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AS – 11 : THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

Ü Scope:
Ü Non-Applicability:
ü This statement does not 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.
ü This statement does not 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.
ü This statement does not deal with exchange differences arising from foreign currency
borrowings to the extent that they are regarded as an adjustment to interest costs.
Note:
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, this statement requires disclosure of the reason
for using that currency. This statement also requires disclosure of the reason for any change
in the reporting currency.
Ü Definitions:
a. Average Rate:
It is the mean of the exchange rates in force during a period.
b. Closing Rate:
It is the exchange rate at the balance sheet date.
c. Exchange Difference:
It is the difference resulting from reporting the same number of units of a foreign currency
in the reporting currency at different exchange rates.
d. Exchange Rate:
It is the ratio for exchange of two currencies.
e. Fair Value:
It is the amount for which an asset could be exchanged, or a liability settled between
knowledgeable, willing parties in an arm’s length transaction.
f. Foreign Currency:
It is a currency other than the reporting currency of an enterprise.
g. Foreign Operation:
It 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.

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h. Forward Exchange Contract:

It means an agreement to exchange different currencies at a forward rate.
i. Forward Rate:
It is the specified exchange rate for exchange of two currencies at a specified future date.
j. Integral Foreign Operations:
It is a foreign operation, the activities of which are an integral part of those of the reporting
enterprise.
k. Monetary Items:
They are money held and assets and liabilities to be received or paid in fixed or determinable
amounts of money.
Examples: Cash, Receivables & Payables.
l. Net investment in a non-integral foreign operation:
It is the reporting enterprise’s share in the net assets of that operation.
m. Non-integral foreign operation:
It is a foreign operation that is not an integral foreign operation.
n. Non-monetary Items:
They are assets and liabilities other than monetary items.
Examples: Fixed Assets, Inventories & Investment in Equity Shares.
o. Reporting Currency:
It is the currency used in presenting the financial statements.
Ü Foreign Currency Transactions:
Ü Initial Recognition:
Ü Meaning:
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:
a. Buy or sell goods or services whose price is denominated in a foreign currency.
b. Borrows or lends funds when the amounts payable or receivable are denominated in a
foreign currency.
c. Becomes a party to an unperformed forward exchange contract.
d. Otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated
in a foreign currency.
Ü 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.
Ü For practical reasons, a rate that approximates the actual rate at the date of the
transaction is often used. However, if exchange rates fluctuate significantly, the use
of the average rate for a period is unreliable.
Ü Reporting at subsequent balance sheet dates:

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Item Monetary Items Exchange Rate

Closing Rate
Non Monetary Items which are carried in terms of Historical Exchange rate at the
Cost denominated in a foreign currency date of the transaction
Non Monetary Items which are carried in terms of fair value or Exchange rates that
similar valuation denominated in a foreign currency existed when the values
were determined
Ü Recognition of Exchange Differences:
ü Meaning: 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.
ü 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 are initially
recorded during the period, or reported in previous financial statements, should be
recognized as income or expenses in the period in which they arise, with the exception
of exchange differences.
ü When the transaction is settled in a subsequent accounting period, the exchange
difference is recognized in each intervening period up to the period of settlement is
determined by the change in exchange rates during that period.
ü Exchange difference relating to Non-integral Foreign Operation:
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 (FCTR) in the enterprise’s financial statements
until the disposal of the net investment at which time they should be recognized as
income or expenses.
ü An enterprise may have a monetary item that is receivable from or payable to a non
integral foreign operation. An item for which settlement is neither planned nor likely
to occur in the foreseeable future in substance an extension to or deduction from
the enterprise net investment in that non integral foreign operation. Such monetary
items may include long term receivables or loans but do not include trade receivable
or trade payables
Ü Classification of Foreign Operations:

Integral Foreign Non-Integral Foreign

Operation Operation

Classification mainly depends on 2 Factors:

a. Way in which it is financed.
b. Operates in relation to the reporting enterprise.
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k. Integral Foreign Operations: (Affects individual monetary items)

Ü A foreign operation that is integral to the operations of the reporting enterprise
carries on its business as if were an extension of the reporting enterprise’s operation.
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.
Ü Example: Such a foreign operation might only sell goods imported from the reporting
enterprise and remits 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 enterprise’s cash flow
from operations.
Ü Non- Integral Foreign Operations : (Affects “net investment”)
Ü 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.
Ü 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.
Ü Indicators that indicate a foreign operation is a NIFO rather than IFO:
a. While the reporting enterprise may control the foreign operation, the activities of the
foreign operation are carried out with a significant degree of autonomy from those of
the reporting enterprise.
b. Transactions with the reporting enterprise are not a high proportion of the foreign
operation’s activities.
c. The activities of the foreign operation are financed mainly from its own operations or
local borrowings rather than from the reporting enterprise.
d. Cost of lab our, material and other components of the foreign operation’s products or
services are primarily paid or settled in the local currency rather than in the reporting
currency.
e. The foreign operation’s sales are mainly in currencies other than the reporting currency.
f. Cash flows of the reporting enterprise are insulated from the day-to-day activities
of the foreign operation rather than being directly affected by the activities of the
foreign operation.
g. Sales prices for the foreign operation’s products are not primarily responsive on a
short term basis to changes in exchange rates but are determined more by local
competition or local government regulation.
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h. There is an active local sales market for the foreign operation’s products, although
there also might be significant amounts of exports.
Ü IFO:
ü Individual items are translated as if all its transactions had been entered into by the
reporting enterprise itself.
ü 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.
ü Cost of inventories is translated at the exchange rates that existed when those costs
were incurred.
ü The recoverable amount or realizable value of an asset is translated using the
exchange rate that existed when the recoverable amount or net realizable value
was determined. An adjustment may be required to reduce the carrying amount of
an asset in the financial statements of the reporting enterprise to its recoverable
amount or net realizable value even when no such adjustment is necessary in the
financial statements of the foreign operation. Alternatively, an adjustment in the
financial statements of the foreign operation may need to be reversed in the financial
statements of the reporting enterprise.
ü For practical reasons, a rate that approximates the actual rate at the date of the
transaction is often used. Eg: an average rate for a week or a month might be used for
all the 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.
Ü NIFO:

Item Translation Rate

a. Assets & Liabilities (Monetary & Non Monetary) Closing Rate
b. Income & Expense Rate at the date of
transactions
c. Contingent Liability Closing Rate
d. Goodwill/Capital Reserve arising on acquisition Closing Rate
Further all resulting exchange differences should be accumulated in a foreign currency
translation reserve until the disposal of net investment.
Ü Disposal of a NIFO:
Ü 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 recognized as income or as expenses in the same period in which the gain
or loss on disposal is recognized.
Ü An enterprise may dispose of its interest in a NIFO through sale, liquidation, repayment
of share capital, or abandonment of all or part of that operation. The payment of a
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dividend forms part of a disposal only when it constitutes a return of the investment. In
the case of a partial disposal, only the proportionate share of the related accumulated
exchange differences is included in the gain or loss. A write down of the carrying
amount of a NIFO does not constitute a partial disposal. Accordingly, no part of the
deferred foreign exchange gain or loss is recognized at the time of a write-down.
Insertion of new paragraph 46 in AS-11, by ICAI for their applicability to entities other than
companies:
In line with para 46 inserted by the MCA for corporate entities, the Council of the ICAI
has also inserted Paragraph 46 in AS 11 for Entities other than Companies in the month of
February, 2014, which is as follows:
46(1) In respect of accounting periods commencing on or after 7th December, 2006 (such
option to be irrevocable and to be applied to all such foreign currency monetary items), the
exchange differences arising on reporting of long-term foreign currency monetary items
at rates different from those at which they were initially recorded during the period, or
reported in previous financial statements, in so far as they relate to the acquisition of a
depreciable capital asset, can be added to or deducted from the cost of the asset and should
be depreciated over the balance life of the asset, and in other cases, can be accumulated
in a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s
financial statements and amortized over the balance period of such long-term asset or
liability, by recognition as income or expense in each of such periods, with the exception of
exchange differences dealt with in accordance with the provisions of paragraph 15.
(2) To exercise the option referred to in sub-paragraph (1), an asset or liability shall be
designated as a long-term foreign currency monetary item, if the asset or liability is
expressed in a foreign currency and has a term of twelve months or more at the date of
origination of the asset or the liability:
Provided that the option exercised by the enterprise should disclose the fact of such option
and of the amount remaining to be amortized in the financial statements of the period
in which such option is exercised and in every subsequent period so long as any exchange
difference remains unamortized.” (If a company follows para-4(e) OF AS-16 then company
is not required to follow para-46 A of AS-11)

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CLASS WORK

Q-1 Kalim Ltd. borrowed US$ 4,50,000 on 01/01/20X1, which will be repaid as on 31/07/20X1.
Kalim Ltd. prepares financial statement ending on 31/03/20X1. Rate of exchange between
reporting currency (INR) and foreign currency (USD) on different dates are as under:
01/01/20X1 1 US$ = ` 48.00
31/03/20X1 1 US$ = ` 49.00
31/07/20X1 1 US$ = ` 49.50
Q-2 Mr. A bought a forward contract for three months of US$ 1,00,000 on 1st December at 1 US$
= ` 47.10 when exchange rate was US$ 1 = ` 47.02. On 31st December when he closed his
books exchange rate was US$ 1 = ` 47.15. On 31st January, he decided to sell the contract at
` 47.18 per dollar. Show how the profits from contract will be recognised in the books.
Q-3 A Ltd. purchased fixed assets costing ` 3,000 lakhs on 1.1.20X1 and the same was fully
financed by foreign currency loan (U.S. Dollars) payable in three annual equal instalments.
Exchange rates were 1 Dollar = ` 40.00 and ` 42.50 as on 1.1.20X1 and 31.12.20X1 respectively.
First instalment was paid on 31.12.20X1. The entire difference in foreign exchange has been
capitalised.
You are required to state, how these transactions would be accounted for.
Q-4 A Ltd. has borrowed USD 10,000 in foreign currency on April 1, 20X1 at 5% p.a. annual interest
and acquired a depreciable asset. The exchange rates are as under:
01/04/20X1 1 US$ = ` 48.00
31/03/20X2 1 US$ = ` 51.00
You are required to pass the journal entries in the following cases:
(i) Option under Para 46A is not availed.
(ii) Option under Para 46A is availed.
(iii) The loan was taken to finance the operations of the entity (and not to procure a
depreciable asset).
In all cases, assume interest accrued on 31 March 20X2 is paid on the same date.
Q-5 Goods purchased on 24.02.2015 of US$ 10000 46.60
Exchange rate on 3 1.03.2015 47.00
Date of actual payment 05.06.2015 47.50
Calculate the loss/gain for the financial years.
Q-6 NDA Ltd. Purchased fixed assets for US$ 50 lakhs costing Rs. 1,825 lakhs on 01.04.2009
and the same was fully financed by the foreign currency loan [i.e. US Dollars] repayment in
five equal installments annually. [Exchange rate at the time of purchase was 1 US Dollar
= Rs. 36.50] AS on 31.03 .2010 the first installment was paid when 1 US Dollar fetched Rs.
41.50. The entire loss on exchange was included in cost of goods sold etc. NDA Ltd. normally
provides depreciation on fixed assets at 20% on WDV basis. Give appropriate Treatment.

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Q-7 Induga Ltd. Delhi has a branch in Sydney, Australia. At the end of 31st March, 2010 the
following ledger balances have been extracted from the books of the Sydney office:
Sydney
(Australia dollars thousand) Debit Credit
Plant & Machinery (Cost) 200 -
Plant & Machinery - 130
Debtors/Creditors 60 30
Stock (01.04.2009) 20
Cash/Bank balances 10
Purchases/Sales 20 123
Goods sent to branch 5
Wages & Salaries 45
Rent 12
Office Expenses 18
Commission Receipts 100
Branch/H.O. current A/c 7
390 390
The following information is also available:
Stock at 31.03.2010, Sydney Branch Australian $ 3,125,
Goods sent by H.O = Rs. 100 Thousands, Branch A/c in HO = Rs. 120 Thousands
You are required to convert the Branch Trail Balance into rupees if it is classified as
(i) Integral Foreign Operation
(ii) Non Integral Foreign Operation
(Use the following rate of exchange
Opening rate A$ = Rs. 20
Closing rate A$ = Rs. 24
Average rate A$ = Rs. 22
For fixed assets A$ = Rs. 18)
Q-8 A company had imported raw material worth US $250,000 on 15th January, 2010 when the
exchange rate was Rs. 46 per US$. The company had recorded the transaction at that rate.
The payment for imports was made only on 15th April, 2010 when the exchange rate was
Rs. 49 per US$. However on 31st March, 2010 the rate of exchange was Rs. 50 per US$, The
company passed an entry on 31st March, 2010 adjusting the cost of raw materials consumed
for the difference between Rs. 49 and Rs. 46 per US$. State your views as an auditor.
Q-9 Explain “monetary item” as per Accounting Standard 11. How are foreign currency monetary
items to be recognized at each Balance Sheet date? Classify the following as monetary or
non-monetary item:
(i) Share Capital (ii) Trade Receivables
(iii) Investments (iv) Fixed Assets.

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Q-10 Beekay Ltd. purchased fixed assets costing Rs.5,000 lakh on 01.04.2012 payable in foreign
currency (US$) on 05.04.2013. Exchange rate of 1 US$ = Rs.50.00 and Rs.54.98 as on 01.04.2012
and 31.03.2013 respectively.
The company also obtained a soft loan of US$ 1 lakh on 01.04.2012 payable in three annual
equal installments. First installment was due on 01.05.2013.
You are required to state, how these transactions would be accounted for in the books of
accounts ending 31st March, 2013.
Q-11
(a)
Sterling Ltd. purchased a plant for US $ 20,000 on 31st December, 2011 payable after 4
months. The company entered into a forward contract for 4 months @ Rs. 48.85 per dollar.
On 31st December, 2011, the exchange rate was Rs. 47.50 per dollar.
How will you recognize the profit or loss on forward contract in the books of Sterling
Limited for the year ended 31st March, 2012.
(b) Exchange Rate per $ Goods sold on 1.1.2011 of US $ 10,000 Rs. 45
Exchange rate on 31.3.2011 Rs. 44
Date of receipt 7.7.2011 Rs. 43
Ascertain the loss/gain for financial years 2010-11 and 2011-12, also give their treatment as
per AS 11.
Q-12 Mr. Y bought a forward contract for three months of US $ 2,00,000 on 1stDecember 2010 at
1 US $ = Rs. 44.10 when the exchange rate was 1 US $ = Rs. 43.90. On 31-12-2010, when he
closed his books, exchange rate was 1 US $ = Rs. 44.20. On 31st January, 2011 he decided
to sell the contract at Rs. 44.30 per Dollar. Show how the profits from the contract will be
recognized in the books of Mr. Y.
Q-13 Option Ltd is engaged in the manufacturing of steel. For its steel plant, it required machineries
of latest technology. It usually resorts to Long Term Foreign Currency Borrowing for its fund
requirements. On 1st April’2011, it borrowed US $ 1 million from International Funding Agency,
USA when exchange rate was 1$= Rs. 52. The funds were used for acquiring machineries on
the same date to be used in three different steel plants. The useful life of the machineries
are 10 years and their residual value is Rs. 20, 00,000. Earlier also the company used to
purchase machineries out of foreign borrowings. The exchange differences arising on such
borrowings were charged to profit and loss account and were not capitalized even though
the company had an option to capitalize it as per notified AS-11 (Notification issued by the
MCA in 2009).
Now for this new purchase of machinery, Option Ltd, is interested to avail the option of
capitalizing the same to the cost of asset. Exchange rate on 31st March’2012 is
1US $=Rs. 51. Assume that on 31st March’2012, Option Ltd. is not having any old long term
foreign currency borrowings except for the amount borrowed for machinery purchased
on 1st April’2011. Can Option Ltd. capitalize the exchange difference tot eh cost of asset on

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31st March’2012? If yes, then calculate the depreciation amount on machineries as on 31st
March’2012. Would your answer differ, if Option Ltd. was not a company and was a LLP?
Q-14 Explain briefly the accounting treatment needed in the following cases as per AS 11 ‘The
Effects of Changes in Foreign Exchanges Rates’.
(i) Sundry Debtors include amount receivable from Ted Rs. 5,00,000 recorded at the
prevailing exchange rate on the date of sales, transactions recorded a t$1 = Rs.38.70
(ii) Long term loan taken from a U.S. Company, amounting to Rs. 60,00,000. It was recorded
at $1 = Rs. 35.60, taking exchange rate prevailing at the date of transactions.
(iii) Another long term loan was there in Pound Sterling for purchase of machinery
amounting to Rs.10,00,000. It was recorded at Pounds Rs. 62.80.
Exchange rates at the end of the year were as under:
$1 Receivable = Rs. 45.80
Pounds = Rs. 72.30
$ 1 Payable = Rs. 45.90
Q-15 (i) Trade receivables as on 31.3.2019 in the books of XYZ Ltd. include an amount receivable
from Umesh ` 5,00,000 recorded at the prevailing exchange rate on the date of sales, i.e. at
US $ 1= ` 58.50. US $ 1 = ` 61.20 on 31.3.2019.
Explain briefly the accounting treatment needed in this case as per AS 11 as on 31.3.2019.
(ii) Power Track Ltd. purchased a plant for US$ 50,000 on 31st October, 2018 payable after 6
months. The company entered into a forward contract for 6 months @` 64.25 per Dollar. On
31st October, 2018, the exchange rate was ` 61.50 per Dollar.
You are required to recognise the profit or loss on forward contract in the books of the
company for the year ended 31st March, 2019.
Ans. (i) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, 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 recognized as income or as expenses in
the period in which they arise.
Accordingly, exchange difference on trade receivables amounting ` 23,076 {` 5,23,076(US $
8547* x ` 61.20) less ` 5,00,000} should be charged to profit & Loss account.
(ii) Calculation of profit or loss to be recognized in the books of Power Track Limited
`
Forward contract rate 64.25
Less: Spot rate (61.50)
Loss on forward contract 2.75
Forward Contract Amount $ 50,000
Total loss on entering into forward contract = ($ 50,000 x ` 2.75) `1,37,500
Contract period 6 months

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Loss for the period 1st November, 2018 to 31st March, 2019 i.e. 5 months
5 months falling in the year 2018-2019
Hence, Loss for 5 months will be ` 1,37,500 x = ` 1,14,583
Thus, the loss amounting to ` 1,14,583 for the period is to be recognized in the year ended
31st March, 2019.
Q-16 Kumar Ltd. borrowed US $ 3,00,000 on 31-12-2020 which will repaid as on 30-06-2021. Kumar
Ltd. prepares its financial statements ending on 31-03-2021. Rate of exchange between
reporting currency (Rupee) and foreign currency (US$) on different dates are as under:
31-12-2020 1 US $ = ` 44.00
31-03-2021 1 US $ = ` 44.50
30-06-2021 1 US $ = ` 44.75
(i) Calculate Borrowings in reporting currency to be recognized in the books on above
mentioned dates and also show journal entries for the same.
(ii) if borrowings were repaid on 28-2-2021 on which date exchange rate was 1 US $ = `
44.20 then what entry should be passed?

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MCQS
1. As per AS 11 assets and liabilities of non-integral foreign operations should be converted at
__________ rate.
(a) Opening (b) Average (c) Closing (d) Transaction
2. The debit or credit balance of “Foreign Currency Monetary Item Translation Difference
Account”
(a) Is shown as “Miscellaneous Expenditure” in the Balance Sheet
(b) Is shown under “Reserves and Surplus” as a separate line item
(c) Is shown as “Other Non-current” in the Balance Sheet
(d) Is shown as “Current Assets” in the Balance Sheet
3. If asset of an integral foreign operation is carried at cost, cost and depreciation of tangible
fixed asset is translated at
(a) Average exchange rate
(b) Closing exchange rate
(c) Exchange rate at the date of purchase of asset
(d) Opening exchange rate
4. Which of the following can be classified as an integral foreign operation?
(a) ranch office serving as an extension of the head office in terms of operations
(b) Independent subsidiary of the parent company
(c) Branch office independent of the head office in terms of operational decisions
(d) None of the above
5. Which of the following items should be converted to closing rate for the purposes of financial
reporting?
(a) Items of Property, Plant and Equipment
(b) Inventory
(c) Trade Payables, Trade Receivables and Foreign Currency Borrowings
(d) All of the above
Answers :
1 (c) 2 (b) 3 (c) 4 (a) 5 (c)

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HOME WORK

Q-1 Assets and liabilities and income and expenditure items in respect of foreign branches (integral
foreign operations) are translated into Indian rupees at the prevailing rate of exchange at
the end of the year. The resultant exchange differences in the case of profit, is carried to
other Liabilities Account and the Loss, if any, is charged to the statement of profit and loss.
Comment.
Sol. The financial statements of an integral foreign operation (for example, dependent foreign
branches) should be translated using the principles and procedures described in AS 11. The
individual items in the financial statements of a foreign operation are translated as if all its
transactions had been entered into by the reporting enterprise itself.
Individual items in the financial statements of the foreign operation are translated at the
actual rate on the date of transaction. For practical reasons, a rate that approximates the
actual rate at the date of transaction is often used, for example, an average rate for a week
or a month may be used for all transactions in each foreign currency during the period. The
foreign currency monetary items (for example cash, receivables, payables) should be reported
using the closing rate at each balance sheet date. Non-monetary items (for example, fixed
assets, inventories, investments in equity shares) which are carried in terms of historical
cost denominated in a foreign currency should be reported using the exchange date at the
date of transaction. Thus the cost and depreciation of the tangible fixed assets is translated
using the exchange rate at the date of purchase of the asset if asset is carried at cost. If
the fixed asset is carried at fair value, translation should be done using the rate existed on
the date of the valuation. The cost of inventories is translated at the exchange rates that
existed when the cost of inventory was incurred and realizable value is translated applying
exchange rate when realizable value is determined which is generally closing rate.
Exchange difference arising on the translation of the financial statements of integral foreign
operation should be charged to profit and loss account. Exchange difference arising on the
translation of the financial statement of foreign operation may have tax effect which
should be dealt as per AS 22 ‘Accounting for Taxes on Income’.
Thus, the treatment by the management of translating all assets and liabilities; income and
expenditure items in respect of foreign branches at the prevailing rate at the year end and
also the treatment of resultant exchange difference is not in consonance with AS 11.
Q-2 A business having the Head Office in Kolkata has a branch in UK. The following is the trial
balance of Branch as at 31.03.20X4:
Account Name Amount in £
Dr. Cr.
Machinery (purchased on 01.04.20X1) 5,000
Debtors 1,600

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Opening Stock 400

Goods received from Head Office Account 6,100
(Recorded in HO books as ` 4,02,000)
Sales 20,000
Purchases 10,000
Wages 1,000
Salaries 1,200
Cash 3,200
Remittances to Head Office (Recorded in HO books as 2,900
` 1,91,000)
Head Office Account (Recorded in HO books as 7,400
` 4,90,000)
Creditors 4,000
• Closing stock at branch is £ 700 on 31.03.20X4.
• Depreciation @ 10% p.a. is to be charged on Machinery.
• Prepare the trial balance after been converted in Indian Rupees.
• Exchange rates of Pounds on different dates are as follow:
01.04.20X1– ` 61; 01.04.20X3– ` 63 & 31.03.20X4 – ` 67
Q-3 Explain briefly the accounting treatment needed in the following cases as per AS 11 as on
31.3. 20X1.
Trade receivables include amount receivable from Umesh ` 5,00,000 recorded at the prevailing
exchange rate on the date of sales, transaction recorded at US $ 1= `58.50.
Long term loan taken from a U.S. Company, amounting to ` 60,00,000. It was recorded at
US $ 1 = ` 55.60, taking exchange rate prevailing at the date of transaction. US $ 1 = `61.20
was on 31.3. 20X1.
Q-4
Assets and liabilities and income and expenditure items in respect of integral foreign
operations are translated into Indian rupees at the prevailing rate of exchange at the end
of the year. The resultant exchange differences in the case of profit, is carried to other
Liabilities Account and the Loss, if any, is charged to revenue. You are required to comment
in line with AS 11.
Ans. Financial statements of an integral foreign operation (for example, dependent foreign
branches) should be translated using the principles and procedures described in paragraphs
8 to 16 of AS 11 (Revised 2003). The individual items in the financial statements of a foreign
operation are translated as if all its transactions had been entered into by the reporting
enterprise itself. Individual items in the financial statements of the foreign operation are
translated at the actual rate on the date of transaction. The foreign currency monetary
items (for example cash, receivables, payables) should be reported using the closing rate
at each balance sheet date. Non-monetary items (for example, fixed assets, inventories,
investments in equity shares) which are carried in terms of historical cost denominated in

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a foreign currency should be reported using the exchange date at the date of transaction.
Thus the cost and depreciation of the tangible fixed assets is translated using the exchange
rate at the date of purchase of the asset if asset is carried at cost. If the fixed asset is
carried at fair value, translation should be done using the rate existed on the date of the
valuation. The cost of inventories is translated at the exchange rates that existed when
the cost of inventory was incurred and realizable value is translated applying exchange rate
when realizable value is determined which is generally closing rate. Exchange difference
arising on the translation of the financial statements of integral foreign operation should
be charged to profit and loss account.
Thus, the treatment by the management of translating all assets and liabilities; income
and expenditure items in respect of foreign branches at the prevailing rate at the year end
and also the treatment of resultant exchange difference is not in consonance with AS 11
(Revised 2003).
Q-5 Trade payables of CAT Ltd. include amount payable to JBB Ltd., ` 10,00,000 recorded at the
prevailing exchange rate on the date of transaction, transaction recorded at US $1 = ` 80.00.
The exchange rate on balance sheet date (31.03.2020) was US $1 = ` 85.00. You are required
to calculate the amount of exchange difference and also explain the accounting treatment
needed for this as per AS 11 in the books of CAT Ltd.
Ans. Amount of Exchange difference and its Accounting Treatment
Foreign `
Currency Rate
Trade payables
Initial recognition US $ 12,500 (`10,00,000/80) 1 US $ = ` 80 10,00,000
Rate on Balance sheet date 1 US $ = ` 85
Exchange Difference loss US $ 12,500 x ` (85-80) 62,500
Treatment:
Debit Profit and Loss A/c by ` 62,500 and Credit Trade Payables
Thus, Exchange Difference on trade payables amounting ‘ 62,500 is required to be transferred
to Profit and Loss.
Q-6 (i) PP Ltd. an Indian Company acquired long term finance from WW (P) Ltd. a U.S. company,
amounting to ` 40,88,952. The transaction was recorded at US $1 = ` 72.00, taking exchange
rate prevailing at the date of transaction. The exchange rate on balance sheet date
(31.03.2021) is US $1 = ` 73.60.
(ii) Trade receivables of PP Ltd. include amount receivable from Preksha Ltd.,` 20,00,150 recorded
at the prevailing exchange rate on the date of sales, transaction recorded at US $1 = ` 73.40.
The exchange rate on balance sheet date (31.03.2021) is US $1 = ` 73.60. Exchange rate on
1st April, 2020 is US $1 = ` 74.00.
You are required to calculate the amount of exchange difference and also explain the

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accounting treatment needed in the above two cases as per AS 11 in the books of PP Ltd.
Ans. (i) Long term Finance
Foreign Currency Rate `
Initial recognition US $ 56,791 (40,88,952/72) 1 US $ = ` 72 40,88,952
Rate on Balance sheet date 1 US $ = ` 73.60
Exchange Difference Loss [US $ 56,791 x 90,866
(73.60 – 72)] (rounded off )
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, 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 recognized as income or as expenses in the period
in which they arise.
However, at the option of an entity, exchange differences arising on reporting of long-term
foreign currency monetary items at rates different from those at which they were initially
recorded during the period, or reported in previous financial statements, in so far as they
relate to the acquisition of a non-depreciable capital asset can be accumulated in a “Foreign
Currency Monetary Item Translation Difference Account” in the enterprise’s financial
statements and amortized over t he balance period of such long-term asset/ liability, by
recognition as income or expense in each of such periods.
Treatment needed in this case: PP Ltd. can either Debit Foreign Currency Monetary Item
Translation Difference (FCMITD) A/c or Debit Profit and Loss A/c by ` 90,866 and Credit Loan
A/c
(ii) Trade Receivables
Foreign Currency Rate `
Initial recognition US $ 27,250 (20,00,150/73.40) 1 US $ = ` 73.40 20,00,150
Rate on Balance sheet date 1 US $ = ` 73.60
Exchange Difference Gain [US $ 27,250 X
(73.60-73.40)] 5,450
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences on
trade receivables amounting ` 5,450 is required to be transferred to Profit and Loss A/c.
Treatment needed in this case: Credit Profit and loss account by ` 5,450.

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