Acting_Stad_11.pps

Galaxy Surfactants Ltd., Navi Mumbai

Accounting Standard (AS) 11 (Revised 2003)

THE EFFECTS OF CHANGES INFOREIGN EXCHANGE RATES

Mandatory for Accounting Periodscommencing on or after 1st April, 2004

Presented by Sumit on 30/9/04


Contents

AS 11 & International AS 219

AS 11 & Schedule VI8

Accounting of Forward Exchange Contracts6

Accounting of Foreign Operations5

Disclosure7

Coverage At A Glance3

Accounting of FC Transactions4

Need & Objective2

Glossary1

ParticularsSr. No.


Glossary

Accounting StandardAS

AccountA/c

United States DollarUS $

Reporting Currency (Rs.)RC

RupeesRs.

DifferenceDiff.

Foreign Currency (US $ etc)FC

ExchangeEx.

Financial Statements (BS, P & L etc)FSs

Reporting Enterprise (GSL)RE


Need & 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 ?


Coverage At A Glance

Foreign Currency Transactions Foreign Operations

Foreign Currency Activities

1. Conversion2. Recognition of Ex. Diff.3. Eg. : FC Transaction

1. Classification of FO2. Conversion of FS3. Disposal of NFO4. 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


Conversion of FC Transactions

Initially FC transactions shall be recorded at TDR * / ARFor 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)

*CR = Rate on BS Date

Closing Rate-----Contingent Liabilities

Valuation Date RateTDR / AR Fair Value

TDR/ARTDR / AR Historical Cost

Non Monetary Carried @

Closing Rate (CR)*TDR / ARMonetary Items

Conversion at BS DtInitial A/cingClassification of BS Items

Back to Glance


Eg. : Average Rate (AR) Policy

• Accounting Policy for Initial Recognition : -o 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)

o Other Transactions in FC are recorded at TDR i.e. Ex. Rates prevailing on Date of Transaction

Note :- AR should approximate to the TDRi.e. AR can not be used if Ex. Rates fluctuates significantly

<<<< Back


Purchase Agreement@ TDR / AR

Reported in BS @

Closing Rate

Settled @ TDR / AR

Settled after the BS Date

Recognition 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


Eg. : Ex. Diff. on FC Transaction

Accounting of asset purchase as per revised AS 11 (2003)

2005-062004-05Accounting Year

52.00

2.00

50.00

52/-

Payment 31.01.05

5.0050.00Vendor A/c CR

47.003.00Vendor A/c DR

1.003.00Ex. Gain A/c CR

46.00Rs. Current A/c CR

5.00Ex. Loss A/c DR

50.00Current Asset A/c DR

52/-

BS Dt 31.03.06

46/-

Payment 30.04.05

47/-50/-Spot Rates (Rs./$)

BS Dt 31.03.05

Purchase 01.12.04

Current Asset purchase worth US $ 1/=

Back to Glance


Classification of FO

Negatively defined –FO which is not an IFO

FO whose activities are an integral part of the activities of RE

Definition

View Indicators of NFO >>>>

Particulars

Classified : Way in which financed & operates w.r.t. RE

Do not have direct impact on RE’s Cash Flows from Operations

Has immediate effect on RE’s Cash Flows from Operations

Effect of Rate Fluctuation

Independent Branch Generates Income, Incurs Expenses, Accumulates Monetary Items, Borrows locally etc. etc.

Selling Agent may just sell goods received from RE and remit proceeds back to RE

Example

Separate EntityExtended arm of REOperates as

Non Integral FO (NFO)Integral FO (IFO)

Foreign Operation (FO) is defined as a subsidiary, associate, joint venture or branch based in a foreign country.


Indicators of NFO• Major factor : Impact on cash flows from operations• Other indicators of NFO are –

1.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


Conversion of FSs of FO &Recognition of Ex. Diff. thereof

For Conversion IFO is treated as FC Transaction

TDR / ARTDR / ARP & L Items

Closing RateClosing RateMonetary Items

Closing RateTDR / ARNon Monetary carried @ Historical Cost

Closing RateValuation Date Rate

Non Monetary carried @ Fair Value

Particulars

Accumulated in FOREX Reserve A/c (Accumulation will continue until disposal of NFO)

Recognized in P & L A/c as & when arise

Recognition of Ex. Diff.

Non Integral FOIntegral FO =FC Transaction

Eg. >>


Eg. : Conversion of NFO FSCr. Rs.Cr $Dr. Rs.Dr $RateParticulars

40/-

40/-

40/-

Acquisition of Galaxy Chemicals Inc., USA on 31.03.04 (Spot = 40/-)

200 2000508000Assets / Liabilities

200050Reserves

4000100Share Capital

1600FOREX Reserve (Balancing Figure)

On next BS Dt 31.03.05 (Spot = Rs. 50/-, AR = Rs. 45/-)

400

400CR = 50/-

AR = 45/-

Original

Original

1150023020000Assets / Liabilities

2000040020000Total

90020Current Profit

200050Opening Reserves

4000100Share Capital

Back to Glance


Disposal of NFO

Back to Glance

Nature of Disposal

Part amount transfer to P & L A/c on pro-rata basis

100% transfer to P & L A/c

Accumulated amt in FOREX Reserve A/c

Particulars

Period in which gain or loss on disposal is recognized in P & L A/c

When to trf FOREX Reserve to P & L

Recognize in P & L A/cRecognize inP & L A/c

Gain or Loss on Disposal

Part Disposal100% Disposal


Change in Classification of FO

TDR / ARTDR / ARP & L Items

Conversion Rate for

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.

IFO reclassified as NFO• Ex. Diff. will arise on conversion of non-monetary items ;&• The same shall be accumulated in FOREX Reserve

Closing RateTDR / ARNon Monetary carried @ Historical Cost (FC)

Closing RateValuation Date RateNon Monetary carried @ Fair Value (FC)

Closing RateClosing RateMonetary Items

NFOIFO = FCT

Particulars

Eg.>>

Eg.>>


Eg. : Reclassification IFO to NFO

NFOIFOUS$

50/-

50/-

50/-

Original

40/-

40/-

Rate

500FOREX Reserve

1100Ex. Gain Loss

150001500050/-300Monetary Assets

2000019500400Total

4500100

400

Non Monetary @ Historical Cost

230

20

50

100

Rs.Rs.Rate

Particulars

500045/-

BS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)

19500

11500

900

2000

4000

50/-

45/-

40/-

40/-

11500Monetary Liabilities

20000Total

2000Current Profit

2000Op. Reserves

4000Share Capital

<< Back


Eg. : Reclassification NFO to IFO

Continued until disposal of FO

16001600FOREX Reserve

150001500050/-300Monetary Assets

2000020000400Total

5000100

400

Non Monetary @ Historical Cost

230

20

50

100

$ RemarksIFO Rs.NFO Rs.RateParticulars

Treated as Historical Cost from date of reclassification

500050/-

BS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-)

20000

11500

900

2000

4000

50/-

45/-

40/-

40/-

11500Liabilities

20000Total

900Current Profit

2000Op. Reserves

4000Share Capital

Back to Glance


Forward Exchange Contract (FEC)

Profit or Loss on Cancellation/Renewal is recognized in P & L A/c

Practical

Ex. Diff.

Premium/ Discount

Accounting

Eg.

Purpose

Particulars

IgnoredDeferred over tenor of the contract

Gain by calculated risksManage risks1

View Eg. >>>>View Eg. >>>> 4

FEC is an agreement to exchange different currencies at Forward Rate

Value of FEC is marked to M.V. on BS Dt

Recognize on the basis of ex. rate movements

Purpose different hence different A/cting treatment3

Earn profit by trading in FOREX

Say Minimizing Ex. Rate fluctuation risk associated with Accounts Receivable of USD 100K

2

Speculative FECHedging FEC#


Eg. : Hedging FEC

Spot = 47.50

Settlement Dt 30.04.05

1/=

Accounts Receivable

US $

FR = 48/-

FEC Dt 01.12.04

Spot = 45/-Spot = 43/-

BS Dt 31.03.05

Sale Dt 01.12.04

0.50

(1.50)

2/-

Net Gain/ (Loss)

4.505/-Total

Ex. Loss Rs.

Ex. Loss Calculation

Ex. Gain Rs.

Premium (5/-) Amortization

Accounting Year

(2.50)45 - 47.501/-5 * (1/5)2005-06

(2/-)43 – 454/-5 * (4/5)2004-05

Accounting as per Revised AS 11 (2003)

<< Back


Eg. : Speculative FEC

30th June, 2005Maturity Date

Rs. 48/- per $Forward Rate available on BS date (31.03.05) for remaining maturity of the contract

Rs. 50/- per $Forward Rate

USD 1/-Forward Purchase of

Rs. 2/-Ex. Loss in 2004-05

1st March, 2005FEC Date

Back to Glance


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


DisclosureAn Enterprise shall specifically disclose –1. Ex. Diff. recognized in P & L A/c for the period2. FOREX Reserve as part of Share Holder’s Funds3. Reconciliation of Opening & Closing FOREX Reserve4. Where RC is different from the currency of domiciled

country, reasons thereof5. Where RC currency has been changed from previous

accounting period then reasons for such change6. If classification of FO has been changed, then -

Nature & Reasons for Change1.Impact of change on Share Holder’s Funds2.Impact on Net Profit or Loss for each prior period, as if change

is applicable from retrospective effect.7. AS 11 encourages disclosure of Enterprise’s FC Risk

Management Policy

Back to Glance


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


Implication

Relation to old AS 11 (1994)

Ex. Diff. on a/c of FC Liability linked to Fixed Asset

Particulars

Recognize in P & L A/cCapitalize i.e. adjust in carrying cost of Fixed Asset

1

Until the revision of Schedule VI capitalization treatment will continue & it will still be considered to be complying with New AS 11 (2003)

ICAI will be approaching Govt. for revision of Schedule VI

3

As per the announcement of ICAI

Capitalization provision discontinued on revision in 2003

In line with Schedule VI provision

2

Revised AS 11 (2003)Schedule VI#

AS 11 (2003) & Schedule VI


AS 11 (2003) & IAS

FO’s are classified as“FO’s that are integral to the operations of RE” &“Foreign Entity”

FO’s are classified as Integral &Non Integral

Terminology w.r.t. FO

Permits alternative :Ex. Diff. on severe devaluation of currency can be included in carrying amt of asset s.t. conditions

Preferring elimination of alternatives, IAS’s alternative treatment is not recognized

Alternative A/cing in case ofSevere Currency Devaluation

Major aspects of FEC’s are covered under IAS 39 (Financial Instruments : Recognition & Measurement)

Covers accounting of FEC’s

Scope

International AS 21Indian AS 11Particulars


Thank You

Documents

Acting_Stad_11.pps