Financial Accounting

M.Com-Part 1

Introduction
AS 11 The Effects of Changes in Foreign Exchange Rates
Accounting Standard (AS) 11, The Effects of Changes in Foreign
Exchange Rates (revised 2003), issued by the Council of the Institute of
Chartered Accountants of India, comes into effect in respect of accounting
periods commencing on or after 1-4-2004 and is mandatory in nature from
that date. The revised Standard supersedes Accounting Standard (AS) 11,
Accounting for the Effects of Changes in Foreign Exchange Rates (1994),
except that in respect of accounting for transactions in foreign currencies
entered into by the reporting enterprise itself or through its branches
before the date this Standard comes into effect, AS 11 (1994) will continue
to be applicable.
The following is the text of the revised Accounting Standard.
Objective
An enterprise may carry on activities involving foreign exchange in two
ways. It may have transactions in foreign currencies or it may have foreign
operations.
* Originally issued in 1989 and revised in 1994. The standard has been
revised again in 2003.
1. Attention is specifically drawn to paragraph 4.3 of the Preface,
according to which Accounting Standards are intended to apply only
to items which are material.
2. Reference may be made to the section titled Announcements of the
Council regarding status of various documents issued by the Institute
of Chartered Accountants of India appearing at the beginning of this
Compendium for a detailed discussion on the implications of the
mandatory status of an accounting standard.

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In order to include foreign currency transactions and foreign

operations in the financial statements of an enterprise, transactions must
be expressed in the enterprises reporting currency and the financial
statements of foreign operations must be translated into the enterprises
reporting currency. The principal issues in accounting for foreign currency
transactions and foreign operations are to decide which exchange rate to
use and how to recognise in the financial statements the financial effect of
changes in exchange rates.

1. This Statement should be applied :

a. in accounting for transactions in foreign currencies; and
b. in translating the financial statements of foreign operations.
2. This Statement also deals with accounting for foreign currency
transactions in the nature of forward exchange contracts.
3. This Statement 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 Statement requires disclosure of the reason
for using that currency. This Statement also requires disclosure of the
reason for any change in the reporting currency.
4. This Statement does not deal with the restatement of an enterprises
financial statements from its reporting currency into another
currency for the convenience of users accustomed to that currency or
for similar purposes.
5. This Statement 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 Statement 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)

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Definitions
The following terms are used in this Statement with the meanings
specified:
Average rate is the mean of the exchange rates in force during a period.
Closing rate is the exchange rate at the balance sheet date.
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.
Exchange rate is the ratio for exchange of two currencies.
Fair value is the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties in an arms
length transaction.
Foreign currency is a currency other than the reporting currency of an
enterprise.
Foreign operation is a subsidiary, associate , joint venture 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.
Forward exchange contract means an agreement to exchange different
currencies at a forward rate.
Forward rate is the specified exchange rate for exchange of two
currencies at a specified future date.
Integral foreign operation is a foreign operation, the activities of which
are an integral part of those of the reporting enterprise.
Monetary items are money held and assets and liabilities to be received or
paid in fixed or determinable amounts of money.
Net investment in a non-integral foreign operation is the reporting
enterprises share in the net assets of that operation.
Non-integral foreign operation is a foreign operation that is not an
integral foreign operation.
Non-monetary items are assets and liabilities other than monetary items.
Reporting currency is the currency used in presenting the financial
statements.

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Foreign Currency Transactions

Initial Recognition
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.
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.
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.

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Reporting at Subsequent Balance Sheet Dates

At each balance sheet dates:
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;
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
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.
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 Statement. The
contingent liability denominated in foreign currency at the balance sheet
date is disclosed by using the closing rate.

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Recognition of Exchange Differences

Exchange differences arising on the settlement of monetary items or on
reporting an enterprises 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.
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
Exchange differences arising on a monetary item that, in substance,
forms part of an enterprises net investment in a non integral foreign
operation should be accumulated in a foreign currency translation reserve
in the enterprises financial statements until the disposal of the net
investment, at which time they should be recognised as income or as
expenses.
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 enterprises 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.

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Financial Statements of Foreign Operations

Classification of Foreign Operations
The method used to translate the
financial statements of a foreign operation
depends on the way in which it is financed
and operates in relation to the reporting
enterprise. For this purpose, foreign
operations are classified as either integral
foreign operations or non-integral foreign
operations.
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
enterprises operations. For example, such a foreign operation might only
sell goods imported from the reporting enterprise and remits 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 enterprises
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 enterprises net investment in that operation.
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 nonintegral foreign operation or the reporting enterprise. The change in the
exchange rate affects the reporting enterprises net investment in the nonintegral foreign operation rather than the individual monetary and
nonmonetary items held by the non-integral foreign operation.

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The following are indications that a foreign operation is a non-integral

foreign operation rather than an integral foreign operation:
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;
transactions with the reporting enterprise are not a high proportion
of the foreign operations activities;
the activities of the foreign operation are financed mainly from its
own operations or local borrowings rather than from the reporting
enterprise;
costs of labour, material and other components of the foreign
operations products or services are primarily paid or settled in the
local currency rather than in the reporting currency;
the foreign operations sales are mainly in currencies other than the
reporting currency;
cash flows of the reporting enterprise are insulated from the day-today activities of the foreign operation rather than being directly
affected by the activities of the foreign operation;
sales prices for the foreign operations 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
there is an active local sales market for the foreign operations
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 non
integral foreign operation or an integral foreign operation of the reporting
enterprise may not be clear, and judgment is necessary to determine the
appropriate classification.

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Integral Foreign Operations

The financial statements of an integral foreign operation should be
translated using the principles and as if the transactions of the foreign
operation had been those of the reporting enterprise itself.
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.
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.

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Non-integral Foreign Operations

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:
The assets and liabilities, both monetary and non-monetary, of the
non-integral foreign operation should be translated at the closing
rate;
Income and expense items of the non-integral foreign operation
should be translated at exchange rates at the dates of the
transactions; and
All resulting exchange differences should be accumulated in a
foreign currency translation reserve until the disposal of the net
investment.
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.
The translation of the financial statements of a non-integral foreign
operation results in the recognition of exchange differences arising from:
Translating income and expense items at the exchange rates at the
dates of transactions and assets and liabilities at the closing rate;
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
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 non-integral 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.

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Any goodwill or capital reserve arising on the acquisition of a nonintegral foreign operation is translated at the closing rate.
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.
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 intra-group 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 intragroup 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.
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

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balance sheet date of the reporting enterprises in accordance with AS

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

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.
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 write down 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.

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Change in the Classification of a Foreign

Operation
When there is a change in the classification of a foreign operation,
should be applied from the date of the change in the classification.
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
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
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

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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.
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.
A gain or loss on a forward
exchange contract to which Forward
Exchange Contracts 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.
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.

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Disclosure
An enterprise should disclose:
The amount of exchange differences included in the net profit or loss
for the period; and
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.
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.
When there is a change in the classification of a significant foreign
operation, an enterprise should disclose:

The nature of the change in classification;

The reason for the change;
The impact of the change in classification on shareholders funds; and
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.

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.
Disclosure is also encouraged of an enterprises foreign currency risk
management policy.

Transitional Provisions
On the first time application of this Statement, if a foreign branch is
classified as a non-integral foreign operation in accordance with the
requirements of this Statement, the accounting treatment of the Statement
in respect of change in the classification of a foreign operation should be
applied.

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Comparison with IAS 21, The Effects of Changes in

Foreign Exchange Rates (revised 1993)
Revised AS 11 (2003) differs from International Accounting Standard (IAS)
21, The Effects of Changes in Foreign Exchange Rates, in the following
major respects in terms of scope, accounting treatment, and terminology.
1. Scope
Inclusion of forward exchange contracts
Revised AS 11 (2003) deals with forward exchange contracts both
intended for hedging and for trading or speculation. IAS 21 does not deal
with hedge accounting for foreign currency items other than the
classification of exchange differences arising on a foreign currency liability
accounted for as a hedge of a net investment in a foreign entity. It also does
not deal with forward exchange contracts for trading or speculation. The
aforesaid aspects are dealt with in IAS 39, Financial Instruments:
Recognition and Measurement. Although, an Indian accounting standard
corresponding to IAS 39 is under preparation, it has been decided to deal
with accounting for forward exchange contracts in the revised AS 11
(2003), since the existing AS 11 deals with the same. Thus, accounting for
forward exchange contracts would not remain unaddressed until the
issuance of the Indian accounting standard on financial instruments.

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2. Accounting treatment
Recognition of exchange differences resulting from severe currency
devaluations
IAS 21, as a benchmark treatment, requires, in general, that exchange
differences on transactions be recognised as income or as expenses in the
period in which they arise. IAS 21, however, also permits as an allowed
alternative treatment, that exchange differences that arise from a severe
devaluation or depreciation of a currency be included in the carrying
amount of an asset, if certain conditions are satisfied. In line with the
preference of the Council of the Institute of Chartered Accountants of India,
to eliminate alternatives, where possible, revised AS 11 (2003) adopts the
benchmark treatment as the only acceptable treatment.

3. Terminology
Foreign operation
The revised AS 11 (2003) uses the terms, integral foreign operation
and non-integral foreign operation respectively for the expressions
foreign operations that are integral to the operations of the reporting
enterprise and foreign entity used in IAS 21. The intention is to
communicate the meaning of these terms concisely. This change has no
effect on the requirements in revised AS 11 (2003). Revised AS 11 (2003)
provides additional implementation guidance by including two more
indicators for the classification of a foreign operation as a non-integral
foreign operation.

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Comparison with AS 11, Accounting for the Effects

of Changes in Foreign Exchange Rates (1994)
This Exposure Draft differs from AS 11, Accounting for the Effects of
Changes in Foreign Exchange Rates, issued in 1994, in the following major
respects:
1. Recognition of exchange gains and losses on certain liabilities
AS 11 (1994) requires exchange differences arising on repayment of
liabilities incurred for the purpose of acquiring fixed assets which are
carried in terms of historical cost to be adjusted in the carrying amount of
the respective fixed assets. Exchange gains and losses are attributable to
the financing and risk management policies followed by enterprises; they
have no effect on an assets productive capacity or operating efficiency.
Enterprises can protect themselves from adverse exchange rate changes by
entering into forward exchange contracts or other arrangements.
Capitalisation of exchange losses on a continuing basis results in carrying
forward the loss incurred in an accounting period to future periods.
AS 11 (1994) is related to a similar provision that was introduced in
Schedule VI to the Companies Act, 1956, after a major devaluation of the
Indian rupee in 1966. At the time, there were stringent foreign exchange
controls in India. Currently, the exchange rate of the rupee is largely
determined by the operation of market forces. The rupee is now fully
convertible on the current account. Furthermore, IAS 21, The Effects of
Changes in Foreign Exchange Rates, does not permit capitalisation of
exchange losses, except in very restricted circumstances. This exposure
draft adopts the benchmark treatment in IAS 21 that requires all exchange
differences to be recognised in the current period. This is also in line with
the endeavor of the Accounting Standards Board of not permitting, to the
extent possible, alternative treatments.

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2. Classification of foreign operations

AS 11 (1994) deals only with translation of financial statements of
branches. This exposure draft deals with translation of financial statements
of foreign operations which includes subsidiaries, associates and joint
ventures also. Further, AS 11 (1994) treats all foreign operations
(branches) as integral to the activities of the reporting enterprise. This has
the effect of treating the transactions of the foreign operations as the
transactions of the reporting enterprise. However, when an enterprise has
foreign operations that are largely independent, the interest of the
enterprise is reflected in its net investment in such operations, rather in
their day-to-day activities. In line with IAS 21 and in response to
suggestions from preparers, regulators and auditors, this exposure draft
requires classification of foreign operations as those that are part of the
enterprise (termed integral foreign operations) and those that are largely
independent (termed non-integral foreign operation). The financial
statements of the former are translated using the temporal method that
involves application of a combination of historical and closing rates; the
financial statements of the latter type of operations are translated by using
the current rate method that involves application of the closing rate. A
number of indicators are provided in order to determine whether a foreign
operation is a non-integral foreign operation.

3. Forward exchange contracts for trading or other purposes

This Exposure Draft specifically deals with forward exchange contracts
entered into for the purpose of trading or speculation. AS 11 (1994) does
not specifically deal with this aspect.

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CONCLUSION
Accounting Standard (AS) 11 is about the Effects of Changes in
Foreign Exchange Rates. The Statement is applied in accounting for
transactions in foreign currency and translating financial statements of
foreign operations. It also deals with accounting of forward exchange
contract. Initial recognition of a foreign currency transaction shall be by
applying the foreign currency exchange rate as on the date of
transaction. In case of voluminous transactions a weekly or a monthly
average rate is permitted, if fluctuation during the period is not
significant.
At each Balance Sheet date foreign currency monetary items such
as cash, receivables, and payables shall be reported at the closing
exchange rates unless there are restrictions on remittances or it is not
possible to effect an exchange of currency at that rate. In the latter case it
should be accounted at realisable rate in reporting currency. Non
monetary items such as fixed assets, investment in equity shares which
are carried at historical cost shall be reported at the exchange rate on the
date of transaction. Non monetary items which are carried at fair value
shall be reported at the exchange rate that existed when the value was
determined.
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. 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.

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Financial Accounting

M.Com-Part 1

BIBLIOGRAPHY

WEBLIOGRAPHY
SOURCES:

Search Enginewww.google.com
www.yahoo.com
www.wikipedia.com

Web siteswww.icai.com
www.pkfindia.in
www.caalley.com
www.mecklai.com

Books
Advance Financial Accounting
- Chaudhary & Chopde

V.E.S College of Arts, Science & Commerce

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