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11
Accounting Standard (AS) 11 Accounting Standard (AS) 11 (Revised 2003)(Revised 2003)
THE EFFECTS OF CHANGES INTHE EFFECTS OF CHANGES IN
FOREIGN EXCHANGE RATESFOREIGN EXCHANGE RATESMandatory for Accounting PeriodsMandatory for Accounting Periods
commencing on or after 1st April, 2004commencing on or after 1st April, 2004
22
ContentsContents
Sr. No. Particulars
1 Glossary
2 Need & Objective
3 Coverage At A Glance
4 Accounting of FC Transactions
5 Accounting of Foreign Operations
6 Accounting of Forward Exchange Contracts
7 Disclosure
8 AS 11 & Schedule VI
9 AS 11 & International AS 21
33
GlossaryGlossary
AS Accounting Standard
RE Reporting Enterprise (GSL)
FSs Financial Statements (BS, P & L etc)
Ex. Exchange
Diff. Difference
FC Foreign Currency (US $ etc)
US $ United States Dollar
A/c Account
RC Reporting Currency (Rs.)
Rs. Rupees
44
Need & ObjectiveNeed & Objective
Galaxy
Export Sales Domestic Sales Foreign Purchases
Indian Purchases
Rs. BorrowingsUS $ Borrowings
Expenses in FC
Expenses in Rs.
Galaxy’s financial reports are in Rs.
All financial transactions are to be recorded in Rs.
How to treat Ex. Diff. in A/cs
Which Ex. Rate ?
55
Coverage At A GlanceCoverage At A Glance
Foreign Currency Transactions Foreign Operations
Foreign Currency Activities
a) Conversionb) Recognition of Ex. Diff.c) Eg. : FC Transaction
a) Classification of FOb) Conversion of FSc) Disposal of NFOd) Change in classification
Direct business dealings with Customers, Suppliers etc. from local point
Business dealings through foreign based branch, JV, Subsidiary, Associate etc.
ForwardExchangeContracts
Tax Effect ofEx. Diff.
Disclosure TransitionalProvisions
Accounting
66
Conversion of FC TransactionsConversion of FC TransactionsInitially FC transactions shall be recorded at TDR * / AR
For practical purpose Average Rate (AR) can be used in place of TDR. Appropriate Accounting Policy shall be established for the purpose.
View Eg. AR Policy >>>>>>>
*TDR = Spot Rate on Transaction Date
Conversion Rate Table for FC Transactions (FCT)
Classification of BS Items Initial A/cing Conversion at BS Dt
Monetary Items TDR / AR Closing Rate (CR)*
Non Monetary Carried @
Historical Cost TDR / AR TDR/AR
Fair Value TDR / AR Valuation Date Rate
Contingent Liabilities ----- Closing Rate
*CR = Rate on BS Date
Back to Glance
77
Eg. : Average Rate (AR) PolicyEg. : Average Rate (AR) Policy
Accounting Policy for Initial Recognition : -Accounting Policy for Initial Recognition : - Purchases & Sales in FC are recorded at Purchases & Sales in FC are recorded at
Customs Ex. RatesCustoms Ex. Rates(Currently CBEC prescribes Customs Ex. (Currently CBEC prescribes Customs Ex. Rates by Notification U/s. 14 (3) (a) of Customs Rates by Notification U/s. 14 (3) (a) of Customs Act, 1962)Act, 1962)
Other Transactions in FC are recorded at TDR Other Transactions in FC are recorded at TDR i.e. Ex. Rates prevailing on Date of Transactioni.e. Ex. Rates prevailing on Date of Transaction
Note :-Note :- AR should approximate to the TDRAR should approximate to the TDRi.e. AR can not be used if Ex. Rates fluctuates i.e. AR can not be used if Ex. Rates fluctuates significantly significantly
<<<< Back
88
Purchase Agreement@ TDR / AR
Reported in BS @Closing
Rate
Settled @ TDR / AR
Settled after the BS Date
Recognition of Ex. Diff. - FCTRecognition of Ex. Diff. - FCT
Back to Glance
The same should be recognized in P & L A/c for the period
Ex. Diff. arises EITHER on Settlement OR on Reporting in BS
99
Eg. : Ex. Diff. on FC TransactionEg. : Ex. Diff. on FC Transaction
Accounting Year 2004-05 2005-06
Accounting of asset purchase as per revised AS 11 (2003)
Current Asset purchase worth US $ 1/=
Purchase 01.12.04
Payment 31.01.05
BS Dt 31.03.05
Payment 30.04.05
BS Dt 31.03.06
Spot Rates (Rs./$) 50/- 52/- 47/- 46/- 52/-
Current Asset A/c DR 50.00
Vendor A/c DR 50.00 3.00 47.00
Ex. Loss A/c DR 2.00 5.00
Rs. Current A/c CR 52.00 46.00
Vendor A/c CR 50.00 5.00
Ex. Gain A/c CR 3.00 1.00
Back to Glance
1010
Classification of FOClassification of FOForeign Operation (FO) is defined as a subsidiary, associate, joint venture or branch based in a foreign country.
Classified : Way in which financed & operates w.r.t. RE
Particulars Integral FO (IFO) Non Integral FO (NFO)
Definition FO whose activities are an integral part of the activities of RE
Negatively defined –
FO which is not an IFO
Operates as Extended arm of RE Separate Entity
Example Selling Agent may just sell goods received from RE and remit proceeds back to RE
Independent Branch Generates Income, Incurs Expenses, Accumulates Monetary Items, Borrows locally etc. etc.
Effect of Rate Fluctuation
Has immediate effect on RE’s Cash Flows from Operations
Do not have direct impact on RE’s Cash Flows from Operations
View Indicators of NFO >>>>
1111
Indicators of NFOIndicators of NFO Major factor : Impact on cash flows from operationsMajor factor : Impact on cash flows from operations Other indicators of NFO are –Other indicators of NFO are –
a)a) High degree of autonomy in carrying operationsHigh degree of autonomy in carrying operationsb)b) Low proportion of transactions with RELow proportion of transactions with REc)c) No dependence on RE for financeNo dependence on RE for financed)d) COP or services settled on it’s ownCOP or services settled on it’s owne)e) Sales are in currencies other than RC (Rs.)Sales are in currencies other than RC (Rs.)f)f) Cash flows of RE are insulated from day-to-day Cash flows of RE are insulated from day-to-day
activities of FOactivities of FOg)g) Sales prices are not responsive to Ex. Rate Sales prices are not responsive to Ex. Rate
FluctuationsFluctuationsh)h) Existence of local demand for the productExistence of local demand for the product
If can’t be classified clearly then judgment is necessary If can’t be classified clearly then judgment is necessary for determination.for determination.
Back to Glance
1212
Conversion of FSs of FO &Conversion of FSs of FO &Recognition of Ex. Diff. thereofRecognition of Ex. Diff. thereof
For Conversion IFO is treated as FC Transaction
Particulars Integral FO =
FC Transaction
Non Integral FO
P & L Items TDR / AR TDR / AR
Monetary Items Closing Rate Closing Rate
Non Monetary carried @ Historical Cost
TDR / AR Closing Rate
Non Monetary carried @ Fair Value
Valuation Date Rate
Closing Rate
Recognition of Ex. Diff.
Recognized in P & L A/c as & when arise
Accumulated in FOREX Reserve A/c (Accumulation will continue until disposal of NFO)Eg. >>Eg. >>
1313
Eg. : Conversion of NFO FSEg. : Conversion of NFO FSParticulars Rate Dr $ Dr. Rs. Cr $ Cr. Rs.
Acquisition of Galaxy Chemicals Inc., USA on 31.03.04 (Spot = 40/-)
Share Capital 40/- 100 4000
Reserves 40/- 50 2000
Assets / Liabilities 40/- 200 8000 50 2000
On next BS Dt 31.03.05 (Spot = Rs. 50/-, AR = Rs. 45/-)
Share Capital Original 100 4000
Opening Reserves Original 50 2000
Current Profit AR = 45/- 20 900
Assets / Liabilities CR = 50/- 400 20000 230 11500
FOREX Reserve (Balancing Figure) 1600
Total 400 20000 400 20000
Back to Glance
1414
Disposal of NFODisposal of NFO
Back to Glance
Particulars Nature of Disposal
100% Disposal Part Disposal
Gain or Loss on Disposal
Recognize in
P & L A/c
Recognize in P & L A/c
Accumulated amt in FOREX Reserve A/c
100% transfer to P & L A/c
Part amount transfer to P & L A/c on pro-rata basis
When to trf FOREX Reserve to P & L
Period in which gain or loss on disposal is recognized in P & L A/c
1515
Change in Classification of FOChange in Classification of FOParticulars Conversion Rate for
IFO = FCT NFO
P & L Items TDR / AR TDR / AR
Monetary Items Closing Rate Closing Rate
Non Monetary carried @ Historical Cost (FC)
TDR / AR Closing Rate
Non Monetary carried @ Fair Value (FC)
Valuation Date Rate Closing Rate
IFO reclassified as NFO Ex. Diff. will arise on conversion of non-monetary items ;& The same shall be accumulated in FOREX Reserve
NFO reclassified as IFO FOREX Reserve is continued until actual disposal of FO Translated amounts for Non Monetary Items are treated as
historical cost of those items, from that date.
Eg.>>
Eg.>>
1616
Eg. : Reclassification IFO to NFOEg. : Reclassification IFO to NFOBS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)
Particulars US
$
IFO NFO
Rate Rs. Rate Rs.
Share Capital 100 40/- 4000 40/- 4000
Op. Reserves 50 40/- 2000 40/- 2000
Current Profit 20 45/- 900 Original 2000
Ex. Gain Loss 1100
FOREX Reserve 500
Monetary Liabilities 230 50/- 11500 50/- 11500
Total 400 19500 20000
Monetary Assets 300 50/- 15000 50/- 15000
Non Monetary @ Historical Cost
100 45/- 4500 50/- 5000
Total 400 19500 20000<< Back
1717
Eg. : Reclassification NFO to IFOEg. : Reclassification NFO to IFOBS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)
Particulars $ Rate NFO Rs. IFO Rs. Remarks
Share Capital 100 40/- 4000 4000
Op. Reserves 50 40/- 2000 2000
Current Profit 20 45/- 900 900
FOREX Reserve 1600 1600 Continued until disposal of FO
Liabilities 230 50/- 11500 11500
Total 400 20000 20000
Monetary Assets 300 50/- 15000 15000
Non Monetary @ Historical Cost
100 50/- 5000 5000 Treated as Historical Cost from date of reclassification
Total 400 20000 20000Back to
Glance
1818
Forward Exchange Contract (FEC)Forward Exchange Contract (FEC)FEC is an agreement to exchange different currencies at Forward Rate
# Particulars Hedging FEC Speculative FEC
1 Purpose Manage risks Gain by calculated risks
2 Eg. Say Minimizing Ex. Rate fluctuation risk associated with Accounts Receivable of USD 100K
Earn profit by trading in FOREX
3 Accounting Purpose different hence different A/cting treatment
Premium/ Discount
Deferred over tenor of the contract
Ignored
Ex. Diff. Recognize on the basis of ex. rate movements
Value of FEC is marked to M.V. on BS Dt
4 Practical View Eg. >>>> View Eg. >>>>
Profit or Loss on Cancellation/Renewal is recognized in P & L A/c
1919
Eg. : Hedging FECEg. : Hedging FEC
Accounts Receivable
US $
Sale Dt 01.12.04
FEC Dt 01.12.04
BS Dt 31.03.05
Settlement Dt 30.04.05
1/= Spot = 43/- FR = 48/- Spot = 45/- Spot = 47.50
Accounting as per Revised AS 11 (2003)
Accounting Year
Premium (5/-) Amortization
Ex. Gain Rs.
Ex. Loss Calculation
Ex. Loss Rs.
Net Gain/ (Loss)
2004-05 5 * (4/5) 4/- 43 – 45 (2/-) 2/-
2005-06 5 * (1/5) 1/- 45 - 47.50 (2.50) (1.50)
Total 5/- 4.50 0.50
<< Back
2020
Eg. : Speculative FECEg. : Speculative FEC
FEC Date 1st March, 2005
Forward Purchase of USD 1/-
Maturity Date 30th June, 2005
Forward Rate Rs. 50/- per $
Forward Rate available on BS date (31.03.05) for remaining maturity of the contract
Rs. 48/- per $
Ex. Loss in 2004-05 Rs. 2/-
Back to Glance
2121
Tax Effects of Foreign Ex. Diff.Tax Effects of Foreign Ex. Diff.
There will be some tax effects associated with There will be some tax effects associated with the gain or loss from exchange rate fluctuationthe gain or loss from exchange rate fluctuation
These tax effects shall be accounted for in These tax effects shall be accounted for in accordance with AS 22 i.e. Accounting for accordance with AS 22 i.e. Accounting for Taxes on IncomeTaxes on Income
Back to Glance
2222
DisclosureDisclosureAn Enterprise shall specifically disclose –An Enterprise shall specifically disclose –1.1. Ex. Diff. recognized in P & L A/c for the periodEx. Diff. recognized in P & L A/c for the period2.2. FOREX Reserve as part of Share Holder’s FundsFOREX Reserve as part of Share Holder’s Funds3.3. Reconciliation of Opening & Closing FOREX ReserveReconciliation of Opening & Closing FOREX Reserve4.4. Where RC is different from the currency of domiciled Where RC is different from the currency of domiciled
country, reasons thereofcountry, reasons thereof5.5. Where RC currency has been changed from previous Where RC currency has been changed from previous
accounting period then reasons for such changeaccounting period then reasons for such change6.6. If classification of FO has been changed, then -If classification of FO has been changed, then -
Nature & Reasons for ChangeNature & Reasons for Change Impact of change on Share Holder’s FundsImpact of change on Share Holder’s Funds Impact on Net Profit or Loss for each prior period, as if change Impact on Net Profit or Loss for each prior period, as if change
is applicable from retrospective effect.is applicable from retrospective effect.
7.7. AS 11 encourages disclosure of Enterprise’s FC Risk AS 11 encourages disclosure of Enterprise’s FC Risk Management PolicyManagement Policy Back to
Glance
2323
Transition on 1Transition on 1stst April, 2004 April, 2004
Revised AS 11 is applicable from 1Revised AS 11 is applicable from 1stst April, 2004. April, 2004.
Old AS 11 used the term “Foreign Branch” Old AS 11 used the term “Foreign Branch” instead of “Foreign Operation”instead of “Foreign Operation”Also it did not classified FO’s as IFO & NFOAlso it did not classified FO’s as IFO & NFO
On 1On 1stst time application, if a Foreign Branch is time application, if a Foreign Branch is classified as NFO then accounting treatment classified as NFO then accounting treatment pertaining to change in classification of FO shall pertaining to change in classification of FO shall be appliedbe applied
i.e. Accumulate Ex. Diff. on conversion of Non i.e. Accumulate Ex. Diff. on conversion of Non Monetary Items in FC Translation ReserveMonetary Items in FC Translation Reserve
2424
As per the announcement of ICAI
# Particulars Schedule VI Revised AS 11 (2003)
1 Ex. Diff. on a/c of FC Liability linked to Fixed Asset
Capitalize i.e. adjust in carrying cost of Fixed Asset
Recognize in P & L A/c
2 Relation to old AS 11 (1994)
In line with Schedule VI provision
Capitalization provision discontinued on revision in 2003
3 Implication ICAI will be approaching Govt. for revision of Schedule VI
Until the revision of Schedule VI capitalization treatment will continue & it will still be considered to be complying with New AS 11 (2003)
AS 11 (2003) & Schedule VIAS 11 (2003) & Schedule VI
2525
AS 11 (2003) & IASAS 11 (2003) & IASParticulars Indian AS 11 International AS 21
Scope Covers accounting of FEC’s
Major aspects of FEC’s are covered under IAS 39 (Financial Instruments : Recognition & Measurement)
Alternative A/cing in case of
Severe Currency Devaluation
Preferring elimination of alternatives, IAS’s alternative treatment is not recognized
Permits alternative :
Ex. Diff. on severe devaluation of currency can be included in carrying amt of asset s.t. conditions
Terminology w.r.t. FO
FO’s are classified as Integral &
Non Integral
FO’s are classified as
“FO’s that are integral to the operations of RE” &
“Foreign Entity”
2626
Thank You