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

Kaveri Traders Ltd purchased machinery from a German supplier on 1 December 2025 for EUR 10,000 at Rs 90 per EUR, payable after 6 months. On 31 March 2026 the closing rate was Rs 93 per EUR. The payable was settled on 30 June 2026 at Rs 92 per EUR. Which statement is correct as per AS 11 (assume no hedging and the liability is not for a long-term foreign currency monetary item)?

Loss of Rs 30,000 arises in FY 2025-26 and gain of Rs 10,000 in FY 2026-27. The payable is restated at the closing rate of 93, raising it from Rs 9,00,000 to Rs 9,30,000. On settlement at 92 the company pays Rs 9,20,000, so the reversal is a gain, each year taken to profit and loss.

  1. ALoss of Rs 30,000 in FY 2025-26, and gain of Rs 10,000 in FY 2026-27Correct
  2. BLoss of Rs 30,000 in FY 2025-26 added to the cost of machinery, and gain of Rs 10,000 in FY 2026-27
  3. CLoss of Rs 20,000 in FY 2026-27 only, recognised on settlement
  4. DLoss of Rs 30,000 in FY 2025-26, and no further entry in FY 2026-27

Explanation

At 31 March 2026 payable = 10,000 x 93 = Rs 9,30,000 versus Rs 9,00,000 booked, so loss Rs 30,000 goes to profit and loss. On settlement at 92 the payable of 9,30,000 is paid as 9,20,000, giving a gain of Rs 10,000 in the next year. Adding the loss to the machinery cost is not permitted here, and the net 20,000 is wrongly deferred in the other options.

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