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

Himalaya Ltd has a foreign subsidiary classified as a non-integral foreign operation. Its net assets at the start of the year were USD 50,000 (rate Rs 80). It earned a profit of USD 10,000 for the year, translated at the average rate of Rs 82. There were no other transactions, and the closing rate was Rs 84, so closing net assets are USD 60,000. What is the exchange difference arising on translation and how is it treated in the financial statements?

The exchange difference is Rs 2,20,000 and it is credited to the foreign currency translation reserve. Closing net assets at Rs 84 are Rs 50,40,000, less opening net assets of Rs 40,00,000 and profit translated at Rs 8,20,000. It stays in the reserve until the net investment is disposed of.

  1. ARs 2,20,000 credited to foreign currency translation reserveCorrect
  2. BRs 2,20,000 credited to profit and loss statement
  3. CRs 10,40,000 credited to foreign currency translation reserve
  4. DRs 2,00,000 credited to foreign currency translation reserve

Explanation

For a non-integral foreign operation, assets and liabilities are translated at the closing rate and income and expenses at transaction-date (or average) rates. Closing net assets = 60,000 x 84 = Rs 50,40,000. Less opening net assets 50,000 x 80 = Rs 40,00,000 and profit 10,000 x 82 = Rs 8,20,000, leaving Rs 2,20,000. Check: 50,000 x 4 + 10,000 x 2 = Rs 2,20,000. This is accumulated in the foreign currency translation reserve until disposal of the net investment, not taken to profit and loss.

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