AS 11.
ACCOUNTING FOR THE EFFETS OF
CHANGES
IN FOREIGN EXCHANGE RATES
Objective:
In accounting for foreign
currency transactions and foreign operations are to decide:
Which
exchange rate to use and
How to
recognize in the financial statements
Scope:
This Standard applies to:
(a) Accounting for transactions in foreign currencies; and
(b) Translating the financial statements of foreign operations.
Definitions:
Reporting currency:
It is the
currency used in presenting the financial statements.
Foreign currency:
It is a
currency other than the reporting currency of an enterprise.
Exchange rate:
It is the
ratio for exchange of two currencies.
Average rate:
It is the
mean of the exchange rates.
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Forward rate:
It is the
exchange rate established by the terms of an agreement for
exchange of two currencies
Closing rate:
It is the
exchange rate at the balance sheet date.
Monetary items:
It include
foreign currency notes, balances in bank accounts denominated in
a foreign currency, receivables, payables and loans denominated
in a foreign currency.
Non-monetary items
These are
assets and liabilities other than monetary items.
E.g.,
Fixed
assets, inventories, investments in equity shares.
Settlement date:
It is the
date at which a receivable is due to be collected or a payable
is due to be paid.
Recoverable amount:
It is the
amount, to be recovered from the future use of an asset,
including its residual value on disposal.
Initial
recognition:
A
transaction in a foreign currency
should be
recorded 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. For practical reasons, a
rate that approximates
the actual rate is often used.
Changes in
Exchange rate subsequent to initial recognition:
Monetary Item:
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It
should be reported using the
closing rate
but in the circumstances where the closing rate is
unrealistic or where there are restrictions on
remittances etc. the relevant monetary item should be
reported at the
realizable value.
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Non-monetary item:
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It
should be valued at the lower of cost and fair value.
Fair value is determined with reference to the closing
rate. Exchange difference, if any, on the above should
be treated as income/expense for the period.
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Disclosure requirements:
Amount of
exchange difference should be disclosed as follows:
a.
It should be included in
the net profit or loss for the period.
b.
Adjust in the carrying
amount of fixed assets during the
accounting
period.
c.
Amount of difference in respect to the outstanding forward
exchange contract relating to one or more subsequent accounting
periods
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