CMA Intermediate · Financial Accounting

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

Full chapter guide

Key formulas

Foreign currency: Foreign currency = any currency other than the reporting currency; Para 7.6. It depends on the enterprise. USD is foreign for an Indian company but is the reporting currency for a US company.
Exchange rate: Exchange rate = ratio for exchange of two currencies; Para 7.4. Example: ₹83 per 1 USD.
Closing rate: Closing rate = exchange rate at the balance sheet date; Para 7.2. Used for monetary items at each balance sheet date.
Exchange difference: Exchange difference = (Rate 2 − Rate 1) × same number of foreign currency units; Para 7.3. A result of rate movement between two dates, not a rate itself.
Monetary items: Money held + assets and liabilities receivable or payable in fixed or determinable amounts of money; Para 7.11. Cash, debtors, creditors, loans.
Non-monetary items: Non-monetary items = assets and liabilities other than monetary items; Para 7.14. Fixed assets, inventory, equity investments.
Rates at a subsequent balance sheet date: Monetary: closing rate | Non-monetary at historical cost: rate on transaction date | Non-monetary at fair value: rate when value was determined; Para 11(a), (b), (c). For monetary items, if the closing rate is unrealistic (for example, remittance restrictions), report the amount likely to be realised or disbursed.
Foreign operation: Foreign operation = subsidiary, associate, joint venture or branch based or conducted in another country; Para 7.7. The test is where its activities are based or conducted.
Initial recognition: Rupee amount = Foreign currency amount × Exchange rate on transaction date; Exchange rate means rupees per one unit of foreign currency, for example ₹83 per US$1.
Average rate rule: Average rate for a week or month may be used if the rate does not fluctuate significantly; Applies per currency. If rates move sharply, use the actual date rate.
Simple average of rates: Average rate = Sum of rates considered ÷ Number of rates; Use only the rates the question gives. Do not invent extra dates.
Journal entry for credit purchase: Purchases A/c Dr. (FC amount × transaction date rate) To Creditor A/c; For a credit sale: Debtor A/c Dr. To Sales A/c at the transaction date rate.
Monetary items at balance sheet date: Rupee value = Foreign currency amount × Closing rate; Applies to cash, receivables and payables (para 11(a)). Exception: use amount likely to be realised or paid if closing rate is not reliable.
Non-monetary items at historical cost: Rupee value = Foreign currency cost × Rate on transaction date; Para 11(b). No restatement at closing rate.
Non-monetary items at fair value: Rupee value = Foreign currency fair value × Rate when fair value was determined; Para 11(c).
Exchange difference on a monetary item: Exchange difference = Foreign currency amount × (Closing rate − Opening rate for the period); Opening rate is the transaction-date rate in the first period, and the previous closing rate in later periods. For a receivable, a higher rate is a gain; for a payable, a higher rate is a loss.
Exchange difference on settlement: Exchange difference = Foreign currency amount × (Settlement rate − Last reported rate); Last reported rate is the transaction-date rate if there was no earlier balance sheet date, otherwise the previous closing rate.
Premium or discount on a hedge contract: (Forward rate − Spot rate on contract date) × Foreign currency amount; This is a premium if the forward rate is higher than spot and a discount if it is lower. Whether it is income or expense depends on whether you are the buyer or seller of the foreign currency. An exporter selling at a premium earns income; an importer buying at a premium bears expense.
Amortisation of premium or discount: Total premium or discount × (Months elapsed in the period ÷ Total months of contract); Spread it over the contract's life. Use the same period split as the financial year-end cuts the contract.
Exchange difference on the forward contract: Foreign currency amount × (Spot at reporting or settlement date − Spot at inception or last reporting date, whichever is later); Recognise it in the statement of profit and loss for the period. This is separate from the premium or discount, which is the other component. For a contract to sell foreign currency, a rising spot rate gives a loss on the contract. For a contract to buy, a rising spot rate gives a gain.
Gain or loss on a speculative contract: Buy contract: Foreign currency amount × (Forward rate for the remaining maturity − Contract rate). Sell contract: Foreign currency amount × (Contract rate − Forward rate for the remaining maturity); A positive result is a gain and a negative result is a loss. The sign is reversed for a sell contract, so check your position first. No separate premium or discount. Recognise the result in the statement of profit and loss for the period.
Cancellation or renewal: Profit or loss on cancellation or renewal = income or expense of the period in which it occurs; Take the figure from the question's cancellation rate and contract data. Do not amortise premium or discount after the contract ends.
Rupee amount actually realised or paid on a hedge: Foreign currency amount × Forward rate; Use it to check your answer. The original transaction value plus the premium income, or less the premium expense, should equal this amount.
Classification test: Integral = extension of the reporting enterprise's business. Non-integral = operates substantially in its own local currency.; Paras 17 to 19. Classification depends on how the operation is financed and operates in relation to the reporting enterprise.
Translation of a non-integral operation: assets and liabilities: Assets and liabilities (monetary and non-monetary) × closing rate; Para 24(a). Fixed assets and inventory also use the closing rate, unlike historical-cost translation.
Translation of a non-integral operation: income and expenses: Income and expense items × rate at the date of each transaction; Para 24(b). In practice, an average rate is often used as a approximation when the question says so.
Exchange difference on translation: Exchange difference = Net assets at closing rate (translated) − Opening net investment (at opening rate) − Profit for the year (at transaction rates) ± other equity changes; Balancing figure that arises from the sources in Para 26. It goes to the foreign currency translation reserve, not to profit or loss.
Net investment: Net investment = Reporting enterprise's share in the net assets of the non-integral foreign operation; Para 7.12.
Treatment of exchange difference: Accumulate in foreign currency translation reserve until disposal of the net investment; Para 24(c). On disposal, it is recognised as income or expense (Para 15 refers to Para 31).
Monetary item forming part of net investment: Exchange difference on such an item → foreign currency translation reserve until disposal; Para 15. Applies where the item, in substance, forms part of the net investment.
Minority interest: Translation differences attributable to minority interest are allocated to and reported as part of minority interest; Para 26, for a non-integral operation that is consolidated but not wholly owned.
Para 46A eligibility: Foreign currency item + monetary + term ≥ 12 months at origination = long-term foreign currency monetary item; Option is irrevocable and applies to all such items. Disclose the fact of the option and the amount remaining to be amortised, in the period of exercise and every later period while any difference remains unamortised.
Exchange difference on depreciable capital asset: Add to or deduct from asset cost; depreciate over balance life of the asset; Applies only where the difference relates to acquisition of a depreciable capital asset.
Other long-term items: Accumulate in FCMITDA; amortise over balance period of the asset or liability to profit or loss; FCMITDA means Foreign Currency Monetary Item Translation Difference Account.
Change in classification (para 33): Apply translation procedures of the revised classification from the date of change; No restatement of earlier periods.
Integral to non-integral (para 34): Exchange differences on translation of non-monetary assets at date of reclassification go to Foreign Currency Translation Reserve; Deferred exchange differences are not recognised in income or expense until disposal of the operation.
Non-integral to integral (para 34): Translated amounts of non-monetary items at date of change = historical cost from then on; Applies in the period of change and later periods.
Post balance sheet rate change (para 43): Disclose as per AS 4; Applies to the effect on monetary items or on a foreign operation's statements of rate changes after the balance sheet date.

Quick revision

Foreign currency transactions are first recorded at the exchange rate on the date of the transaction.
At each balance sheet date, foreign currency monetary items are reported at the closing rate.
If the closing rate is unrealistic or remittances are restricted, report the monetary item at the amount likely to be realised or paid.
Non-monetary items at historical cost use the rate on the date of the transaction.
Non-monetary items at fair value or similar valuation use the rate when the value was determined.
Cash, receivables and payables are monetary; fixed assets, inventories and equity investments are non-monetary.
A contingent liability in foreign currency is disclosed using the closing rate.
In a forward contract, the premium or discount is the difference between the exchange rate at the date of inception and the forward rate specified in the contract (forward rate above spot is a premium, below is a discount). It is accounted for separately from exchange differences.
A forward contract for trading or speculation ignores premium or discount and is marked to market, with the gain or loss recognised.
For a non-integral foreign operation, translate assets and liabilities at the closing rate and income and expenses at transaction-date rates.
The exchange differences go to a foreign currency translation reserve until the net investment is disposed of.
Net investment in a non-integral foreign operation is the reporting enterprise's share in its net assets.

Common mistakes

Treating closing rate and exchange difference as the same thing. Fix: Closing rate is the rate on the balance sheet date. Exchange difference is the rupee gain or loss from the change in rates between two dates.
Translating fixed assets or inventory at the closing rate. Fix: Non-monetary items at historical cost stay at the transaction-date rate (para 11(b)). Only monetary items use the closing rate.
Using the payment date rate to record a credit purchase or sale. Fix: Record at the rate on the date of the transaction. The payment date rate matters only when you settle and compute the exchange difference.
Using the year-end closing rate for the first entry. Fix: The closing rate is for reporting at the balance sheet date. Initial recognition always uses the transaction date rate.
Restating fixed assets or inventory at the closing rate Fix: Closing rate is only for monetary items. Historical cost items stay at the transaction-date rate.
Using the transaction-date rate for a payable at year end Fix: Restate all receivables, payables and cash balances in foreign currency at the closing rate.
Treating the whole forward-minus-spot gap as a gain or loss on the contract date Fix: For a hedge, the gap is premium or discount. Amortise it over the contract life and recognise only the part belonging to each period.
Using the forward rate to translate the receivable or payable at the year-end Fix: Translate the receivable or payable at the closing spot rate as AS 11 requires. The effect of the hedge is shown through the exchange difference on the contract and the premium or discount.
Taking the exchange difference on translation of a non-integral operation to the statement of profit and loss. Fix: Remember Para 24(c) and Para 26: these differences are not income or expense for the period. Accumulate them in the foreign currency translation reserve until disposal.
Translating fixed assets and inventory of a non-integral operation at historical rates. Fix: Para 24(a) says assets and liabilities, both monetary and non-monetary, are translated at the closing rate.

Exam tips

Write the definition first, with the paragraph number if you are sure of it, then apply it. Theory marks are easy to earn.
In MCQs, watch for options that confuse closing rate, exchange rate and exchange difference. Match the wording exactly to the definition.
For classification questions, give a one-line reason such as 'fixed amount receivable, hence monetary'. A bare label may not earn full marks.
In numerical answers, show a small working table: item, foreign amount, rate, rupee amount. Step marks depend on it.
Revise para 11 with its exception on unrealistic closing rates, as examiners like a statement on when the closing rate may not apply.
In MCQs, the question often lists several rates. Pick the one that matches the transaction date and ignore the rest.
Write the rate and the multiplication in your answer. Step marks are given for the right rate even if the arithmetic slips.
If a question says to use an average rate, check whether it says the rate is stable. State that condition in one line.