AS-11 (REV) Foreign currency transactions

BY
RAMKI

www.pkfindia.in

Latest change- Govt notification Mar 31, 09

Applicable to companies only

Exchange diff arising on reporting of Long term FC monetary items at a rate different from
those at which they were initially recorded during the period or reported in previous FS
relating to depreciable capital asset can be added to or deducted from cost of fixed asset and
depreciated over balance life of asset

In other cases (where not related to fixed assets) can be accumulated in a "Foreign currency
Monetary item Translation difference' a/c and amortised over the balance period of long term
asset/liability but not beyond 31.3.2011.

Applicable from accounting periods commencing on or after 7/12/06 or date from which FC
monetary asset is acquired whichever is later

www.pkfindia.in

(Other than differences under para 15-non integral foreign operation)

The past transfers to P&L to be reversed to general reserve.

Disclosure of option, amount remaining to be amortised

AS11 (rev) -CHANGES

www.pkfindia.in

Exchange differences arising on repayment of liabilities incurred for acquisition of fixed assets
to be charged off and not capitalised. (Old AS 11 required capitalisation)
However in view of SCH VI of Companies Act, exemption provided for exchange
differences arising on repayment of liabilities incurred for imported assets ,which was
continued to be capitalised till 6 Dec 06 ; This is no longer allowed after 7 Dec 06 after
Companies (Accounting standards rules) 2006. (confirmed by announcement of ICAI in Jul
07)
However even now Reliance Industries continues to take the forex diff to fixed assets
based on legal opinion. (see Jun 07 results)

AS 11 rev deals with translation of financial statements of all foreign operations including
subsidiaries, associates and JVs also; Old AS 11 covered only foreign branches

Also AS 11 rev requires classification of foreign operations as integral (part of the enterprise)
and non integral (largely independent)
Temporal method used for former and current rate method used for latter

AS 11 rev deals with forward exchange contracts entered into for the purposes of trading or
speculation

What are foreign currency transactions?

www.pkfindia.in

Foreign currency transaction is a transaction

which is denominated in
or
requires settlement in a foreign currency.

Foreign currency transactions

www.pkfindia.in

A foreign currency transaction should be recorded on initial

recognition by applying to the FC 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 transaction can be used- e.g avg. rate for a
week or a month provided exchange rate does not fluctuate
significantly

Date of transaction

Date on which transaction becomes eligible to be

recognised in books of accounts
E.g for sale it will be date as per AS 9 date on
which risk and reward of ownership are transferred
E.g when advance is given for a fixed asset the
translation is done based on date of actual receipt
later and not date advance was given

www.pkfindia.in

Restatement at BS date

www.pkfindia.in

If a foreign currency transaction is outstanding at BS date,

Monetary items (cash, receivables, payables etc) should
be reported using the closing rate
Non monetary items carried at historical cost to be carried
at exchange rate at the date of transaction
For inst. Inventory- exchange difference should not be
added to cost of inventory
Non monetary assets carried at fair value (say nrv or
revalued assets) to be reported at exchange rate that
existed when the values were determined

Monetary and Non monetary

www.pkfindia.in

Monetary
Examples from AS-11- cash, receivables, payables.
Examples from IFRS- pensions and other employee benefits to
be paid in cash, cash dividends recognised as liability

Non monetary Examples from AS-11- Fixed assets, investments in equity

shares
Examples from IFRS- Prepaid goods and services, goodwill,
intangibles, inventory, property and plant , provisions to be settled
by delivery of non monetary asset.

One item with differing opinions is: advance from customers for export
and converted into rupees.
ICAI EAC opinion says it is monetary but IFRS definition
suggests it is non monetary

What rates to use for restatement?

www.pkfindia.in

Current assets excl. cash and bank: Bills buying

Cash and bank:

TT buying

Liabilities (excl. LT loans)

Bills selling

LT loans

TT selling

Income

TT buying

Expenditure
TT selling
Not stated in Standard (in IFRS too) common practice

What not to restate?

www.pkfindia.in

All current assets are not to be restated. Only monetary

assets

Monetary assets and liabilities are those for which the

amount is receivable/ payable in Foreign Currency and
the amount is fixed.

Thus non refundable advance to a supplier for fixed

asset purchase should not be restated.

Treatment of exchange differences

www.pkfindia.in

Exchange differences on settlement of monetary items

or on restatement to be recognised in P&L account
except as stated earlier

Exchange difference amount should be debited to a

separate account and the amount disclosed

Forex gain of doubtful debt

Any forex gain on a doubtful debt in FC should be

recognised as per AS 11
However a provision should be made for the total
receivable

www.pkfindia.in

Forward exchange contracts

www.pkfindia.in

A forward cover may be related to one of following and

treatment differs in each case :

*
Hedging where there is an underlying asset or
liability/loan (AS 11 applies)

Speculative or trading contracts

*
Hedging where there is no underlying asset or liability
(firm commitment or highly probable forecast transaction)- AS
11 does not apply; ICAI announcement applies; New AS 30
/31 will apply

Forward exchange contracts AS 11

www.pkfindia.in

Non speculation:
Premium/discount (difference between exchange rate at
the date of inception of forward exchange contract and
forward rate specified in the contract) to be amortised over
life of contract
Exchange differences on such contract to be recognised
in P&L on reporting date
Profit or loss on cancellation to be recognised in P&L

Speculation:
Gain/loss computed by multiplying the FC amount of the
FE contract by the difference between Forward rate
available at reporting date for remaining maturity and the
contracted forward rate
The gain/loss accounted in P&L

Firm commitment/ Highly probable forecast

transaction

www.pkfindia.in

Clarification of ICAI Jul 07: Pending the issuance of the proposed Accounting
Standard on Financial Instruments: Recognition and Measurement, which is
under formulation, exchange differences arising on the forward exchange
contracts entered into to hedge the foreign currency risks of a firm commitment
or a highly probable forecast transaction should be recognised in the statement
of profit and loss in the reporting period in which the exchange rate changes.
Any profit or loss arising on renewal or cancellation of such contracts should be
recognised as income or expense for the period.

The ICAI announcement on this would now be applicable in respect of

accounting period(s) commencing on or after April 1, 2008.

This covers transactions to be entered into in future not transactions already in

place. (first issued in Jan 06 and implementation postponed quite a few times)

This covers exchange difference only and not premium/ discount which should
be accounted as per AS 11- rev 2003.

This announcement now stands withdrawn.

Derivatives

www.pkfindia.in

After Hexaware one needs to be very careful in this

area

Go through the transactions carefully and obtain

management reps.

Ensure any exposure not marked to market (even if not

required because of postponement of announcement )
is disclosed to audit committee

Derivatives

Pending new AS in this area Company to disclose some info. In notes on accounts.
category-wise quantitative data about the derivative instruments that are outstanding at
the BS date;
the purpose viz. hedging or speculation for which such derivative instruments have
been acquired and
the foreign currency exposures that are not hedged by a derivative instrument or
otherwise.

Sample disclosure adapted from Aditya Birla Nuvo Ltd

Derivatives outstanding on BS date:
Currency and interest rate swap USD- 22511365
Buyers credit
- Jyen- 2986811871
Forward contracts
-USD- 22011365

www.pkfindia.in

-do-Jyen -4245311871
All above for hedging purposes and not speculation

FC exposures not hedged on BS date:

USD payable: 27181525; receivable: 10012579
Euroreceivable: 1962527

Derivatives ICAI new announcement -29/3/08

www.pkfindia.in

AS 30 can be followed by the entities, as the earlier adoption of a standard is always

encouraged.

In case an entity does not follow AS 30, the entity should mark-to-market all the outstanding
derivative contracts on the balance sheet date.

The resulting mark-to-market losses should be provided for keeping in view the principle of
prudence as enunciated in AS 1, Disclosure of Accounting Policies.

The entity needs to disclose the policy followed with regard to accounting for derivatives in its
financial statements.
In case AS 30 is followed by the entity, a disclosure of the amounts recognised in the financial
statements should be made.

In case AS 30 is not followed, the losses provided for as suggested in paragraph 3 above
should be separately disclosed by the entity.

The auditors should consider making appropriate disclosures in their reports if the aforesaid
accounting treatment and disclosures are not made.

This clarificatory Announcement applies to financial statements for the period ending March
31, 2008, or thereafter.

Case study- derivatives

www.pkfindia.in

The Arvind mills Ltd Mar 31, 06

Accounting policy:
The derivative instruments for hedging risk arising out of movement
in the foreign currency vis--vis Indian Re, interest rates and prices in
cotton are measured based on available market data wrt spot price of
underlying instrument, time duration of the derivative instrument,
volatility, interest rates etc, and accepted pricing methods/ models.
The Company does not measure and recognise open/unsettled
derivative instrument while preparing financial statements. The
Company recognises the income or expenses arising out of derivative
instrument on realisation basis only on the maturity /settlement/
cancellation of the derivative contract.
Notes:
9. There is an unrealised gain of Rs 1.14 CR on a/c of exchange
differences arising on forward exchange contracts to hedge the
foreign currency contracts to hedge the foreign currency of a firm
commitment or a highly probable forecast transaction, which is to be
recognised in the accounts of subsequent years.
10. ---The Company has borrowed long term as well as short term
loans in FC but as the Company is net foreign currency surplus
company, there is no unhedged exposure in foreign currency.

IFRS V (IGAAP)

www.pkfindia.in

IAS 21 , IAS 39, IFRS 7 / (AS 11)

No distinction in foreign operations that are integral and non integral. (Such
distinction there)

Exchange differences cant be capitalised. (In India till 7 Dec 06 it was required
that exchange differences arising on repayment / restatement of liabilities
incurred for imported fixed assets should be capitalised. No longer.)

Forward exchange contracts and dertivatives etc. are dealt in IAS 39 (Dealt in
AS 11 and different from IAS 39; separate announcement covers forward covers
for firm commitments and highly probable transactions-but implementation
postponed to 1.4.08)

Deals with when monetary item forming part of an entity is net investment in a
foreign operation (not dealt with)

Functional currency -currency of the primary economic environment- used. (no

such concept)

Convergence with IFRS -status

www.pkfindia.in

Category II-level of preparedness

Gaining experience before adopting IAS 21

No material differences as functional currency

approach gives almost same results as under pre
revised IAS 21 which also talked of integral/non integral
foreign operations