Standard 11: The Effects of Changes in Foreign Exchange Rates

Standard 11: The Effects of Changes in Foreign Exchange Rates · Complied AI

(b)

in translating the financial statements of foreign operations.

2 This Standard also deals with accounting for foreign currency transactions in the nature of forward exchange contracts . 2

3 This Standard 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

Standard requires disclosure of the reason for using that currency. This Standard also requires disclosure of the

reason for any change in the reporting currency.

4 This Standard does not deal with the restatement of an enterprise’s financial statements from its reporting currency into another currency for the convenience of

users accustomed to that currency or for similar purposes.

5 This Standard 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 Standard 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 ).

Definitions

7. The following terms are used in this Standard with the meanings specified:

7.1 Average rate is the mean of

the exchange rates in force during a period.

7.2 Closing rate is the exchange

rate at the balance sheet date.

7.3 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.

7.4 Exchange rate is the ratio

for exchange of two currencies.

7.5 Fair value is the amount for

which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s

length transaction.

7.6 Foreign currency is a

currency other than the reporting currency of an enterprise.

7.7 Foreign operation is a

subsidiary 3 , associate 4 , joint venture 5 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.

7.8 Forward exchange contract means an agreement to exchange different currencies at a forward rate.

7.9 Forward rate is the specified

exchange rate for exchange of two currencies at a specified future date.

7.10 Integral foreign operation is a foreign operation, the activities of which are an integral part of those of the reporting

enterprise.

7.11 Monetary items are money

held and assets and liabilities to be received or paid in fixed or determinable amounts of money.

7.12 Net investment in a non-integral foreign

operation is the reporting enterprise’s share in the net assets of that operation.

7.13 Non-integral foreign operation is a foreign operation that is not an integral foreign operation.

7.14 Non-monetary items are

assets and liabilities other than monetary items.

7.15 Reporting currency is the currency used in presenting the financial statements.

Foreign Currency Transactions

Initial Recognition

8 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:

(c)

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.

12. 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 Standard. The contingent liability denominated

in foreign currency at the balance sheet date is disclosed by using the closing rate.

Recognition of Exchange Differences

13. Exchange differences arising on the settlement of monetary items or on reporting an enterprise’s

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 15.

14. 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

15 Exchange differences arising on a monetary item that, in substance, forms part of

an enterprise’s net investment in a non-integral foreign

operation should be accumulated in a foreign currency translation reserve in the enterprise’s financial

statements until the disposal of the net investment, at which time they should be recognised as income or as

expenses in accordance with paragraph 31 .

16 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 enterprise’s 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.

Financial Statements of Foreign Operations

Classification of Foreign Operations

17 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”.

18 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 enterprise’s operations. For example, such a foreign operation might only sell

goods imported from the reporting enterprise and remit 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 enterprise’s 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

enterprise’s net investment in that operation.

19 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 non-integral foreign operation or the reporting

enterprise. The change in the exchange rate affects the reporting enterprise’s net investment in the non-integral

foreign operation rather than the individual monetary and non-monetary items held by the non- integral foreign

operation.

20 The following are indications that a foreign operation is a non- integral foreign operation rather than an

integral foreign operation:

(h)

there is an active local sales market for the foreign operation’s 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 judgement is

necessary to determine the appropriate classification.

Integral Foreign Operations

21. The financial statements of an integral foreign operation should be translated using the principles

and procedures in paragraphs 8 to 16 as if the transactions of the foreign operation had been those of the reporting

enterprise itself.

22 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.

23 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.

Non-integral Foreign Operations

24 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:

(c)

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 a 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.

27 Any goodwill or capital reserve arising on the acquisition of a non- integral foreign operation is translated at

the closing rate in accordance with paragraph 24.

28 A contingent liability disclosed in the financial statements of a non- integral foreign operation is translated at

the closing rate for its disclosure in the financial statements of the reporting enterprise.

29 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 intra-group 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.

30 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 balance sheet date of the reporting

enterprises in accordance with AS 21. 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

31. 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.

Paragraph 32 for Companies

32. 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. Remittance from a non-integral foreign operation

by way of repatriation of accumulated profits does not form part of a disposal unless it constitutes return of the

investment 6 . 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.

Paragraph 32 for Entities other than Companies

32. 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.

Change in the Classification of a Foreign Operation

33. When there is a change in the classification of a foreign operation, the translation procedures

applicable to the revised classification should be applied from the date of the change in the classification.

34 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

35 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 7

36. 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 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.

37. 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.

38. A gain or loss on a forward exchange contract to which paragraph 36 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.

39. 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.

Disclosure

40 An enterprise should disclose:

(d)

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.

43 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 .

44 Disclosure is also encouraged of an enterprise’s foreign currency risk management policy.

Proviso

Provided that a Micro, Small and Medium-sized Enterprise non-company entity as

defined in Appendix I to this Compendium, may not comply with paragraph 44.

Transitional Provisions 8

45. On the first time application of this Standard, if a foreign branch is classified as a non-integral

foreign operation in accordance with the requirements of this Standard, the accounting treatment prescribed in

paragraphs 33 and 34 of the Standard in respect of change in the classification of a foreign operation should be

applied. Paragraphs 46 and 46A for Companies

46 9 In respect of accounting periods commencing on or after 7th December, 2006 and ending on or before

31st March, 2020 10 , at the option of the enterprise (such option to be irrevocable and to be exercised

retrospectively for such accounting period, from the date this transitional provision comes into force or the first

date on which the concerned foreign currency monetary item is acquired, whichever is later, and applied to all such

foreign currency monetary items), exchange differences arising on reporting of long-term foreign currency monetary

items at rates different from those at which they were initially recorded during the period, or reported in previous

financial statements, in so far as they relate to the acquisition of a depreciable capital asset, can be added to or

deducted from the cost of the asset and shall be depreciated over the balance life of the asset, and in other cases,

can be accumulated in a

“Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s financial statements and

amortized over the balance period of such long-term asset/liability but not beyond 31st March, 2020 11 , by

recognition as income or expense in each of such periods, with the exception of exchange differences dealt with in

accordance with paragraph 15 . For the purposes of exercise of this

option, an asset or liability shall be designated as a long- term foreign currency monetary item, if the asset or

liability is expressed in a foreign currency and has a term of 12 months or more at the date of origination of the

asset or liability. Any difference pertaining to accounting periods which commenced on or after 7th December, 2006,

previously recognized in the profit and loss account before the exercise of the option shall be reversed in so far

as it relates to the acquisition of a depreciable capital asset by addition or deduction from the cost of the asset

and in other cases by transfer to “Foreign Currency Monetary Item Translation Difference Account” in both cases, by

debit or credit, as the case may be, to the general reserve. If the option stated in this paragraph is exercised,

disclosure shall be made of the fact of such exercise of such option and of the amount remaining to be amortized in

the financial statements of the period in which such option is exercised and in every subsequent period so long as

any exchange difference remains unamortized.

46A 12 . (1) In respect of accounting periods commencing on or after the 1st April, 2011, for an enterprise

which had earlier exercised the option under paragraph 46 and at the option of any other enterprise (such option to

be irrevocable and to be applied to all such foreign currency monetary items), the exchange differences arising on

reporting of long- term foreign currency monetary items at rates different from those at which they were initially

recorded during the period, or reported in previous financial statements, in so far as they relate to the

acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be

depreciated over the balance life of the asset, and in other cases, can be accumulated in a ‘‘Foreign Currency

Monetary Item Translation Difference Account” in the enterprise’s financial statements and amortized over the

balance period of such long term asset or liability, by recognition as income or expense in each of such periods,

with the exception of exchange differences dealt with in accordance with the provisions of paragraph 15 of the said

rules.

Notes, amendments & references (43)

of Companies (Accounting Standards) Rules, 2006, under Companies Act, 1956. The Standard has been notified as part

of Companies (Accounting Standards) Rules, 2021, under Companies Act, 2013.The following footnote has been inserted

in Companies (Accounting Standards) Rules, 2021, which is relevant for companies:

" In respect of accounting for transactions in foreign currencies entered into by the reporting

enterprise itself or through its branches before the effective date of the notification prescribing Accounting

Standard (AS) 11 as part of Companies (Accounting Standards) Rules, 2006, the applicability of this Standard would

be determined on the basis of the Accounting Standard (AS) 11 revised by the ICAI 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 This Standard is applicable to exchange differences on all forward exchange contracts

including those entered into to hedge the foreign currency risk of existing assets and liabilities and is not

applicable to the exchange differences arising on forward exchange contracts entered into to hedge the foreign

currency risks of future transactions in respect of which firm commitments are made or which are highly probable

forecast transactions. A ‘firm commitment’ is a binding agreement for the exchange of a specified quantity of

resources at a specified price on a specified future date or dates and a ‘forecast transaction’ is an uncommitted

but anticipated future transaction.

3 As defined in AS 21,

Consolidated Financial Statements.

4 As defined in AS 23,

Accounting for Investments in Associates in Consolidated Financial Statements.

5 As defined in AS 27,

Financial Reporting of Interests in Joint Ventures.

6 Ministry of Corporate Affairs, Government of India, amended this paragraph by Notification

G.S.R. 569(E) dated June 18, 2018, which is relevant for companies.

7 See footnote 2.

8 Ministry of Corporate Affairs, Government of India, inserted the following footnote in

Companies (Accounting Standards) Rules, 2021, which is relevant for companies: “Transitional Provisions given in

Paragraphs 45 are relevant only for standards notified under Companies (Accounting Standards) Rules, 2006, as

amended from time to time. Transitional Provisions given in Paragraphs 46-46A are relevant for standards notified

under Companies (Accounting Standards) Rules, 2006 (as amended from time to time) as well as Companies

(Accounting Standards) Rules, 2021.”

9 Ministry of Corporate Affairs, Government of India, inserted this paragraph by Notification

dated 31st March, 2009, which is relevant for companies.

10 Initially the period mentioned was “31st March, 2011” which was substituted by “31st March,

2012” by Notification dated 11th May, 2011, published by Ministry of Corporate Affairs, Government of India.

Subsequently, “31st March, 2012” was substituted by “31st March, 2020” by Notification dated 29th December, 2011,

published by Ministry of Corporate Affairs, Government of India.

11 The Council has issued an Announcement clarifying presentation of Foreign Currency Monetary

Item Translation Difference Account (See Announcement XLIII ).

12 Ministry of Corporate Affairs, Government of India, inserted this paragraph by Notification

dated 29th December, 2011, which is relevant for companies.

13 Paragraph 46 has been inserted for entities other than Companies

in accordance with an Announcement issued by the Council of the ICAI ( See Announcement XLIV) .