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

Meera Textiles Ltd. has a subsidiary in Dubai that is classified as a non-integral foreign operation. While translating the subsidiary's financial statements for consolidation, the company finds exchange differences arising because income and expenses are translated at one rate and assets and liabilities at another. How does AS 11 require these exchange differences to be treated until the net investment in the subsidiary is disposed of?

Exchange differences arising on translating a non-integral foreign operation are accumulated in a foreign currency translation reserve. They stay there until the net investment is disposed of, and only then are recognised in profit or loss. Taking them to profit or loss every year is the integral-operation treatment.

  1. ARecognised in the statement of profit and loss of the year in which they arise
  2. BAccumulated in a foreign currency translation reserveCorrect
  3. CAdjusted against the carrying amount of the fixed assets of the subsidiary
  4. DCarried forward as deferred revenue expenditure and amortised over five years

Explanation

For a non-integral foreign operation, exchange differences on translation are accumulated in a foreign currency translation reserve until the net investment is disposed of. On disposal, the cumulative amount is recognised as income or expense. Recognising them in profit or loss each year is the treatment for an integral foreign operation, not a non-integral one.

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