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Accounting Standard (AS) 11 (Revised 2003)

Accounting Standard (AS) 11 (Revised 2003). THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Mandatory for Accounting Periods commencing on or after 1st April, 2004. Contents . Glossary. Need & Objective. Domestic Sales. Foreign Purchases. Export Sales. Expenses in FC.

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Accounting Standard (AS) 11 (Revised 2003)

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  1. Accounting Standard (AS) 11 (Revised 2003) THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Mandatory for Accounting Periods commencing on or after 1st April, 2004

  2. Contents

  3. Glossary

  4. Need & Objective Domestic Sales Foreign Purchases Export Sales Expenses in FC Indian Purchases Galaxy Expenses in Rs. Rs. Borrowings US $ Borrowings Galaxy’s financial reports are in Rs. All financial transactions are to be recorded in Rs. Which Ex. Rate ? How to treat Ex. Diff. in A/cs

  5. Coverage At A Glance Business dealings through foreign based branch, JV, Subsidiary, Associate etc. Direct business dealings with Customers, Suppliers etc. from local point Foreign Currency Activities Accounting Tax Effect of Ex. Diff. Disclosure Transitional Provisions Foreign Currency Transactions Foreign Operations Forward Exchange Contracts • Conversion • Recognition of Ex. Diff. • Eg. : FC Transaction • Classification of FO • Conversion ofFS • Disposal of NFO • Change in classification

  6. Conversion of FC Transactions Back to Glance

  7. Eg. : Average Rate (AR) Policy • Accounting Policy for Initial Recognition : - • Purchases & Sales in FC are recorded at Customs Ex. Rates (Currently CBEC prescribes Customs Ex. Rates by Notification U/s. 14 (3) (a) of Customs Act, 1962) • Other Transactions in FC are recorded at TDR i.e. Ex. Rates prevailing on Date of Transaction Note :- AR should approximate to the TDR i.e. AR can not be used if Ex. Rates fluctuates significantly <<<< Back

  8. Recognition of Ex. Diff. - FCT Settled after the BS Date Purchase Agreement @ TDR / AR Reported in BS @ Closing Rate Settled @ TDR / AR Ex. Diff. arises EITHER on Settlement OR on Reporting in BS The same should be recognized in P & L A/c for the period Back to Glance

  9. Eg. : Ex. Diff. on FC Transaction Back to Glance

  10. Classification of FO

  11. Indicators of NFO • Major factor : Impact on cash flows from operations • Other indicators of NFO are – • High degree of autonomy in carrying operations • Low proportion of transactions with RE • No dependence on RE for finance • COP or services settled on it’s own • Sales are in currencies other than RC (Rs.) • Cash flows of RE are insulated from day-to-day activities of FO • Sales prices are not responsive to Ex. Rate Fluctuations • Existence of local demand for the product If can’t be classified clearly then judgment is necessary for determination. Back to Glance

  12. Conversion of FSs of FO &Recognition of Ex. Diff. thereof Eg. >>

  13. Eg. : Conversion of NFO FS Back to Glance

  14. Disposal of NFO Back to Glance

  15. Change in Classification of FO Eg.>> Eg.>>

  16. Eg. : Reclassification IFO to NFO << Back

  17. Eg. : Reclassification NFO to IFO Back to Glance

  18. Forward Exchange Contract (FEC)

  19. Eg. : Hedging FEC << Back

  20. Eg. : Speculative FEC Back to Glance

  21. Tax Effects of Foreign Ex. Diff. • There will be some tax effects associated with the gain or loss from exchange rate fluctuation • These tax effects shall be accounted for in accordance with AS 22 i.e. Accounting for Taxes on Income Back to Glance

  22. Disclosure An Enterprise shall specifically disclose – • Ex. Diff. recognized in P & L A/c for the period • FOREX Reserve as part of Share Holder’s Funds • Reconciliation of Opening & Closing FOREX Reserve • Where RC is different from the currency of domiciled country, reasons thereof • Where RC currency has been changed from previous accounting period then reasons for such change • If classification of FO has been changed, then - • Nature & Reasons for Change • Impact of change on Share Holder’s Funds • Impact on Net Profit or Loss for each prior period, as if change is applicable from retrospective effect. • AS 11 encourages disclosure of Enterprise’s FC Risk Management Policy Back to Glance

  23. Transition on 1st April, 2004 • Revised AS 11 is applicable from 1st April, 2004. • Old AS 11 used the term “Foreign Branch” instead of “Foreign Operation” Also it did not classified FO’s as IFO & NFO • On 1st time application, if a Foreign Branch is classified as NFO then accounting treatment pertaining to change in classification of FO shall be applied i.e. Accumulate Ex. Diff. on conversion of Non Monetary Items in FC Translation Reserve

  24. AS 11 (2003) & Schedule VI

  25. AS 11 (2003) & IAS

  26. Thank You

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