CA Intermediate · Advanced Accounting

AS 11 The Effects of Changes in Foreign Exchange Rates: formula sheet

Full chapter guide

Key formulas

Initial recognition amount: Reporting currency amount = Foreign currency amount × Exchange rate on the transaction date; Use the rate given for the date of the transaction. Do not use the balance sheet date rate here.
Average rate (practical approach): Average rate for the week or month may be used for all transactions in that period; Allowed only if the rate does not fluctuate significantly. Otherwise use the actual rate on each date.
Purchase on credit entry: Purchases A/c Dr. (FC amount × rate) To Creditor A/c; Both sides carry the same rupee figure at initial recognition.
Sale on credit entry: Debtor A/c Dr. (FC amount × rate) To Sales A/c; The sale is recorded at the transaction date rate, and the debtor is shown at the same amount.
Monetary items: Reporting currency amount = Foreign currency amount × Closing rate; Closing rate is the rate at the balance sheet date. Applies to cash, debtors, creditors, loans.
Non-monetary items at historical cost: Amount = Foreign currency cost × Rate on date of transaction; Never restate at closing rate. No exchange difference arises.
Non-monetary items at fair value: Amount = Foreign currency fair value × Rate on date fair value was determined; Used for items carried at fair value, NRV or similar valuation.
Exchange difference on a monetary item: Difference = Foreign currency amount × (Closing rate − Rate at initial recognition or previous balance sheet date); For an asset, a positive result is a gain. For a liability, a positive result is a loss. Generally recognised in profit or loss, except net investment and para 46/46A cases.
Lower of cost and NRV: Carrying amount = Lower of (Cost at transaction-date rate) and (NRV at rate when NRV determined); Compare both in ₹ after translating each at its own rate.
Premium or discount on a hedging contract: FC amount × (Forward rate − Spot rate on inception date); Positive = premium, negative = discount. Spot rate is the rate on the date the contract is made.
Amortisation of premium or discount: Total premium or discount × (months or days elapsed in the period ÷ total contract period); Charge premium as expense and discount as income. Use the same time basis (months or days) that the question gives.
Exchange difference on a hedging contract: FC amount × (Spot rate at settlement or balance sheet date − Spot rate at inception or previous balance sheet date, whichever is later); Recognised in the statement of profit and loss for the period. For a contract to buy FC, a rise in spot rate gives a gain. For a contract to sell FC, a rise gives a loss.
Speculative contract: gain or loss at balance sheet date: FC amount × (Forward rate available at balance sheet date for remaining maturity − Contracted forward rate); Sign depends on direction. Buyer of FC gains if the new forward rate is higher. Seller of FC gains if the new forward rate is lower.
Cancellation or renewal: Gain or loss = FC amount × difference between contract rate and the rate at which it is cancelled or renewed; Recognised in the statement of profit and loss of the period of cancellation or renewal.
Integral operation: monetary items: Monetary items × closing rate; Exchange difference goes to the statement of profit and loss.
Integral operation: non-monetary items: Historical cost items × rate on transaction date; fair value items × rate on date fair value was determined; Treat the operation's transactions as the reporting enterprise's own.
Non-integral operation: assets and liabilities: All assets and liabilities (monetary and non-monetary) × closing rate; This also applies to fixed assets and inventory.
Non-integral operation: income and expenses: Income and expenses × rate on transaction date (average rate if it approximates); State the average-rate assumption in your answer.
Foreign currency translation reserve: FCTR = Closing net assets × closing rate − Opening net assets × opening rate − Profit × average rate + Dividends paid × rate on payment date; A balancing figure. Use it to check your balance sheet. Dividends reduce closing net assets, so you add them back, translated at the rate on the payment date. If there is no dividend, drop that term. A positive result is a credit to the FCTR and a negative result is a debit.
Treatment on disposal: Accumulated FCTR is recognised as income or expense in the period of gain/loss on disposal; Applies to disposal of the net investment in a non-integral operation.
Change in classification: Non-integral to integral: the translated amount of non-monetary items at the date of change is treated as their historical cost, and the accumulated FCTR stays until disposal. Integral to non-integral: exchange differences on translating the operation are accumulated in the FCTR.; Apply from the date of change. FCTR already accumulated stays until disposal.
Net investment treatment: Exchange difference on monetary item forming part of net investment → FCTR (in the statements including the foreign operation) → profit or loss on disposal; Applies only when settlement is neither planned nor likely in the foreseeable future.
Exchange difference on a loan forming part of net investment: Foreign currency amount × (closing rate − opening rate), if the loan existed at the start of the year. If the loan was granted during the year, use the rate on the transaction date instead of the opening rate.; Pick the starting rate that matches when the loan arose. For a loan receivable, a rise in the rate gives a gain.
Change in classification: Applied prospectively from the date of change; no restatement of earlier periods; The procedures for the new classification apply from the date of change. Integral to non-integral: non-monetary assets are translated at the closing rate from the date of change, and the exchange differences on translating them go to FCTR until disposal. Non-integral to integral: the translated amounts of non-monetary items at the date of change are treated as their historical cost, and the FCTR balance is retained until disposal.
Disposal of net investment: Cumulative FCTR balance transferred to profit or loss in the same period as the disposal gain or loss; On disposal, including partial disposal of the net investment (proportionately), the related FCTR is recognised in profit or loss. Settlement of ordinary operating items does not trigger the transfer.
Key disclosures: Exchange differences in P&L + net exchange differences in FCTR with reconciliation + reasons for reporting currency or classification change; Write these as separate points in the answer.

Quick revision

Reporting currency is the currency used in presenting the financial statements.
Initial recognition: use the exchange rate on the transaction date, and an average rate may be used for a week or month if the rate does not fluctuate significantly.
Monetary items such as cash, debtors, creditors and loans are restated at the closing rate.
Non-monetary items carried at historical cost are reported at the rate on the transaction date.
Non-monetary items carried at fair value are reported at the rate on the date the fair value was determined.
Exchange differences on settlement or restatement of monetary items are normally recognised in profit or loss for the period. There are exceptions: differences on monetary items that form part of the net investment in a non-integral foreign operation are accumulated in the foreign currency translation reserve, and long-term foreign currency monetary items have special treatment.
Closing rate is the exchange rate at the balance sheet date.
For a forward contract that is not for trading or speculation, the premium or discount is the difference between the spot rate at inception and the forward rate, times the foreign currency amount. Only this premium or discount is amortised over the life of the contract.
Exchange difference on such a forward contract for each period = foreign currency amount × (closing rate − the previous reporting date's closing rate). In the first period, use the spot rate at inception instead. On settlement, it is foreign currency amount × (settlement spot rate − last reporting date's closing rate), or the inception spot rate if there was no earlier reporting date. Do not use the forward contract rate here; the forward rate is used only to compute the premium or discount. Recognise the exchange difference in profit or loss in the period it arises. It is not amortised.
Foreign operations are classified as integral or non-integral, and the classification decides the translation method.
An integral foreign operation is translated as if its transactions were those of the reporting enterprise itself: monetary items at the closing rate, non-monetary items at historical rates (or fair-value date rates), with exchange differences in profit or loss.
For a non-integral foreign operation, all assets and liabilities, monetary and non-monetary, are translated at the closing rate and income and expenses at the transaction-date rates. Do not carry over the monetary and non-monetary split from integral operations. The resulting exchange difference is accumulated in a foreign currency translation reserve until disposal of the net investment. Likewise, exchange differences on monetary items that form part of the net investment in a non-integral foreign operation are accumulated in this reserve in the reporting enterprise's financial statements, not taken to profit or loss. This applies only to such net investment items, not to monetary items in general. On disposal, the cumulative amount in the reserve is recognised as income or expense.
Disclose the exchange differences recognised in profit or loss and the net exchange difference accumulated in the translation reserve with a reconciliation.

Common mistakes

Using the balance sheet date rate for initial recognition. Fix: Initial recognition always uses the transaction date rate. The closing rate is for later reporting.
Using an average rate when the rate fluctuates sharply. Fix: Use an average rate only if the rate does not fluctuate significantly. Otherwise use the actual date rate.
Restating fixed assets or inventory at the closing rate. Fix: Ask first if the item is monetary. Non-monetary items at historical cost stay at the transaction-date rate.
Taking exchange differences on monetary items to profit or loss without checking for the exceptions. Fix: Apart from the para 46/46A options and net investment cases, exchange differences on monetary items go to profit or loss in the period they arise. Net investment differences go to FCTR until disposal. Para 46/46A allows capitalisation to the asset or accumulation in FCMITDA for long-term monetary items. Use these only when the question gives such facts.
Using the closing spot rate to compute premium or discount. Fix: Premium or discount always uses the spot rate on the inception date of the contract, compared with the forward rate fixed that day.
Writing off the whole premium in the first year when the contract runs into the next year. Fix: Amortise over the contract life by time. Only the elapsed share goes to the current year.
Taking the exchange difference of a non-integral operation to profit and loss every year. Fix: For non-integral operations, accumulate the difference in FCTR. Release it to profit and loss only on disposal of the net investment.
Translating non-monetary items of a non-integral operation at historical rates. Fix: For a non-integral operation, fixed assets, inventory and every other asset and liability go at the closing rate.
Taking exchange difference on a net investment loan to profit or loss in the consolidated statements. Fix: Check first if the item is part of net investment. If yes, use FCTR until disposal.
Restating earlier years when classification changes. Fix: Remember it is a change in the facts about the operation, treated as a change in accounting estimate. Apply it only from the date of change.

Exam tips

Read the question for the exact transaction date. The rate list often includes dates that are distractors.
If the question says the rate is stable and gives an average rate, use it. If it does not mention an average, use the date rate.
In written answers, quote the AS 11 rule first and then show the working. Then pass the entry with narration.
Do not compute exchange differences unless the question gives a settlement or balance sheet date. Extra work earns no marks.
Begin every answer with a one-line classification of each item as monetary or non-monetary. Examiners give marks for this.
Always write the rate you used next to each figure. A wrong rate with clear workings still earns partial marks.
For MCQs, memorise the direction: rate rises means gain on foreign assets and loss on foreign liabilities.
Watch for items settled during the year. Their difference uses the settlement rate, not the closing rate.