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

Himalaya Pharma Ltd. holds a wholly owned US subsidiary, classified as a non-integral foreign operation. Opening net assets on 1 April 2025 were USD 100,000. The subsidiary earned a profit of USD 20,000 during 2025-26, evenly over the year, and paid no dividend or made any other change in equity. Relevant rates (₹ per USD): 1 April 2025 – 82; average for the year – 83; 31 March 2026 – 85. The subsidiary's profit is translated at the average rate. What is the exchange difference to be credited to the foreign currency translation reserve for the year?

Closing net assets of USD 120,000 at 85 equal ₹1,02,00,000. Opening net assets at 82 (₹82,00,000) plus profit at the average rate 83 (₹16,60,000) total ₹98,60,000. The exchange difference credited to the translation reserve is therefore ₹3,40,000.

  1. A₹3,00,000
  2. B₹3,40,000Correct
  3. C₹3,60,000
  4. D₹40,000

Explanation

Closing net assets = 120,000 × 85 = ₹1,02,00,000. Opening net assets in rupees = 100,000 × 82 = ₹82,00,000, and the profit translated at the average rate = 20,000 × 83 = ₹16,60,000, giving ₹98,60,000. The difference is ₹3,40,000. Check: 100,000 × (85−82) = 3,00,000 plus 20,000 × (85−83) = 40,000 gives 3,40,000. ₹3,00,000 wrongly translates the profit at the closing rate, and ₹40,000 considers only the profit.

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