The Effects of Changes in Foreign Exchange Rates discusses foreign currency transactions entered by entity, translation of financial statements of foreign operations and accounting for forward exchange contracts.

An entity may carry on foreign activities in two ways. It may have transactions in foreign currencies or it may have foreign operations. In addition, an entity may present its financial statements in a foreign currency.

1.Objective of AS- 11

a. The objective of this Standard is to prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity and how to translate financial statements into a presentation currency.

b. The principal issues are which exchange rate(s) to use and how to report the effects of changes in exchange rates in the financial statements.

2. Scope of AS- 11

a. This Standard shall be applied

 (a)  in accounting for transactions and balances in foreign currencies, except for those derivative transactions and balances that are within the scope of Ind AS 39 Financial Instruments: Recognition and Measurement,

 (b)  in translating the results and financial position of foreign operations that are included in the financial statements of the entity by consolidation, proportionate consolidation or the equity method; and

 (c)  in translating an entity’s results and financial position into a presentation currency.

b. Ind AS 39 applies to many foreign currency derivatives and, accordingly, these are excluded from the scope of this Standard. However, those foreign currency derivatives that are not within the scope of Ind AS 39 (e.g. some foreign currency derivatives that are embedded in other contracts) are within the scope of this Standard. In addition, this Standard applies when an entity translates amounts relating to derivatives from its functional currency to its presentation currency.

c. This Standard does not apply to hedge accounting for foreign currency items, including the hedging of a net investment in a foreign operation.

d. This Standard applies to the presentation of an entity’s financial statements in a foreign currency and sets out requirements for the resulting financial statements to be described as complying with Indian Accounting Standards. For translations of financial information into a foreign currency that do not meet these requirements, this Standard specifies information to be disclosed.

e. This Standard does not apply to the presentation in a statement of cash flows of the cash flows arising from transactions in a foreign currency, or to the translation of cash flows of a foreign operation.

3. Reporting foreign currency transactions in the functional currency

a. Initial recognition

i. A foreign currency transaction is a transaction that is denominated or requires settlement in a foreign currency, including transactions arising when an entity:

 (a)  buys or sells 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; or

 (c)  otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency.

ii. A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.

iii. The date of a transaction is the date on which the transaction first qualifies for recognition in accordance with Indian Accounting Standards. 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 inappropriate.

4. Reporting at the ends of subsequent reporting periods

a. At the end of each reporting period

 (a)  foreign currency monetary items shall be translated using the closing rate;

 (b)  non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction; and

 (c)  non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was determined.

b. The carrying amount of an item is determined in conjunction with other relevant Standards. For example, property, plant and equipment may be measured in terms of fair value or historical cost in accordance with Ind AS 16 Property, Plant and Equipment. Whether the carrying amount is determined on the basis of historical cost or on the basis of fair value, if the amount is determined in a foreign currency it is then translated into the functional currency in accordance with this Standard.

c. The carrying amount of some items is determined by comparing two or more amounts. For example, the carrying amount of inventories is the lower of cost and net realisable value in accordance with Ind AS 2 Inventories. Similarly, in accordance with Ind AS 36 Impairment of Assets, the carrying amount of an asset for which there is an indication of impairment is the lower of its carrying amount before considering possible impairment losses and its recoverable amount. When such an asset is non-monetary and is measured in a foreign currency, the carrying amount is determined by comparing:

 (a)  the cost or carrying amount, as appropriate, translated at the exchange rate at the date when that amount was determined (i.e. the rate at the date of the transaction for an item measured in terms of historical cost); and

 (b)  the net realisable value or recoverable amount, as appropriate, translated at the exchange rate at the date when that value was determined (e.g. the closing rate at the end of the reporting period).

The effect of this comparison may be that an impairment loss is recognised in the functional currency but would not be recognised in the foreign currency, or vice versa.

d. When several exchange rates are available, the rate used is that at which the future cash flows represented by the transaction or balance could have been settled if those cash flows had occurred at the measurement date. If exchangeability between two currencies is temporarily lacking, the rate used is the first subsequent rate at which exchanges could be made.