Accounting for Foreign Currency Transactions AS 11 revised

Accounting for Foreign Currency Transactions (AS 11 revised w. e. f. 1. 4. 2004) Online Learning Resources CA Prasanna M. Tambe Last updated on 17 th April 2020 Email for comments & suggestions tybcom. faa 1@gmail. com

How to use these online learning resources ? �Download & open the presentation file (PPT) provided to you in PDF form �Download & open the audio file named “as 11 audio” �Note that each slide is serially numbered �Listen & proceed with audio file and PPT �Audio will instruct you to change over to next slide 2

Key issues in AS 11 �Scope Ø Applies to transactions in foreign currency including forward exchange contracts Ø Covers transactions in the nature of v Purchase/sale of goods or services where price is denominated in Fx v Borrowing/lending of money where amount is denominated in Fx v Unperformed forward exchange contract v Acquisition or disposal of assets or incurring/settling liabilities denominated in Fx 3

Key issues in AS 11 Transactions excluded from scope Ø Restatement of financial statements from its reporting currency into another currency for user convenience Ø Presentation of cash flows in Fx and transactions of cash flows from foreign operations (AS 3) Ø Exchange differences related to adjustment in interest costs (AS 16) 4

Key issues in AS 11 When transactions are translated ? Ø Initial recognition & immediate settlement Ø Recognition in stages v On the date of transaction v On balance sheet date v On settlement Ø Recognition of Fx gain or loss in profit & loss account 5

Key issues in AS 11 Which transactions are translated ? Ø Monetary items viz. foreign currency notes, balance in bank accounts denominated in Fx, debtors /creditors or loans denominated in Fx – Require translation Ø Non-monetary items viz. assets or liabilities other than monetary items for Eg. Inventories , fixed assets , capital , investment in equity shares etc – Do not Require translation 6

Key issues in AS 11 Rate for conversion q Monetary items Ø Rate on date of initial recognition or balance sheet or settlement Ø Expected realizable value in certain cases q Non monetary items to be carried at historical cost or fair value 7

Certain terms used in AS 11 �Reporting currency is the currency used in 8 presenting financial statements �Foreign currency is the currency other than reporting currency �Exchange rate is the ratio for exchange of two currencies �Closing rate is the rate on the date of balance sheet �Fair value is the amount for which an asset could be exchanged or liability settled between willing parties having complete knowledge of transactions carried out at arm’s length.

Accounting Entries – Import purchases When goods are purchasesd Import purchases a/c Dr To Supplier a/c When payment is made Supplier a/c Dr. Fx Fluctuation a/c Dr. (for loss) To Bank a/c To Fx Fluctuation a/c (for gain) 9

Accounting Entries – Import purchases At year end Fx Fluctuation a/c Dr. (for loss) To Supplier a/c OR Supplier a/c Dr. To Fx Fluctuation a/c (for gain) Fx Fluctuation a/c Dr. (for net gain) To P&L a/c 10

Accounting Entries – Export sales When the goods are sold Customer a/c Dr To Export sales When amount is received Bank a/c Dr. Fx Fluctuation a/c Dr. (for loss) To Customer a/c To Fx Fluctuation a/c (for gain) 11

Accounting Entries – Export sales At year end Fx Fluctuation a/c Dr. (for loss) To Customer a/c OR Customer a/c Dr. To Fx Fluctuation a/c (for gain) Fx Fluctuation a/c Dr. (for net gain) To P&L a/c 12

Key points to remember 13 IMPORT PURCHASES EXPORT SALES Fx rate increases – loss Fx rate increases – Gain Fx rate decreases - Gain Fx rate decreases – loss BORROWING LENDING Fx rate increases – loss Fx rate increases – Gain Fx rate decreases – loss

Thank You ! 14