The standard deals with the issues involved in accounting for foreign currency transactions and foreign operations i.e., to decide which exchange rate to use and how to recognize the financial effects of changes in exchange rates in the financial statements. The standard requires the enterprises to disclose:
- the amount of exchange differences included in the net profit or loss for the period
- the amount of exchange differences adjusted in the carrying amount of fixed assets,
- the amount of exchange differences in respect of forward exchange contracts to be recognized in the profit or loss in one or more subsequent accounting periods (over the life of the contract).
This Statement should be applied:
- In accounting for transactions in foreign currencies.
- In translating the financial statements of foreign operations.
- This Statement also deals with accounting for foreign currency transactions in the nature of forward exchange contracts.
This Statement 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, the Standard requires disclosure of the reasons for using that currency.
The Standard also requires disclosure of the reason for any change in the reporting currency.
- 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.
Which are addressed in AS 3 Cash flow statement
- Deal with exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.
- 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.
Terms Used in AS-11
- 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.
- 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.
- Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money. For example, cash, receivables and payables.
- Non-monetary items are assets and liabilities other than monetary items. For example, fixed assets, inventories and investments in equity shares.
- 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.
- Integral foreign operation is a foreign operation, the activities of which are an integral part of those of the reporting enterprise. 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.
- Non-integral foreign operation is a foreign operation that is not an integral foreign operation. 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. ‘Net investment in a non-integral foreign operation’ is the reporting enterprise’s share in the net assets of that operation.
- Forward exchange contract means an agreement to exchange different currencies at a forward rate.
- Forward rate is the specified exchange rate for exchange of two currencies at a specified future date.
- Foreign currency is a currency other than the reporting currency of an enterprise.
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.
- 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.
Reporting at each balance sheet date
The treatment of foreign currency items at the balance sheet date depends on whether the item is:
- monetary or non-monetary; and
- carried at historical cost or fair value (for non-monetary items).
- Foreign currency monetary items should be reported using the closing rate. However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realised from, or required to disburse, a foreign currency monetary item at the balance sheet date, e.g., where there are restrictions on remittances or where the closing rate is unrealistic and it is not possible to effect an exchange of currencies at that rate at the balance sheet date. In such circumstances, the relevant monetary item should be reported in the reporting currency at the amount which is likely to be realised from or required to disburse, such item at the balance sheet date.
- 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.
- 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.
Recognition of Exchange Differences
Exchange differences arise on:
- the settlement of monetary items at a date subsequent to intial recognition; and
- remeasuring an enterprise’s monetary items at rates different from those at which they were either initially recorded (if in the period) or previously recorded (at the previous balance sheet date).
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.