Accounting For Foreign Branches

ACCOUNTING FOR FOREIGN BRANCHES
For the purpose of accounting, classifies the foreign branches may be classified into two
types:
 Integral Foreign Operation;

 Non- Integral Foreign Operation.
Integral Foreign Operation (IFO)
It is a foreign operation, the activities of which are an integral part of those of the
reporting enterprise. The business of IFO is carried on as if it were an extension of the
reporting enterprise’s operations. For example, sale of goods imported from the
reporting enterprise and remittance of proceeds to the reporting enterprise.
Non-Integral Foreign Operation (NFO)
It is a foreign operation that is not an Integral Foreign Operation. The business of a NFO
is carried on in a substantially independent way by accumulating cash and other
monetary items, incurring expenses, generating income and arranging borrowing in its
local currency. An NFO may also enter into transactions in foreign currencies, including
transactions in the reporting currency. An example of NFO may be production in a
foreign currency out of the resources available in such country independent of the
reporting enterprise.
The following are the indicators of Non- Integral Foreign Operation-
 Control by reporting enterprises - While the reporting enterprise may control the
foreign operation, the activities of foreign operation is carried independently
without much dependence on reporting enterprise.
 Transactions with the reporting enterprises are not a high proportion of the
foreign operation’s activities.
 Activities of foreign operation are mainly financed by its operations or from local
borrowings. In other words, it raises finance independently and is in no way
dependent on reporting enterprises.
 Foreign operation sales are mainly in currencies other than reporting currency.
 All the expenses by foreign operations are primarily paid in local currency, not in
the reporting currency.
 Day-to-day cash flow of the reporting enterprises is independent of the foreign
enterprises cash flows.
 Sales prices of the foreign enterprises are not affected by the day-to-day
changes in exchange rate of the reporting currency of the foreign operation.
 There is an active sales market for the foreign operation product.
The above are only indicators and not decisive/conclusive factors to classify the foreign
operations as non-integral, much will depend on factual information, situations of the
particular case and, therefore, judgment is necessary to determine the appropriate
classification.
Controversies may arise in deciding the foreign branches of the enterprises into integral
or non-integral. However, there may not be any controversy that subsidiary associates
and joint ventures are non-integral foreign operation.
In case of branches classified as independent for the purpose of accounting are

generally classified as non-integral foreign operations.
TECHNIQUES FOR FOREIGN CURRENCY TRANSLATION
Integral Foreign Operation (IFO)
Following are the standard recommendations for foreign currency translation:
(1) All transactions of IFO be translated at the rate prevailing on the date of transaction.
This will require date wise details of the transaction entered by that operation together
with the rates. Weekly or monthly average rate is permitted if there are no significant
variations in the rate.
(2) Translation at the balance sheet date-
i. Monetary items at closing rate;

ii. Non-monetary items: 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 existed on the date of the valuation.
iii. 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 closing
rate.
iv. Exchange difference arising on the translation of the financial statement of
integral foreign operation should be charged to profit and loss account.
Non-Integral Foreign Operation
Accounts of non-integral foreign operation are translated using the following principles:
 Balance sheet items i.e. Assets and Liabilities both monetary and non- monetary
– apply closing exchange rate.
 Items of income and expenses – At actual exchange rates on the date of
transactions. However, accounting standard allows average rate subject to
materiality.
 Resulting exchange rate difference should be accumulated in a “foreign currency
translation reserve” until the disposal of “net investment in non- integral foreign
operation
Items Integral Foreign Operations Non Integral Foreign Operations

Monetary Items (Cash, Bank
Balance, Debtor, Creditor, Loans, Closing rate Closing rate
Bills receivable, Bills Payable)
Non-Monetary Items (Fixed Assets) Rate on date of purchase Closing Rate
Generally, closing rate (but if rate on
Inventory the date of purchase of inventory is Closing Rate
available, then that rate)
Average rate Average rate
Profit and Loss items (revenue
(but if rate on the date of transaction (but if rate on the date of transaction
items)
is available, then that rate) is available, then that rate)
Accumulated in Foreign Currency
Exchange Difference Charge to P&L account.
Translation reserve.
CHANGE IN CLASSIFICATION
Integral to Non-Integral
i. Translation procedure applicable to non-integral shall be followed from the date

of change
ii. Exchange difference arising on the translation of non-monetary assets at the
date of re-classification is accumulated in foreign currency translation reserve.
Non-Integral to Integral
i. Translation procedure as applicable to integral should be applied from the date of

change.
ii. Translated amount of non-monetary items at the date of change is treated as
historical cost.
iii. Exchange difference lying in foreign currency translation reserve is not to be
recognized as income or expense till the disposal of the operation even if the
foreign operation becomes integral.

Accounting For Foreign Branches

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ACCOUNTING FOR FOREIGN BRANCHES

 Integral Foreign Operation;

Integral Foreign Operation (IFO)

Non-Integral Foreign Operation (NFO)

The following are the indicators of Non- Integral Foreign Operation-

In case of branches classified as independent for the purpose of accounting are

TECHNIQUES FOR FOREIGN CURRENCY TRANSLATION

Integral Foreign Operation (IFO)

Following are the standard recommendations for foreign currency translation:

(2) Translation at the balance sheet date-

i. Monetary items at closing rate;

Non-Integral Foreign Operation

Items Integral Foreign Operations Non Integral Foreign Operations

i. Translation procedure applicable to non-integral shall be followed from the date

i. Translation procedure as applicable to integral should be applied from the date of

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