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CA Intermediate · Advanced Accounting · Accounting for Branches including Foreign Branches

Mehta Exports has a foreign branch in the USA that is a non-integral foreign operation under AS 11. Opening net assets were USD 10,000 (rate ₹82). The branch earned a profit of USD 2,000 during the year, translated at the average rate of ₹83. There were no remittances. Closing rate is ₹84, so closing net assets are USD 12,000. How should the exchange difference on translation be treated in the books at year-end?

The exchange difference is ₹22,000, credited to Foreign Currency Translation Reserve. Closing net assets of ₹10,08,000 exceed opening net assets plus average-rate profit (₹9,86,000) by that amount. For a non-integral foreign operation under AS 11, the difference is held in the reserve, not taken to profit or loss.

  1. A₹22,000 credited to Foreign Currency Translation ReserveCorrect
  2. B₹20,000 credited to Foreign Currency Translation Reserve
  3. C₹22,000 credited to Statement of Profit and Loss
  4. D₹2,000 credited to Foreign Currency Translation Reserve

Explanation

Closing net assets are 12,000 × 84 = ₹10,08,000. Opening net assets in rupees are ₹8,20,000 and the profit is 2,000 × 83 = ₹1,66,000, which gives ₹9,86,000. The difference is ₹22,000. Check: 10,000 × 2 + 2,000 × 1 = ₹22,000. For a non-integral operation, the exchange difference is accumulated in the FCTR, not taken to profit or loss.

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