FOREIGN CURRENCY

1 CONVERSION JAS PER AS 11]

FOREIGN BRANCHES

THEORY AND ILLUSTRATIONS

OUTLINE
No. Topic Page
1. Conversion of Foreign Branch Trial Balance
2. lustrations on Foreign Branches 1 i 5
2.1 Integral V/s Non-Integral
2.2 Foreign Branch of Indian'H.O.
2.3 Indian Branch of Foreign H.O.
3. Foreign Operations: Provisions of AS 11 36
3.1 Scope
3.2 Definitions [Para 2]
3.3 Classification of Foreig Operafons
3.4 Financial Statements of Integraleeignperations
3.5 Financial Statements of Non-Integral'Foraidn Operations
3.6 Disposal of a Non-Integral Foreign Operatiten
3.7 Change in the Classification.of a:Forejgn Opjeration
3.8 Disclosure
3.9 Transitional Provisions

1. CONVERSION OF FOREIGN BRANCH TRIAL BALANCE

We have already studied a substantial part of Accounting Standard 11 (revised 2003) in S.Y.B.A.F
(see our Book Financial Accounting for S.Y.B.A.F. Semester II). We will now be studying the

remaining provisions of AS11 Foreign Branches/Subsidiaries, in this chapter.

regarding
(1) Foreign Branches
Foreign branches generally maintain independent and complete record of business transacted by
them in currency of the country in which they operate. Thus problems of conversion of trial balance
offoreign branches relate mainly to translation of foreign currency into Indian rupees. For the purpose
ofaccounting, AS 11 classifies the foreign branches into two types: (a) Integral Foreign Operation
1.e. a 'dependent' branch; or (b) Non- Integral Foreign Operation i.e. an "independent' branch (see
Para 2).
 Advanced Financial Accounting (M. Com. Purt-I1: SEM-1,
Dependent Branech |Integral Foreign Operation (IFO)|
(2)
Dependent' Branch is a foreign branch/operation, the activities of which are an integral
of'the reporting enterprise. The business of IFO is carried on as ifit part of those
were an extension
enterprise's operations. Generally, IFO carries on business in a single foreign of the reporting
country where it is located. Thus, it makes sale of currency, i.e. of the
proceeds to the HO in the same currency. goods imported from the H.O. and remits the
(3) Independent Branch [Non-Integral Foreign
Operation (NFOb)
'Independent Branch' is a foreign branch/operation that is not an
business of a NFO is carried on in a Integral Foreign Operation. The
substantially independent
monetary items, incurring expenses, generating income and way by accumulating cash and other
An NFO may also enter into arranging borrowing in its local currency.
transactions in foreign currencies, including transactions in the
currency. An example of NFO may be
in such country production in a foreign country out of the resources reporting
available
independent of the H.O.
(4) Techniques for Conversion of
Foreign Currency Items
1. Dependent Branch
[Integral Foreign Operation IFO]
Following are the steps for foreign currency
translation
(1) Translation of Transactions during year: All transactions of IFO be translated at the rate
prevailing on the date of transaction. This will require date-wise details
by that branch together with the rates. Weekly or of the transaction entered
significant variations in the rate.
monthly average rate is permitted if there are no

(2) Translation at the balance sheet date:

(i) Monetary items are converted at closing rate. Monetary items are held and assets and
liabilities to be received or paid in fixed or determinable amounts money
and payables are examples of of money. Cash, receivables
monetary items
(ii) Non-monetary items are assets and liabilíties other than
investments in equity shares, inventories are
monetary items. Fixed assets,
examples of non-monetary assets. The cost and
depreciation of the tangible fixed assets is translated using the exchange rate at the date of
purchase of the asset if asset is carried at cost. If tangible fixed asset is carried at fair value,
translation should be done using the rate that existed on the date of the valuation.
(ii) The cost of inventories is translated at the exchange rates that existed when the cost of
inventory was incurred; and realizable value is translated applying exchange rate when
realizable value is determined which is generally the closing rate.
(iv)Exchange difference (which is a balancing figure in the converted trial balance) arising on
the translation of the financial statement of integral foreign operation should be charged to
profit and loss account.
2. Independent Branch [Non-Integral Foreign Operation]
Trial Balance of Independent Branch (non-integral foreign operation) is converted using the
following principles:
(i) Balance sheet items i.e. Assets and Liabilities both monetary and non-monetary are converted at
the closing exchange rate.
(ii) Items of income and expenses are converted at the actual exchange rates on the date or
transactions. However, accounting standard allows average rate subject to materiality.
(ii) Resulting exchange rate difference should be accumulated in a "foreign currency translation
reserve" until the disposal of "net investment in
non-integral foreign operation
Foreign Curreney Conversion [As Per AS 111 - Foreign Branches 3

EXHIBIT 1:EXCHANGE RATE TO BE USED FOR REPORTING

S. N.Basis of Comparison Integral Foreign Non-Integral Foreign
1. Monetary ltems [e.g.
Operations [IFO] Non-inons (NIFO)
Operations [NIFOJ
Closing Rate Closing Rate
Cash, Debtors, Creditors,|
Prepaid Expenses, O/s
Expenses]
2. Opening Stock if carried Actual Exchange Rate as Opening Rate
at Historical Cost on the date of purchase of
Stock
Note: Use Opening Rate
in the absence of Actual
Exchange Rate.
3 Closing Stock if carried Actual Exchange Rateas Closing Rate
at Historical Cost on the date of purchase of
Stock.
Note: Use Closing Rate
in the absence of Actual
Exchange Rate.
4. Non-Monetary ltems Actual Exchange Rate as Closing Rate
(excluding stocks) on the date of Purchase of |
carried at Historical Cost| Assets.
[e.g. Fixed Assets
. Depreciation if asset is Actual Exchange Rate as Closing Rate
carried at historical cost on the date of Purchase of
Assets.
Other Revenue Items Actual Exchange Rate Actual Exchange Rate
.
[e.g. Purchases, Sales, Note: Use Average Rate Note Use Average
in the absence of Actual Rate in the absence of
Interest, Expenses]
Exchange Rate. Actual Exchange Rate
Taken at amounts recorded Taken at amounts
Goods received from HO/ recorded in H.O. Books
in H.O. Books
Sent to HO
Taken at amounts recorded Taken at amounts
8. Balance in HO Ac in
in H.O. Books recorded in H.O. Books
Branch Books Actual Exchange Rate Actual Exchange Rate
9. Remittances Closing Rate Closing Rate
10. Contingent Liability
it is reasonable to assume that the
Important Note for Examination : Unless otherwisetheindicated,
office.
of head
Branch is an Integral Foreign Operation (IFO)

EXHIBIT 2: INTEGRAL VIS NON-INTEGRAL FOREIGN OPERATIONS

No. Integral Foreign Operation (1F0) Non-Integral Foreign Operation (NFO)

1. Meaning that is not
It is a foreign operation, whose activities It is a foreign operation an

are an integral part of those of the reporting integral Foreign Operation.

enterprise.
Advaced Financial Accounting (M.Com. Part-II : SEM-
I

.
Foreign Currency Conversion [4s Per AS 11] - Foreign Branches 5

2. Business
The business of IFO is caried on as if it The busincess of NFO is carried on in a
were an extension of the
reporting substantially independent manner by
enterprise's operations. accumulating cash and other monetary
ifems. incurring expenses. gencrating
income and arranging borroWings, in its
local currency.
3. Etample
Sale ot goods imported from the reporting Production in a foreign country out of
enterpnse and remittance of proceeds to the resources available in such nation
reporting enterprise. independent of the reporting enterprise.
4. Currencies Operated
Generally. IFO carries on business in a NFO business may also enter into
single foreign currency, i.e. of the country transactions in several foreign currencies,
where it is located.
including transactions in the reporting
currency.
5. Cash Flows From Operations
Cash flows from operations of the
reporting Change in the exchange rate between the
enterprise are directly and immediately reporting currency and the local currency,
affected by a change in the exchange rate has little or no direct effect on the present
berween the reporting currency and the and future Cash Flows from Operations of
currency in the country of IFO. either the NFO or the reporting enterprise.
6. Effect of Change in Exchange Rate
Change in the exchange rate affects the Change in the exchange rate affects the
individual monetary items held by the IFO reporting enterprise's Net Investment in
rather than the reporting enterprise's Net
Investment in the IFO.
the NFO rather than the individual monetary
and non-monetary items held by the NFO.

2. LLUSTRATIONS ON FOREIGN BRANCHES

21 INTEGRAL VISNON-INTEGRAL
Hustration 1: (Conversion of Ledger Balances)
On 31st March, 2017, the following ledger balances have been extracted from the books of
Washington branch office
Particulars
Buiiding ' *** *
180
Stock as on 1-4-2016 26
Cash and Bank Balances ***** ** 57
Purchases 96
Sales 110
Commission Receipts ***** ** *****
28
Debtors 46
Creditors 65
YOu are required to convert above Ledger balances into Indian Rupees.
Use the following rates of exchange
Particulars per $
Opening rate * * 46
Closing rate 50
Average rate 48
For Fixed Assets 42
 6 Advanced Financial Accounting (M.Com. Part-II : SEM-

Solution (CA-Inter, May, 2010)

Conversion of Ledger Balances (in Dollars) into Rupees

Particulars S Rate per S Amount in

180 42 7.560
Building
Stock as on 1-4-2017 26 46 1,196
Cash and Bank Balances 57 50 2.850
Purchases 96 48 4,608
Sales 110 48 5.280
Commission Receipts 28 48 1,344
Debtors 46 50 2.300
Creditors 65 50 3,250
lustration 2: (Converting Trial Balancefor Ascertaining FE Gain/Loss: Integral Operations)
ILtd. hasa branch in Sydney, Australia. At the end of31st March, 2017 the following ledger balances
have been extracted from the books of the Sydney office
Sydney (Australia Dollars thousand)

Particulars Dr. AS Cr AS Particulars Dr.Dr. AS C. AS

Plant & Machinery (Cost)
lant & Machinery (Depr.)
200 Goods Sent to Branch 5

Debtors/Creditors
130 and Salaries
Wages 45
60 30 Rent 12
Stock (1-4-2016) 20 Office Expenses 18|
Cash/Bank Balances 10 Commission Receipts 100
Purchases/Sales 20 123 Branch/H.O. Current Alc
7

390| 390
The following information is also available
Goods sent by H.O. 100 thousand. Branch Ac in H.O. - T 120 thousand.
Stock at 31-3-2017, Sydney Branch Australian $ 3,125. You are required to convert the Branch Tna
Balance into rupees
(Use the following rate of exchange : Opening Rate A $ = 20; Closing Rate A$ = 24; Averag
Rate A $ =R 22; For Fixed Assets A $ = 7 18)
Ascertain the exchange loss or gain, according to AS 11 (Revised 2003) assuming that the branc
operations are integral to the main operations (i.e. it is a "dependent" branch).
Solution (M.Com., Oct. 09, CA-Inter, May 1995, adapted)
As per AS-11 (Revised 2003). the Sydney Branch Trial Balance is to be converted as under.
Sydney Branch Trial Balance as on 31-3-2017 000)

Particulars Dr. A $ Cr. A S

Conversion Dr. Cr

Rate Per S
Plant and Machinery (Cost) 200 18 3.600
Plant and Machinery (Depreciation) 130| 1 18 2,340
Debtors/Creditors 60 30 24 720
1,440
Opening Stock 20 20 400
Cash and Bank Balances 10 24 240
Purchases/Sales 20 123 22 2,706
Goods Received from H.O.
440|
100
Wages and Salaries 45 22 990
Rent 12 22 264
Office Expenses 18 R 22 396
Commission Receipts 100 22 2,200
H.O. Current Account 120
7,870 8,080
Exchange Difference (Bal. Fig)
(Dr. to P&L A/c) 216
8 086
8,086
Foreign Currency Conversion .As Per AS 11- Foreign Branches
As per AS-11 (Revised 2003), the exchange difference (loss) in case of an integrated foreign operaton
should be written off in profit and loss for the year.
lustration 3: (Non-integral)
Assume, in llustration 2 above, that the Sydney branch is an "independent" branch i.e. ts operations
are non-integral in nature.

Solution:
In case the operations are non-integral, the Sydney Branch Trial Balance is to be converted as
under
Sydney Branch Trial Balance as on 31-3-2017

Particulars Conversion Dr. Cr.

Rate Per $S (000) (000)
Plant and Machinery (Cost) 24 4,800
Plant and Machinery (Depreciation) * *** *** * **
24 3,120
Debtors/ Creditors 24 1,440 720
Opening Stock 20 400
Cash and Bank Balances *
24 240
Purchases / Sales 22 440 2,706
Goods Received From H.O. * * * **
100
Wages and Salaries 22 990
Rent * * ** 22 264
Office Expenses ** *** ***
22 396
Commission Receipts '** ***
22 2,200
* * ' ***
22 120
H.O. Current Account . .

9,070 8,866
Exchange Difference (Profit) (Bal. Fig.) 204
(Credited to Foreign Currency Translation Reserve) 9,070 9,070

Notes
even the Fixed
Thus, when branch operation is non-integral, (i) all balance sheet items (e.g.
a
difference is transferred
Assets in above case) are converted at the closing rate; and (ii) the exchange
to a Reserve.

2.2 FOREIGN BRANCH OFINDIAN H.O.

llustration 4
has a branch in Sydney. At the end of each year
The firm Hardik and Co. with its H.O. in Bhopal
the branch in Australian dollar currency is converted into
(December 31) a Trial Balance sent by
Rupee currency at the head office.
has been compiled at the branch as on 31st December,
The following Trial Balance for the year
2017.

Particulars
Dr.$ Cr. $
2,500
Bills Receivable
3,800
Sundry Debtors 1,100
Sundry Creditors * *'' ''
13,500|
Purchases 22,800
Sales 1,340
Furniture and Fixtures
Stock (1st January, 2017)
2,000||
2,000
Establishment Expenses
1,400
Salaries **' **' **' 400
Rent, Rates and Taxes
* * ' 1,450
Sundry Expenses 128
Furniture and Fixtures
' ' '' '*

Depreciation on
Remittances to H.O.
**'*'''' ''' ''
1,502|
"' ' ' ' '*" ' ' ' ''' 6,920
Head Office Account ' **' *'' ''" 800
Cash on hand and at Bank
30,820 30,820
Total
 41
Forcign Currencyr Conversion [4s Per AS 11) - Foreign Branches

EXERCISES

OUTLINE
Theory Questions 41
. Objective Questions 41
5.1 Multiple Choice Questions 41
5.2 Check Your Answers 43

4 THEORY QUESTIONS
1. Write a short note on Conversion of Foreign Branch Trial Balance. (May 99)
[Ans.: Refer Para 1]
2. in the context of the relevant Accounting Standard. give your comments on thefollowing : "ASsets
and liabilities and income and expenditure items in respect of foreign branches are translated
into Indian Rupees at the prevailing rate of exchange at the end of the year. The resultant
exchange differences, in case of proit, is carried to other Liabilities Account, and incase ofloss
is charged to Revenue". (CA Final, Nov. 2002) [Ans.: Refer Para 1]

5. OBJECTIVE QUESTIONS

5.1 MULTIPLE CHOICEQUESTIONS

1. AS 11 defines 'Foreign Operation" as an entity whose activities are based in a foreign country
VIz.

(a) subsidiary of the reporting enterprise (b) joint venture of the reporting enterprise
(c) branch of the reporting enterprise (d) all the above
2. If a foreign operation which sells goods imported from the reporting enterprise and remits the

proceeds to the reporting enterprise, it is

(a) An Integral Foreign Operation (b) A Non-integral Foreign Operation
(c) either (a) or (b) (d) neither (a) nor (b)
3. If 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, it is
(a) An Integral Foreign Operation (b) A Non-integral Foreign Operation
(c) either (a) or (b) (d) neither (a) nor (b)
4. If the change in the exchange rate affects the reporting enterprise's net investment in that operation
rather than the individual monetary items held by the foreign operation, it is
(a) An Integral Foreign Operation (b) A Non-integral Foreign Operation
(c) either (a) or (b) (d) neither (a) nor (b)
5. If transactions with the reporting enterprise are not a high proportion of the foreign operation's
activities, it is
(a) An Integral Foreign Operation (b) A Non-integral Foreign Operation
(c) either (a) or (b) (d) neither (a) nor (b)
6. If the activities of the foreign operation are financed mainly from its own operations or local
it is
borrowings rather than from the reporting enterprise,
(a) An Integral Foreign Operation (b) A Non-integral Foreign Operation
(c) either (a) or (b) (d) neither (a) nor (b)
7. If the foreign operation's sales are mainly in currencies other than the reporting currency, it is
(a) An Integral Foreign Operation (b) A Non-integral Foreign Operation
(c) either (a) or (b) (d) neither (a) nor (b)
8. If the foreign operation's sales are mainly in currencies other than the reporting currency, it is
(a) An Integral Foreign Operation (b) A Non-integral Foreign Operation
(c) either (a) or (b) (d) neither (a) nor (b)
 42 Advanced Financial Accounting (M.Com. Part-1I: SEM- l
9. AS 11 classifies the foreign branches into
(@) ()Integral Foreign Operation and (i) Non- Integral Foreign Operation
(6) Branches following () Debtors method and (i) Stock and debtors method
(c) Branches receiving goods at (i) cost and (i) invoice price
(d None of the above
10. Monetary items of Integral Foreign Operation at the balance sheet are translated at
(a) exchange rate at the date of transaction
(b) closing exchange rate
(c) average exchange rate during the year
(d) exchange rate on date of valuation at fair value
11.Tangible Fixed assets of Integral Foreign Operation carried at cost are translated at
(a) exchange rate at the date of purchase of asset
(b) closing exchange rate
(c) average exchange rate during the year
(d) exchange rate on date of valuation at fair value
12. Depreciation Fixed assets of
on
Integral Foreign Operation carried at cost are translated at
(a) exchange rate at the date of purchase of asset
(b) closing exchange rate
(c) average exchange rate during the year
(d) exchange rate on date of valuation at fair value
13.Tangible Fixed assets of lIntegral Foreign Operation carried at fair value are translated at
(a) exchange rate at the date of purchase of asset
(b) closing exchange rate
(c) average exchange rate during the year
(d) exchange rate on date of valuation at fair value
14. Cost of inventories of Integral Foreign Operation is translated
at
(a) closing exchange rate
(b) average exchange rate during the year
(c) exchange rates that existed when the cost of inventony was incurred
(d) opening exchange rate
15.Realizable Value of inventories of Integral Foreign Operation is translated at
(a) closing exchange rate
(b) average exchange rate during the year
(C) exchange rates that existed when the cost of
inventory was incurred
(d)
opening exchange rate
16. Exchange difference of Integral Foreign Operation is
(a) transferred to suspense account
(b) transferred to profit and loss account
(c) transferred to foreign currency translation reserve
(d) transferred to "Net investment in Integral foreign operation
Account"
17.Monetary items of Non-integral Foreign Operation at the balance sheet are translated at
(a) exchange rate at the date of transaction
(b) closing exchange rate
(c) average exchange rate during the year
(d) exchange rate on date of valuation at fair value
18.Non-monetary items of Non-integral Foreign Operation at the balance sheet
(a) exchange rate at the date of transaction are translated
(b) closing exchange rate
(c) average exchange rate during the year
(d) exchange rate on date of valuation at fair value
19.Exchange ditference of Non-integral Foreign Operation is
(a) transferred to suspense account
(b) transferred to profit and losss account
(c) transferred to foreign currency translation reserve
(d) transferred to "Net investment in Integral foreign operation Account
Foreign Currency Coversion [As Per AS 11/ - Foreign Branches 43
20.Any goodwill or capital reserve arising on the acquisition of a non-integral foreign operation is
translated at
(a) exchange rate at the date of transaction
(b) closing exchange rate
(c) average exchange rate during the year
(d) exchange rate on date of valuation at fair value
21.A contingent liability disclosed in the financial statements of a non-integral foreign operation is
translated at
(a) exchange rate at the date of transaction
(b) closing exchange rate
(c) average exchange rate during the year
(d) exchange rate on date of valuation at fair value

5.2 CHECK YOUR ANSWERS

5.1

1. (d) 4. (6) 7. (b) 10. (b) 13. (d) 16. (b) 19 (c)
2. (a) 5. (b) 8. (b) 11. (a) 14 (c) 17. (b) 20. (b)
3. (a) 6. (b) 9 (a) 12. (a) 15. (a) 18. (6) 21. (6)