Advanced Accounting · AS 11 The Effects of Changes in Foreign Exchange Rates

AS 11 Scope, Definitions and Key Terms for CA Inter

Updated 5 October 2026

AS 11 (The Effects of Changes in Foreign Exchange Rates) tells you how to record foreign currency transactions and translate foreign operations into the reporting currency. To solve questions, first identify the reporting currency, then classify each item as monetary or non-monetary, then pick the right rate: transaction date, closing rate or fair value date.

Understand AS 11 Scope, Definitions and Key Terms

A business whose books are kept in rupees may buy goods in dollars, borrow in euros or run a branch abroad. AS 11 sets the rules for converting those foreign amounts into rupees so that financial statements are consistent and comparable.

Start with the key terms. Reporting currency is the currency in which the financial statements are presented. Foreign currency is any currency other than the reporting currency. Exchange rate is the ratio of exchange between two currencies. Closing rate is the exchange rate at the balance sheet date. Exchange difference is the difference from reporting the same number of units of a foreign currency in the reporting currency at different exchange rates.

The most tested idea is the split between monetary and non-monetary items. Monetary items are money held and assets and liabilities to be received or paid in a fixed or determinable amount of money. Examples are cash, receivables, payables, loans and debentures. Non-monetary items are those that are not monetary. Examples are fixed assets, inventories and investments in equity shares. Monetary items are generally restated at the closing rate. Non-monetary items carried at historical cost stay at the rate on the transaction date. This rule applies to the enterprise's own transactions and to an integral foreign operation. It does not apply to a non-integral foreign operation, where both monetary and non-monetary items are translated at the closing rate.

A foreign operation is a subsidiary, associate, joint venture or branch of the reporting enterprise whose activities are based or conducted in a country other than India. Foreign operations are classified as integral or non-integral. An integral foreign operation carries on its business as if it were an extension of the reporting enterprise's operations, for example it sells goods imported from the reporting enterprise and remits the proceeds to it. A non-integral foreign operation accumulates cash and other monetary items, incurs expenses, generates income and arranges borrowings substantially in its own local currency, and it has a low volume of dealings with the reporting enterprise. When you translate the financial statements of a non-integral foreign operation, all its assets and liabilities, monetary and non-monetary, are translated at the closing rate.

On scope, AS 11 applies to accounting for transactions in foreign currencies and for translating the financial statements of foreign operations. It also covers accounting for forward exchange contracts. AS 11 deals with forward exchange contracts and similar instruments entered into to establish the amount of reporting currency required or available at the settlement date of a transaction. For these, the premium or discount, which is the difference between the forward rate and the spot rate at inception, is amortised over the life of the contract. The exchange difference on the contract is also recognised as income or expense of the period. It is the foreign currency amount translated at the closing rate (or the settlement rate, if the contract is settled in the period) less the same amount translated at the later of the inception date rate and the previous reporting date rate. Other forward contracts, such as those that are speculative or for trading, are recorded at the forward rate available at the balance sheet date for the remaining maturity of the contract, with the gain or loss recognised in the statement of profit and loss. Hedge accounting for firm commitments and highly probable forecast transactions is outside AS 11.

AS 11 does not deal with the following:

The presentation of cash flows from foreign currency transactions, or the translation of cash flows of a foreign operation, in a cash flow statement (that is AS 3).
Restatement from one reporting currency to another for convenience.
Hedge accounting for firm commitments and highly probable forecast transactions.

Para 46A deals with exchange differences on long-term foreign currency monetary items. It is an option, not a mandatory rule. Under it, an enterprise may adjust the exchange difference on a long-term foreign currency monetary item to the cost of the depreciable capital asset, where the item relates to the acquisition of that asset. Exchange differences on other long-term foreign currency monetary items are accumulated in the Foreign Currency Monetary Item Translation Difference Account (FCMITDA) and amortised.

Check your study material for the exact scope wording for the exam.

Key rules to remember

Exchange difference on restatement of a monetary item: Foreign currency amount × (closing rate − rate at initial recognition or previous balance sheet date, whichever is later); Compare the closing rate with the rate at which the item was last recorded: the transaction date if it arose in the current period, otherwise the previous balance sheet date. Where the rate is quoted as rupees per unit of foreign currency, a positive result is a gain on a receivable and a loss on a payable. A negative result is the reverse.
Exchange difference on settlement of a monetary item: Foreign currency amount × (settlement rate − rate at previous balance sheet date or transaction date, whichever is later); Use this when the item is settled during the period. If the item was already restated at an earlier balance sheet date, measure against that balance sheet date rate, not the original transaction date. The same sign rule applies: a positive result is a gain on a receivable and a loss on a payable.
Initial recognition: Reporting currency amount = Foreign currency amount × exchange rate on the transaction date; An average rate for a week or month may be used if the rate does not fluctuate significantly.
Monetary items at balance sheet date: Restate at the closing rate; Applies to monetary items such as cash, receivables, payables and loans.
Non-monetary items at historical cost: Report at the rate on the date of the transaction; Examples are fixed assets and inventory at cost. This applies to the enterprise's own transactions and to an integral foreign operation. For a non-integral foreign operation, non-monetary items are translated at the closing rate.
Non-monetary items at fair value: Report at the rate on the date when the fair value was determined; For example, an item carried at fair value in foreign currency. This applies to the enterprise's own transactions and to an integral foreign operation. For a non-integral foreign operation, non-monetary items are translated at the closing rate.
Assets and liabilities of a non-integral foreign operation: Translate all assets and liabilities, monetary and non-monetary, at the closing rate; Income and expense items of a non-integral foreign operation are translated at the rates on the transaction dates. The resulting exchange differences are accumulated in a foreign currency translation reserve.
Closing rate versus transaction rate: Closing rate = rate on the balance sheet date; Transaction rate = rate on the date of the transaction; Do not interchange them.

How to solve AS 11 Scope, Definitions and Key Terms questions

Use this order for any definition-based or classification question on AS 11.

1Identify the reporting currency of the enterprise. Anything else is foreign currency.
2List every item in the question: cash, debtors, creditors, loans, fixed assets, inventory, investments.
3Classify each item as monetary or non-monetary. Ask: will it be settled in a fixed amount of money?
4For monetary items, take the closing rate at the balance sheet date. For non-monetary items at cost, keep the transaction date rate.
5Compute the exchange difference as foreign currency units × change in rate. On restatement, compare the closing rate with the rate at initial recognition or the previous balance sheet date, whichever is later. On settlement, compare the settlement rate with the rate at the previous balance sheet date or the transaction date, whichever is later. State whether it is a gain or loss.
6If a foreign operation is involved, decide whether it is integral or non-integral using the business facts given.
7Write the answer with the term, the rule and the conclusion, quoting the AS 11 definition in your own words.

Quickest way: Classify, pick the rate, compute

When to use it: Use it for MCQs and short written parts under time pressure.

For MCQs, test the item: cash, receivable, payable and loan are monetary. Fixed assets, inventory and equity investments are non-monetary.
Match the rate: monetary gets closing rate, non-monetary at cost gets transaction date rate.
Gain or loss (where the rate is quoted as rupees per unit of foreign currency): asset with a rising rate is a gain, liability with a rising rate is a loss. Reverse when the rate falls.
Pick the right base rate. On restatement, compare the closing rate with the rate at initial recognition or the previous balance sheet date, whichever is later. On settlement, compare the settlement rate with the rate at the previous balance sheet date or the transaction date, whichever is later.
For integral or non-integral, look for dependence on the parent: parent's goods, parent's financing and parent's currency mean integral.
In written answers, state the definition first, then the working, then the conclusion. This earns step marks even if the final figure slips.

Common mistakes in AS 11 Scope, Definitions and Key Terms

Treating inventory or fixed assets as monetary items.
They are valuable assets, so students assume they are money-like.
Fix: Ask whether the item will be received or paid in a fixed amount of money. If not, it is non-monetary.
Restating a fixed asset bought on credit at the closing rate.
Students apply the closing rate to the whole transaction.
Fix: The asset stays at the transaction date rate. Only the creditor (monetary) is restated.
Mixing up closing rate with average rate or the rate on the date of payment.
Several rates appear in one question.
Fix: Closing rate is only the rate on the balance sheet date. Label each rate in your working.
Getting the sign of the exchange difference wrong for a liability.
Students remember a rising rate as a gain and apply it to every item.
Fix: A rising rate gains on foreign currency assets and loses on foreign currency liabilities.
Measuring a settlement difference against the original transaction date even though the item was restated at an earlier balance sheet date.
Students treat restatement and settlement as one calculation.
Fix: Keep them separate. Restatement compares the closing rate with the rate at initial recognition or the previous balance sheet date, whichever is later. Settlement compares the settlement rate with the previous balance sheet date rate or the transaction date rate.
Classifying a foreign operation as integral or non-integral by its legal form.
Students think a branch is always integral and a subsidiary always non-integral.
Fix: Classification depends on how the operation functions, not its legal form. Use the indicators in the facts.

Worked examples

Example 1

A company with the rupee as reporting currency has these items at the balance sheet date: (a) cash in hand, (b) debtors, (c) plant, (d) inventory, (e) loan from a bank, (f) investment in equity shares. Classify each as monetary or non-monetary and state the rate normally used at the balance sheet date for items carried at historical cost.

Show the solution

Monetary items are money held and items to be received or paid in a fixed or determinable amount of money.
Cash in hand, debtors and the bank loan fit that test, so they are monetary.
Plant, inventory and equity shares have no fixed money amount to be received or paid, so they are non-monetary.
Monetary items are restated at the closing rate.
Non-monetary items carried at historical cost are shown at the rate on the transaction date.

Answer: Monetary: cash, debtors, bank loan (closing rate). Non-monetary: plant, inventory, equity investment (transaction date rate when at historical cost).

Example 2

An Indian company bought goods for US $10,000 on 1 March when the rate was ₹82 per US $. The balance sheet date is 31 March, the closing rate is ₹84 per US $, and the creditor is unpaid. Compute the amount of the creditor on initial recognition, at the balance sheet date, and the exchange difference.

Show the solution

Initial recognition: 10,000 × ₹82 = ₹8,20,000. Debit purchases (or inventory) with ₹8,20,000 and credit the creditor with ₹8,20,000.
The creditor is a monetary item, so restate it at the closing rate: 10,000 × ₹84 = ₹8,40,000.
Exchange difference: ₹8,40,000 − ₹8,20,000 = ₹20,000.
The liability has increased, so this is an exchange loss. Only the creditor is restated.
Purchases (or inventory) stay at ₹8,20,000 as they are non-monetary and at cost.

Answer: Creditor initially ₹8,20,000, at balance sheet date ₹8,40,000. Purchases (or inventory) remain at ₹8,20,000. Exchange loss ₹20,000 is recognised in the statement of profit and loss for the period.

Exam tips

Learn the definitions in your own words. Short theory questions often ask for the meaning of a term or the difference between two terms.
Prepare a clean table in your head for integral versus non-integral foreign operations and write both columns in answers.
In numerical problems, write each rate with its date and label it as transaction rate or closing rate.
Always state whether the exchange difference is a gain or loss and where it goes, not just the number.
MCQs often test the classification of items. Revise the monetary and non-monetary list until it is automatic.

Practice questions from AS 11 The Effects of Changes in Foreign Exchange Rates

AS 11 Scope, Definitions and Key Terms: frequently asked questions

What is the closing rate in AS 11?

It is the exchange rate at the balance sheet date. Monetary items in a foreign currency are restated at this rate when the financial statements are prepared.

What is the difference between monetary and non-monetary items?

Monetary items are cash and items to be received or paid in a fixed or determinable amount of money, such as debtors, creditors and loans. Non-monetary items have no such fixed amount, such as fixed assets, inventory and equity shares.

How do I decide if a foreign operation is integral or non-integral?

Look at how it functions. If it works as an extension of the parent, using the parent's goods, financing and currency, it is integral. If it operates mostly in its own local currency with its own financing and little dealing with the parent, it is non-integral.

What is an exchange difference?

It arises when the same number of foreign currency units is reported in the reporting currency at different exchange rates. It can arise on settlement or on restatement at the closing rate. On restatement you compare with the rate at initial recognition or the previous balance sheet date, whichever is later.