PRESENTATION ON THE EFFECTS OF CHANGES IN FOREIGN

PRESENTATION ON THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) ORGANISED BY ON AT Presented by: CA Verendra Kalra

Applicability Accounting standard (as) 11, the effects of changes in foreign exchange rates (revised 2003), issued by the council of the institute of chartered accountants of India, comes into effect in respect of accounting periods commencing on or after 1 -4 -2004 and is mandatory in nature from that date. The revised standard supersedes accounting standard (as) 11, accounting for the effects of changes in foreign exchange rates (1994), except that in respect of accounting for transactions in foreign currencies entered into by the reporting enterprise itself or through its branches before the date this standard comes into effect, as 11 (1994) will continue to be applicable THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 2

Objective An enterprise may carry on activities involving foreign exchange in two ways: • It may have transactions in foreign currencies • It may have foreign operations. In order to include foreign currency transactions and foreign operations in the financial statements of an enterprise, transactions must be expressed in the enterprise's reporting currency and the financial statements of foreign operations must be translated into the enterprise’s reporting currency. The principal issues in accounting foreign currency transactions and foreign operations are to decide which exchange rate to use and how to recognize in the financial statements the financial effect of changes in exchange rates. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 3

Scope This Statement should be applied: • in accounting for transactions in foreign currencies; and • in translating the financial statements of foreign operations. • accounting foreign currency transactions in the nature of forward exchange contracts THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 4

Definitions Average rate is the mean of the exchange rates in force during a period. Closing rate is the exchange rate at the balance sheet date. 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. Exchange rate is the ratio for exchange of two currencies. 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. Foreign currency is a currency other than the reporting currency of an enterprise. Foreign operation is a subsidiary , associate , joint venture 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. Forward exchange contract means an agreement to exchange different currencies at a forward rate. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 5

Definitions Forward rate is the specified exchange rate for exchange of two currencies at a specified future date. Integral foreign operation is a foreign operation, the activities of which are an integral part of those of the reporting enterprise Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money. Cash, receivables, and payables are examples of monetary items. Net investment in a non-integral foreign operation is the reporting enterprise’s share in the net assets of that operation. Non-integral foreign operation is a foreign operation that is not an integral foreign operation. Non-monetary items are assets and liabilities other than monetary items. Fixed assets, inventories, and investments in equity shares are examples of non-monetary items. Reporting currency is the currency used in presenting the financial statements. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 6

Foreign Currency Transactions Initial Recognition • 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: buys or sells goods or services whose price is denominated in a foreign currency; borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; o becomes a party to an unperformed forward exchange contract; or otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency. A foreign currency transaction should be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. o 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. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 7

Reporting at Subsequent Balance Sheet Dates At each balance sheet date: foreign currency monetary items should be reported using the closing rate. non-monetary items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction; and 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. The contingent liability denominated in foreign currency at the balance sheet date is disclosed by using the closing rate. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 8

Recognition of Exchange Differences 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 ( Net investment in a Non–integral Foreign Operation). 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. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 9

Net Investment in a Non-integral Foreign Operation EXCEPTION TO THE RULE 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. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 10

Financial Statements of Foreign Operations Classification of Foreign Operations 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”. 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. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 11

Classification of Foreign Operations 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 nonintegral foreign operation. Appropriate classification for each operation can, in principle, be established from factual information related to the indicators listed in the AS. 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 judgment is necessary to determine the appropriate classification. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 12

Integral Foreign Operations 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. 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. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 13

Integral Foreign Operations 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. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 14

Non-integral Foreign Operations 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: the assets and liabilities, both monetary and non-monetary, of the non-integral foreign operation should be translated at the closing rate; income and expense items of the non-integral foreign operation should be translated at exchange rates at the dates of the transactions; and all resulting exchange differences should be accumulated in a foreign currency translation reserve until the disposal of the net investment. For practical reasons, a rate that approximates the actual exchange rates, for example an average rate for the period, is often used to translate income and expense items of a foreign operation. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 15

Non-integral Foreign Operations The translation of the financial statements of a non-integral foreign operation results in the recognition of exchange differences arising from: translating income and expense items at the exchange rates at the dates of transactions and assets and liabilities at the closing rate; translating the opening net investment in the non-integral foreign operation at an exchange rate different from that at which it was previously reported; and 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. A contingent liability disclosed in the financial statements of a nonintegral foreign operation is translated at the closing rate for its disclosure in the financial statements of the reporting enterprise. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 16

Non-integral Foreign Operations 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 nonintegral 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 nonintegral 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. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 17

Disposal of a Non-integral Foreign Operation 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. In the case of a partial disposal, only the proportionate share of the related accumulated exchange differences is included in the gain or loss. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 18

Change in the Classification of a Foreign Operation 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. • 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. • THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 19

Forward Exchange Contracts 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. 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( spot rate) 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, Minus (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. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 20

Forward Exchange Contracts SPECULATIVE CONTRACTS 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. Eg; 1 -03 -2006 Bought rate of a 3 month forward contract is Rs 47. 10 31 -03 -2006 Spot rate was Rs 47. 02 Bought rate for a 2 month contract Rs 47. 20, and sell rate was Rs 47. 15 Profit to be booked = 47. 15 -47. 10=. 05 paisa 31 -05 -06 - Forward contract sold for Rs 47. 11 Loss to be booked = 47. 11 -47. 15=. 04 paisa 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. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 21

An Illustration H. O. TRIAL BALANCE AS ON 31. 03. 2003 (RS. IN MILLION) Share Capital 100. 00 General Reserve 500. 00 Profit & Loss A/c 10. 00 Foreign Currency Loan ( $ 10 million) 470 Sales 600 Transfer to Branch 200. 00 Branch Account (Sales minus cash received $ 2 million = 117. 5) Purchase Opening Stock Tangible Fixed Assets 82. . 25 1000. 00 20. 00 500. 00 Accumulated Depreciation Debtors 45. 00 300. 00 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 22

TRIAL BALANCE AS ON 31. 03. 2003 N (RS. IN MILLION THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) ) 23

OTHER INFORMATION (i) (iii) (iv) (v) Exchange rates: When foreign currency loan was taken by the company US$1 =47 When tangible fixed assets were acquired US$ 1 = 45. When closing stock was acquired US $ = 47. 05 Closing exchange rate US $ 47. 50 Details of sales and expenses (Translation is carried applying actual rates Sales & Expenses translated as per actual rates on dates of Transactions are : Sales Rs 330. 85 million Expenses Rs 141. 76 million Exchange rate on date of last sale =47. 10 US$ Value of cost of closing stock: US$ 1 million X 47. 50= Rs 47. 50 million Realisable value of stock: US$1. 01 million X 47. 10= 47. 47 million Bank balance at closing rate=. 50 X 47. 50 = Rs 23. 75 million THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 24

TRANSLATED BRANCH TRIAL BALANCE (IN MILLION RS. ) Transfer from HO Expenses Tangible fixed assets 200 141. 76 90 Accumulated Depreciation 22. 50 HO Account 82. 25 Bank Balance 23. 75 Sales 330. 85 Exchange Fluctuation Gain 19. 91 455. 51 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 455. 51 25

CONSOLIDATED TRIAL BALANCE Rs. In Million Share Capital 100. 00 General Reserve 500. 00 Profit & Loss A/c 10. 00 Foreign Currency Loan ($ 10 million) 475. 00 Sales 930. 85 Expenses 141. 76 Purchases 1000. 00 Opening stock Tangible Fixed Assets 20. 00 590. 00 Accumulated Depreciation Debtors Cash & Bank Balances 67. 50 300. 00 46. 50 Exchange Fluctuation Total Closing Stock 14. 91 2098. 26 72. 47 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 26

OTHER INFORMATION Foreign currency loan of the company should be reported at the balance sheet date at closing rate i. e. 47. 5. There arises an exchange fluctuation loss of Rs. 5 million which is shown net of adjustment translation gain arising from branch account conversion. Internal transactions and balances are eliminated. Assume that current depreciation for branch and HO = Rs. 15 million. Profit and Loss Account and Balance Sheet of A Ltd. would appear as follows THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 27

Profit & Loss Account for the year ended on 31. 3. 2003 (Rs. In Million) Sales 930. 85 Stock Adjustment 52. 47 Exchange Fluctuation 14. 91 Revenue 998. 23 Purchases 1000. 00 Expenses 141. 76 Depreciation 25. 00 Expenses 1166. 76 Loss 168. 53 Add: Balance of profit b/d 10. 00 Loss adjusted against General Reserve 158. 53 168. 53 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 28

BALANCE SHEET AS ON 31. 3. 2003 (Rs. In Million) Share Capital 100. 00 General Reserve 341. 47 Profit and Loss Account 0 Foreign Currency Loan ($ 10 million) 475. 00 916. 47 Tangible Fixed Assets 590. 00 Less: Accumulated Depreciation Net Block 92. 50 497. 50 Current Assets Stock 72. 47 Debtors 300. 00 Cash & Bank 46. 50 916. 47 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 29

AS-11 VS. SCHEDULE VI Asset related exchange variation loss or gain Fixed assets are generally shown at ‘original cost after deduction of depreciation in the corporate financial statements. In case of fixed assets acquired from a country outside India and financed by foreign currency loan or deferred credit, there is a deviation from this generally accepted principle. Because of exchange rate fluctuations such foreign currency liability may change resulting in a loss/ gain to the acquirer of fixed assets. Schedule VI, Part 1 to the Companies Act, 1956 requires adjustment of such loss/gain with the carrying amount of fixed assets (in the Companies Bill 1997 such requirement has been retained and the latest amendment to the Companies Act, was silent in this issue till FY 2005 -06) THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 30

AS-11 VS. SCHEDULE VI Schedule VI Part 1 to the Companies Act, 1956 requires that “where the original cost aforesaid and conditions and deductions thereto, relate to any fixed asset which has been acquired from a country outside India, and in consequence, of a change in the rate of exchange at any time after the acquisition of such assets, there has been an increase or reduction in liability of the company as expressed in Indian currency for making payment towards the whole or a part of the cost of the assets or for repayment of the whole or part of the moneys borrowed by the company from any person, directly or indirectly, in any foreign currency specially for the purpose for acquiring the assets (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability is so increased or reduced during the year, shall be added to, or as the case may be deducted from the cost, and the amount arrived at after such addition or deduction shall be taken to be the cost of the fixed assets. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 31

AS-11 VS. SCHEDULE VI In other words, exchange variation gain or loss arising out of payment towards cost of fixed assets acquired from a country outside India should be adjusted in the historical cost of the fixed assets. Also the exchange variation loss or gain arising out of asset-linked foreign currency liability should be adjusted in the historical cost of the fixed assets. Moreover, interest during the instillation period till the fixed assets is ready for commercial use is part of the historical cost of the asset (see Para 9. 2) of AS-10). So, any increase/ decrease in foreign currency interest liability, which is incurred during the installation period of the fixed assets, arising out of exchange fluctuation loss or gain is also adjusted to the historical cost of the fixed assets. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 32

AS-11 VS. SCHEDULE VI The Council of the Institute of Chartered Accountants of India had issued an Announcement on ‘Treatment of exchange differences under Accounting Standard (AS) 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates vis-à-vis Schedule VI to the Companies Act, 1956’, which was published in the November 2003 issue of ‘The Chartered Accountant’ (pp. 497) Subsequent to the issuance of the above Announcement, the Ministry of Company Affairs (now known as the Ministry of Corporate Affairs) issued the Companies (Accounting Standards) Rules, 2006, by way of Notification in the Official Gazette dated 7 th December, 2006. As per Rule 3(2) of the said Rules, the Accounting Standards shall come into effect in respect of accounting periods commencing on or after the publication of these accounting standards under the said Notification. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 33

AS-11 VS. SCHEDULE VI AS 11, as published in the above Government Notification, carries a footnote that “it may be noted that the accounting treatment of exchange differences contained in this Standard is required to be followed irrespective of the relevant provisions of Schedule VI to the Companies Act, 1956”. In view of the above footnote to AS 11, the Council of the Institute of Chartered Accountants of India has decided at its 269 th meeting held on July 18, 2007, to withdraw the Announcement on ‘Treatment of exchange differences under Accounting Standard (AS) 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates vis-à-vis Schedule VI to the Companies Act, 1956’, published in ‘The Chartered Accountant’ of November 2003. Accordingly, the accounting treatment of exchange differences contained in AS 11 notified as above is applicable and not the requirements of Schedule VI to the Act, in respect of accounting periods commencing on or after 7 th December, 2006. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 34

RELEVANCE TO ONGC Disclosures made in the financial Statements Schedule relating to Financing costs Exchange Fluctuation loss for the year ending 31 st march 2006 was reflected as under in the : Exchange variation for the year (Net) Less: Capitalised Significant accounting policies state as under: Foreign Exchange Transactions in foreign exchange are accounted for at the prevailing rate on the date of transaction. FC monetary assets and liabilities at the year end are translated using mean exchange rate prevailing on the last day of the financial year. The loss or gain thereon and also the exchange differences on settlement of the foreign currency transactions during the year are recognized as income or expense and adjusted to the profit & loss account except in cases a) where such liabilities and/or transactions relate to fixed assets/ projects and these were incurred /entered into before 1. 4. 2004; b) fixed assets acquired from a company outside India, in which case , these are adjusted to the cost of respective fixed assets. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 35

RELEVANCE TO ONGC In the consolidated Balance sheet, under Schedule of Reserves & Surplus, foreign exchange Translation Reserve has been reflected. In the Significant Accounting Policies to the consolidated Financial statements, the following disclosure has been made as regards foreign exchange transactions: 12. 1 Foreign currency transactions on initial recognition in the reporting currency are accounted for at the exchange rates prevailing on the date of transaction. 12. 2 At each Balance Sheet date, foreign currency monetary items are translated using the average of the exchange rates prevailing on the balance sheet date and nonmonetary items are translated using the exchange rate prevailing on the date of transaction or on the date when the fair value of such items was determined. 12. 3 The loss or gain thereon and also the exchange differences on settlement of the foreign currency transactions during the year are recognized as income or expense and adjusted to the profit and loss account except in cases (a) where such liabilities and / or transactions relate to fixed assets/ projects and these were incurred/ entered into before 1/4/2004; (b) fixed assets acquired from a country outside India, in which case, these are adjusted to the cost of respective fixed assets. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 36

RELEVANCE TO ONGC In respect of the company’s integral foreign operations. The foreign currency transactions on initial recognition in the reporting currency are recorded following the policy stated in 12. 1. For practical reasons, the average exchange rate of the relevant month is taken for the transactions of the month in respect of joint venture operations, where actual date of transaction is not available. At each Balance Sheet date, monetary and non-monetary items are translated following the policy stated in 12. 2. All exchange differences are treated following the policy stated in 12. 3. THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Accounting Standard (AS) 11 (Revised 2003) 37

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