
Disposal
Loss
on Recognize in
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
P & L A/c on pro-rata
basis
When to trf FOREX Period in which gain or loss
Reserve to P & L
disposal is recognized in P & L A/c
on
Back to Glance
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Change in Classification of FO
Particulars
Conversion Rate for
IFO = FCT
NFO
TDR / AR
TDR / AR
Closing Rate
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
 Ex. Diff. will arise on conversion of non-monetary items ;&
 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.
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Eg. : Reclassification IFO to NFO
BS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)
Particulars
US
$
IFO
Rate
Rs.
Rate
Rs.
Share Capital
100
40/-
4000
40/-
4000
Op. Reserves
50
40/-
2000
40/-
2000
Current Profit
20
45/-
900
Original
2000
Ex. Gain Loss
NFO
1100
FOREX Reserve
500
Monetary Liabilities
230
Total
400
50/-
11500
50/-
11500
19500
20000
Monetary Assets
300
50/-
15000
50/-
15000
Non Monetary @
Historical Cost
100
45/-
4500
50/-
5000
Total
400
19500
<< Back
20000
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Eg. : Reclassification NFO to IFO
BS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)
Particulars
$
Rate NFO Rs.
IFO Rs.
Share Capital
100 40/-
4000
4000
Op. Reserves
50
40/-
2000
2000
Current Profit
20
45/-
900
900
1600
1600
230 50/-
11500
11500
400
20000
20000
Monetary Assets 300 50/-
15000
15000
Non Monetary @ 100 50/Historical Cost
5000
FOREX Reserve
Liabilities
Total
Total
400
20000
Remarks
Continued until
disposal of FO
5000 Treated as Historical
Cost from date of
reclassification
20000
Back to Glance
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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 100K
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. >>>>
View Eg. >>>>
Profit or Loss on Cancellation/Renewal is recognized in P & L A/c
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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 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
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Eg. : Speculative FEC
FEC Date
Forward Purchase of
Maturity Date
Forward Rate
Forward Rate available on BS
date (31.03.05) for remaining
maturity of the contract
Ex. Loss in 2004-05
1st March, 2005
USD 1/30th June, 2005
Rs. 50/- per $
Rs. 48/- per $
Rs. 2/-
Back to Glance
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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
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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
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Transition on 1st April, 2004
 Revised AS 11 is applicable from 1st 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 1st 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
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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)
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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
Preferring
elimination
of
alternatives,
IAS’s
alternative treatment
is not recognized
Terminology
w.r.t. FO
FO’s are classified as FO’s are classified as
Integral &
“FO’s that are integral to the
Non Integral
operations of RE” &
“Foreign Entity”
Permits alternative :
Ex.
Diff.
on
severe
devaluation of currency can
be included in carrying amt
of asset s.t. conditions
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Thank You