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

Ishaan Ltd. has a foreign branch that is a non-integral foreign operation. At 31 March, the branch's net assets in foreign currency were translated at the closing rate, and the revenue and expense items at average rates. Which of the following is the correct treatment of the resulting exchange difference in the financial statements of the reporting enterprise under AS 11?

The exchange difference is accumulated in a foreign currency translation reserve until the net investment in the non-integral foreign operation is disposed of. AS 11 does not take such differences to profit or loss annually, because the operation is largely independent of the reporting enterprise.

  1. ARecognise it in the statement of profit and loss of the year
  2. BAccumulate it in a foreign currency translation reserve until disposal of the net investmentCorrect
  3. CAdjust it against the opening balance of retained earnings
  4. DCapitalise it to the fixed assets of the branch

Explanation

For a non-integral foreign operation, assets and liabilities are translated at the closing rate and income and expenses at the transaction date rates (or average rate as an approximation). The resulting exchange differences are accumulated in a foreign currency translation reserve until the disposal of the net investment, when they are recognised as income or expense. Charging them to profit or loss each year is the treatment for integral operations.

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