EFFECTS OF CHANGES IN FOREIGN EXCHANGE

RATES

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TOPICS COVERED

1. EXISTING STANDARD

2. AS – Vs - MCA

3. AS - Vs - Ind AS

4. Ind AS - Vs - IFRS

5. PRACTICAL ISSUES

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Accounting Standard - 11

Originally Issued in the year 1989 & revised in 1994.

Again revised in 2003.Revised Standard - Applicable in

respect of Accounting periods commencing after 01-04-2004.

To be succeeded by Ind AS – 21.

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Coverage At A Glance

Foreign Currency Transactions Foreign Operations

Foreign Currency Activities

a) Conversionb) Recognition of Ex. Diff.c) Eg. : FC Transaction

a) Classification of FOb) Conversion of FSc) Disposal of NFOd) Change in classification

Direct business dealings with Customers, Suppliers etc. from local point

Business dealings through foreign based branch, JV, Subsidiary, Associate etc.

ForwardExchangeContracts

Tax Effect ofEx. Diff.

Disclosure TransitionalProvisions

Accounting

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Conversion of FC TransactionsInitially FC transactions shall be recorded at TDR * / ARFor 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

Monetary Items TDR / AR Closing Rate (CR)*

Non Monetary Carried @

Historical Cost TDR / AR TDR/AR

Fair Value TDR / AR Valuation Date Rate

Contingent Liabilities ----- Closing Rate

*CR = Rate on BS Date

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Eg. : Average Rate (AR) Policy

Accounting Policy for Initial Recognition : - Purchases & Sales in FC are recorded at rates

prevailing on the Date of Transfer of Significant Risks & Rewards.

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 RKEANS

Transaction@ TDR / AR

Reported in BS @Closing

Rate

Settled @ TDR / AR

Settled after the BS Date

Recognition of Ex. Diff. - FCT

The same should be recognized in P & L A/c for the period

Ex. Diff. arises EITHER on Settlement OR on Reporting in BS

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Eg. : Ex. Diff. on FC Transaction

Accounting Year 2014-15 2015-16

Accounting of purchase as per revised AS 11 (2003)

Purchase worth US $ 1/- Purchase 01.12.14

Payment 31.01.15

BS Dt 31.03.15

Payment 30.04.15

BS Dt 31.03.16

Spot Rates ( `/$) 50/- 52/- 47/- 46/- 52/-

Purchase A/c DR 50.00

Vendor A/c DR 50.00 3.00 47.00

Ex. Loss A/c DR 2.00 5.00

Rs. Current A/c CR 52.00 46.00

Vendor A/c CR 50.00 5.00

Ex. Gain A/c CR 3.00 1.00

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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. Reporting Entity (RE)

Particulars Integral FO (IFO) Non Integral FO (NFO)

Definition FO whose activities are an integral part of the activities of RE

Negatively defined –FO which is not an IFO

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 Fluctuation

Has immediate effect on RE’s Cash Flows from Operations

Do not have direct impact on RE’s Cash Flows from Operations

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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.

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Conversion of FSs of FO &Recognition of Ex. Diff. thereofFor 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 Ex. Diff.

Recognized in P & L A/c as & when arise

Accumulated in FOREX Reserve A/c (Accumulation will continue until disposal of NFO)

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Eg. : Conversion of NFO FSParticulars Rate Dr $ Dr. ` Cr $ Cr. `

Acquisition of Chemicals Inc., USA on 31.03.14 (Spot = 40/-)

Share Capital 40/- 100 4000

Reserves 40/- 50 2000

Assets / Liabilities 40/- 200 8000 50 2000

Total 200 8000 200 8000

On next BS Dt 31.03.15 (Spot = ` 50/-, AR = ` 45/-)

Share Capital Original 100 4000

Opening Reserves Original 50 2000

Current Profit AR = 45/-

20 900

Assets / Liabilities CR = 50/-

400 20000

230 11500

Foreign Currency Translation Reserve (Balancing Figure)

1600

Total 400 20000

400 20000

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Disposal of NFO

Particulars Nature of Disposal

100% Disposal Part Disposal

Gain or Loss on Disposal

Recognize inP & L A/c

Recognize in P & L A/c

Accumulated amount in FCT Reserve A/c

100% transfer to P & L A/c

Part amount transfer to P & L A/c on pro-rata basis

When to transfer FCT Reserve to P & L

Period in which gain or loss on disposal is recognized in P & L A/c

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Change in Classification of FOParticulars Conversion Rate for

IFO = FCT NFO

P & L Items TDR / AR TDR / AR

Monetary Items 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

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.

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Eg. : Reclassification IFO to NFO

BS Dt 31.03.15 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)

Particulars US$

IFO NFO

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 1100

FOREX Reserve 500

Monetary Liabilities 230 50/- 11500 50/- 11500

Total 400 19500 20000

Monetary Assets 300 50/- 15000 50/- 15000

Non Monetary @ Historical Cost

100 45/- 4500 50/- 5000

Total 400 19500 20000RKEANS

Eg. : Reclassification NFO to IFOBS Dt 31.03.15 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)

Particulars $ Rate NFO Rs. IFO Rs. Remarks

Share Capital 100

40/- 4000 4000

Op. Reserves 50 40/- 2000 2000

Current Profit 20 45/- 900 900

FOREX Reserve 1600 1600 Continued until disposal of FO

Liabilities 230

50/- 11500 11500

Total 400

20000 20000

Monetary Assets

300

50/- 15000 15000

Non Monetary @ Historical Cost

100

50/- 5000 5000 Treated as Historical Cost from date of

reclassification

Total 400

20000 20000RKEANS

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Forward Exchange Contracts

AS 11 (revised 2003) orginally prescribed Accounting treatments for Forward Exchange Contracts entered for Both Hedging & Speculative purposes.

In 2004 Hedging of Firm Commitments & Highly Probable forecasts were eliminated. Between 2006 to 2008 several clarifications were given for accounting & disclosure of Hedges & Derivatives which were postponed till 2008.

In 2011 when AS 30 was supposed to be effective ICAI brought Limited revision to AS 11 to eliminate all Hedging & Derivative Transactions & relevant portions.

AS 30,31& 32 not notified till date. Ind AS 32, 39 & 107 yet to be applicable.

Forward Exchange Contract (FEC)FEC is an agreement to exchange different currencies at Forward Rate in respect of Existing Assets & Liabilities.

# Particulars FEC

1 Purpose Manage risks

2 Eg. Say Minimizing Ex. Rate fluctuation risk associated with Accounts Receivable of USD 100K

3 Accounting Purpose different hence different A/cting treatment

Premium/ Discount Deferred over tenor of the contract

Ex. Diff. Recognize on the basis of ex. rate movements

4 Practical View Eg. >>>>

Profit or Loss on Cancellation/Renewal is recognized in P & L A/c

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Eg. : Accounting FEC

Accounts Payable

US $

Sale Dt 01.12.14

FEC Dt 01.12.14

BS Dt 31.03.15

Settlement Dt 30.04.15

1/= Spot = 43/- FR = 48/- Spot = 45/- Spot = 47.50

Accounting as per Revised AS 11 (2003)

Accounting Year

Premium (5/-) Amortization

Exp.Rs.

Ex. Loss Calculation

Ex. Diff Rs.

Net (Gain) /

Loss

2014-15 5 * (4/5) 4/- 43 – 45 (2/-) 2/-

2015-16 5 * (1/5) 1/- 45 - 47.50 (2.50) (1.50)

Total 5/- 4.50 0.50

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Eg. : Speculative Other FEC

FEC Date 1st March, 2015

Forward Purchase of USD 1/-

Maturity Date 30th June, 2015

Forward Rate ` 50/- per $

Forward Rate available on BS date (31.03.15) for remaining maturity of the contract

` 48/- per $

Ex. Loss in 2014-15 ` 2/-

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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

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DisclosureAn Enterprise shall specifically disclose –

1. Ex. Diff. recognized in P & L A/c for the period

2. FCT Reserve as part of Share Holder’s Funds

3. Reconciliation of Opening & Closing FCT 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

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Transition on 1st April, 2004

Revised AS 11 is applicable from 1st April, 2004.

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 & Rev Schedule VI

Background

Schedule VI of the Companies Act provided for capitalisation of increase or decrease of a Liability (loan) due to fluctuation of exchange rates. GSR 129 Dt. 03/01/1968

As per AS – 11, any gains/losses arising in such valuation are required to be recognised in the statement of profit and loss.In 2003, ICAI had made an announcement stating that Auditors need not Qualify in case adoption of Schedule VI.

MCA issued the Companies (Accounting Standards) Rules, 2006, by way of Notification in the Official Gazette dated 7th December, 2006. In Rules it was clarified by MCA that accounting treatment of exchange differences will be made as per AS 11 and further categorically mentioned that provisions of AS-11 is required to be followed irrespective of the relevant provision of Schedule-VI to the Companies Act, 1956.

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AS 11 & Rev Schedule VI

On July 18, 2007, ICAI withdrew the Announcement on ‘Treatment of exchange differences under Accounting Standard (AS) 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates vis-à-vis Schedule VI to the Companies Act, 1956’.

MCA introduced Clause 46 to AS -11 on 31-03-09, giving an option to accumulate FC gains/losses on LT FC Monetary Items to FC Monetary Item Translation Diff A/c or adjust to Asset value and amortise upto 31.03.2011 and also permitted retrospective application from 7-12-06.

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AS 11 & Rev Schedule VI

MCA introduced Clause 46A to AS -11 on 29-12-11, extending the period of amortisation upto the Balance life of the Asset / Liability.

There is no specific mention about the treatments in Revised Schedlue VI .

Guidance Note issued by ICAI on Rev-Sh VI only speaks about manner of disclosure of such items under “Other Adjustments” in the Reconciliation of Gross & Net Carrying amounts of Assets. ICAI Announcement on 26/03/2013 gives the disclosure treatment for FC Monetary Item Translation Diff A/c.

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Ind AS 21 Vs AS 11

Functional Currency Concept.

Does not deal with Forward Exchange Contracts covered under Ind As 39.

FEV on Long Term Monetary Items accumulated to Equity & transferred to P&L over the term.

Clarity on ERV arising on Inventory valuation & Impairment of Assets.

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Ind AS 21 Vs IAS 21

FEV on Long Term Monetary Items accumulated to Equity & transferred to P&L over the term – not in IFRS.

Change in Functional currency required disclosure of FACT & Reason – not in Ind AS.

“Statement of Financial Position” used in IFRS instead of “Balance Sheet”.

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PRACTICAL ISSUES

Accounting for Advances.Previous years Figures in

Consolidation.Effect on Depreciation.Forex AccountsPostponement of recognition due to

Uncertainty of Realisation.

Eg. : Ex. Diff. on FC Transaction

Accounting Year 2014-15

Accounting of Sales as per revised AS 11 (2003)

Sales worth US $ 2/- Payment 1 $

01.12.14

Sale2$

31.01.15

Payment1$

02.02.15

Sale2$

31.01.15

Payment1$

02.02.15

Spot Rates ( `/$) 50/- 52/- 52/- 52/- 52/-

Sales A/c Cr 104/- 102/-

Vendor A/c DR 104/- 102/-

Ex. Loss A/c DR 2/-

Rs. Current A/c Dr 50/- 52/- 52/-

Vendor A/c CR 50/- 54/- 52/-

Ex. Gain A/c CR

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Eg. : Conversion of NFO FSParticulars Rate Dr $ Dr. `

Acquisition of Chemicals Inc., USA on 31.03.14 (Spot = 40/-, AR = 42/-)

Fixed Assets 40/- 100 4000

Depreciation 42/- 50 2100

Closing Balance 40/- 50 1900

40 X 50 = 2000

Particulars Rate Dr $ Dr. `

On next BS Dt 31.03.15 (Spot = ` 50/-, AR = ` 45/-)

Fixed Assets 50/- 50 2500 1900

Depreciation 45/- 50 2250 2250

Closing Balance 0 250 -350

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Eg. : Conversion of Forex Bal

Particulars Rate $ `

Sale Realisation 40/- 100 4000

Payment for Purchases 42/- - 50 - 2100

Closing Balance 44/- 50 1900

44 X 50 = 2200

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THANK YOU

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