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

Himalaya Industries Ltd, an Indian parent, gave an unsecured loan of USD 50,000 to its wholly owned non-integral foreign subsidiary. Repayment is neither planned nor likely in the foreseeable future, so the loan is in substance part of the net investment. The rate was Rs 80 per USD at the date of the loan (assume this is also the opening rate) and is Rs 84 at the year-end. How is the Rs 2,00,000 exchange difference treated?

The Rs 2,00,000 gain is recognised in profit and loss in the parent's separate statements, because the loan is a monetary item translated at the closing rate. In the consolidated statements it is accumulated in the foreign currency translation reserve until the net investment is disposed of.

  1. AGain in the profit and loss of the parent's separate statements and also of the consolidated statements
  2. BGain in the profit and loss of the parent's separate statements, but accumulated in the foreign currency translation reserve in the consolidated statements until disposal of the net investmentCorrect
  3. CAccumulated in the foreign currency translation reserve in both the separate and consolidated statements
  4. DNot recognised in the separate statements until the loan is repaid, and accumulated in the reserve on consolidation

Explanation

AS 11 requires the exchange difference on a monetary item forming part of the net investment to be recognised as income or expense in the reporting entity's separate financial statements. In the consolidated statements it is accumulated in the foreign currency translation reserve until disposal of the net investment. The gain is Rs 4 x 50,000 = Rs 2,00,000. Deferring recognition in the separate statements until repayment is not permitted.

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