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

Exchange differences arising on translating the financial statements of a non-integral foreign operation are, under AS 11, not recognised as income or expense for the period because:

They are kept out of profit or loss because exchange rate changes have little or no direct effect on the present and future cash flows from operations of either the non-integral foreign operation or the reporting enterprise, so they are not income or expense of the period.

  1. Athey are always insignificant in amount
  2. Bchanges in exchange rates have little or no direct effect on present and future cash flows from operations of the foreign operation or the reporting enterpriseCorrect
  3. Cthey are already covered by forward exchange contracts
  4. Dthey are taxed only on realisation

Explanation

AS 11 states that these differences are not recognised as income or expense because exchange rate changes have little or no direct effect on present and future cash flows of the non-integral foreign operation or the reporting enterprise. The 'insignificant amount' option is wrong because the reason is not about size.

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