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

A company exercised the option under paragraph 46A of AS 11 for a 5-year USD loan taken on 1 April 2025 to buy plant. At 31 March 2026 the loan restatement gave an exchange loss of Rs 12,00,000. The loan is a long-term foreign currency monetary item and the loss relates to acquisition of the depreciable asset. The plant has a balance life of 10 years at 31 March 2026 and the company charges depreciation on straight-line basis with nil residual value. Treatment is:

The Rs 12,00,000 exchange loss is added to the cost of the plant and depreciated over its balance life of 10 years, because paragraph 46A requires differences on long-term foreign currency monetary items relating to depreciable assets to adjust the asset's cost.

  1. ACharge Rs 12,00,000 to profit and loss in 2025-26
  2. BAdd Rs 12,00,000 to the cost of the plant and depreciate it over the balance life of 10 yearsCorrect
  3. CCarry it in the Foreign Currency Monetary Item Translation Difference Account and amortise over the 5-year loan term
  4. DDeduct Rs 12,00,000 from the cost of the plant

Explanation

Under paragraph 46A, differences on long-term foreign currency monetary items relating to acquisition of a depreciable capital asset are added to or deducted from the asset's cost and depreciated over its balance life. A loss is added, so cost rises by Rs 12,00,000, giving extra depreciation of Rs 1,20,000 a year over 10 years. The FCMITDA route applies only to other cases, and deduction would apply to a gain.

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