Financial Accounting · The Effects of Changes in Foreign Exchange Rates (AS 11)

AS 11 Scope, Objective and Key Definitions

Updated 10 October 2026 · Fact-checked

AS 11 tells you how to account for foreign currency transactions and how to translate the financial statements of foreign operations. To solve questions, first identify the reporting currency, then classify each item as monetary or non-monetary, and apply the right rate: closing rate for monetary items, transaction-date rate for historical-cost non-monetary items.

Understand AS 11 Scope, Objective and Key Definitions

AS 11 answers one basic question: an Indian company deals in dollars, euros or dirhams, but its books and financial statements are in rupees. How do you record and report those foreign amounts? The standard gives the rules for converting them and for treating the gains or losses that arise when exchange rates move.

In practice the standard covers three areas: accounting for transactions in foreign currencies, translating the financial statements of foreign operations for inclusion in the reporting enterprise's statements, and accounting for forward exchange contracts. Its objective is to prescribe how foreign currency items are reported and how the effect of exchange rate changes is recognised.

Start with the basic terms. Foreign currency is a currency other than the reporting currency of an enterprise (para 7.6). The reporting currency is the currency in which the financial statements are presented; for an Indian company it is normally the rupee. The exchange rate is the ratio for exchange of two currencies (para 7.4). The closing rate is the exchange rate at the balance sheet date (para 7.2).

The most tested split is monetary versus non-monetary. Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money (para 7.11). Examples are cash, debtors, creditors and loans. Non-monetary items are assets and liabilities other than monetary items (para 7.14). Examples are plant, land, inventory and equity investments. The split matters because it decides which rate you use at the balance sheet date (para 11).

An exchange difference is the difference from reporting the same number of units of a foreign currency in the reporting currency at different exchange rates (para 7.3). It is a result, not a rate. A foreign operation is a subsidiary, associate, joint venture or branch whose activities are based or conducted in a country other than that of the reporting enterprise (para 7.7).

Key rules to remember

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.

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

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

1Identify the reporting currency of the enterprise. This is usually the rupee for an Indian company.
2Mark every other currency as foreign currency. A transaction in the reporting currency is not a foreign currency transaction.
3Classify each item as monetary or non-monetary. Ask: will it be received or paid in a fixed or determinable amount of money?
4For each item, note how it is carried: historical cost or fair value.
5Pick the rate: closing rate for monetary items; transaction-date rate for non-monetary items at historical cost; rate when value was determined for non-monetary items at fair value.
6Compute the amount in rupees and the exchange difference, which is the change in rupee value of the same foreign currency units.
7State the definition or paragraph basis briefly in one line to earn the theory mark.

Quickest way: Money test and rate pick

When to use it: Use for MCQs and short classification questions where you have under two minutes.

Ask: is this cash, or a fixed amount to receive or pay? If yes, it is monetary and uses the closing rate.
If it is plant, stock or shares, it is non-monetary. Check whether it is at historical cost or fair value.
Historical cost means keep the transaction-date rate. Fair value means the rate when the value was determined.
If the question says 'rate', 'ratio' or 'balance sheet date', think exchange rate or closing rate. If it says 'difference', think exchange difference.

Common mistakes in AS 11 Scope, Objective and Key Definitions

Treating closing rate and exchange difference as the same thing.
Both appear in the same sums and both involve rates.
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.
Students apply the closing rate to every foreign currency balance.
Fix: Non-monetary items at historical cost stay at the transaction-date rate (para 11(b)). Only monetary items use the closing rate.
Calling a currency 'foreign' without checking the reporting currency.
Students assume dollars are always foreign.
Fix: Foreign currency means a currency other than the reporting currency of that enterprise. Name the reporting currency first.
Classifying an item by its name instead of by what will be received or paid.
Students memorise lists and miss borderline items.
Fix: Use the definition: fixed or determinable amounts of money means monetary. Equity shares have no fixed amount, so they are non-monetary.
Treating any overseas branch or subsidiary as a foreign operation only if it is a subsidiary.
Students remember only the word 'subsidiary'.
Fix: Para 7.7 covers a subsidiary, associate, joint venture or branch whose activities are based or conducted in another country.
Always using the closing rate for monetary items even when the question says the rate is unrealistic.
The rule is learned without its exception.
Fix: Para 11(a) allows the amount likely to be realised or disbursed when the closing rate does not reflect it, for example under remittance restrictions.

Worked examples

Example 1

Classify the following items of an Indian company as monetary or non-monetary under AS 11 and state the rate used at the balance sheet date: (a) USD debtors, (b) imported machinery carried at historical cost, (c) USD loan payable, (d) inventory carried at cost.

Show the solution

Reporting currency is the rupee, so USD is foreign currency.
(a) Debtors will be received in a fixed amount of money. Monetary. Closing rate (para 11(a)).
(b) Machinery is neither money nor a fixed receivable or payable. Non-monetary at historical cost. Rate on the date of the transaction (para 11(b)).
(c) Loan payable is a fixed amount to be paid. Monetary. Closing rate.
(d) Inventory is non-monetary and carried at cost. Rate on the date of the transaction.

Answer: (a) Monetary, closing rate. (b) Non-monetary, transaction-date rate. (c) Monetary, closing rate. (d) Non-monetary, transaction-date rate.

Example 2

On 1 March, an Indian company bought machinery from a US supplier for USD 10,000 on credit when the rate was ₹82 per USD. On 31 March, the closing rate was ₹83 per USD. The payable is unpaid. Show the amounts reported on 31 March and the exchange difference.

Show the solution

Machinery is a non-monetary item at historical cost. It stays at USD 10,000 × ₹82 = ₹8,20,000.
The payable is a monetary item. Report it at the closing rate: USD 10,000 × ₹83 = ₹8,30,000.
Payable on 1 March was ₹8,20,000.
Exchange difference = ₹8,30,000 − ₹8,20,000 = ₹10,000.
The payable has increased, so the company owes more rupees. This is an exchange loss, recognised in the period in which the rate changed (para 14).

Answer: Machinery is reported at ₹8,20,000. The payable is reported at ₹8,30,000. The exchange loss for the period is ₹10,000.

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.

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

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

What is the difference between foreign currency and reporting currency in AS 11?

Reporting currency is the currency in which the enterprise presents its financial statements. Foreign currency is any currency other than that. For an Indian company the rupee is normally the reporting currency, so dollars and euros are foreign currencies.

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

Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money, such as cash, debtors and loans. Non-monetary items are all other assets and liabilities, such as plant, inventory and equity shares.

What is the difference between closing rate and exchange difference?

Closing rate is the exchange rate on the balance sheet date. Exchange difference is the difference from reporting the same number of foreign currency units in the reporting currency at different exchange rates. One is a rate and the other is the resulting amount.

What is a foreign operation under AS 11?

It is a subsidiary, associate, joint venture or branch of the reporting enterprise whose activities are based or conducted in a country other than the country of the reporting enterprise. It can be integral or non-integral, which decides how its statements are translated.