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

Rohan Ltd. has a foreign branch that is a non-integral foreign operation, with a functional currency of the local unit. For translating its financial statements into Indian rupees, the closing rate is Rs 80 and the average rate for the year is Rs 78. Branch revenue for the year is 10,00,000 local units and the branch's net assets at the start of the year (translated at the opening rate of Rs 75) are 40,00,000 local units. How does AS 11 require revenue and the resulting exchange differences to be treated?

Revenue is translated at the average rate of Rs 78, as an approximation of transaction-date rates, and assets and liabilities at the closing rate. The resulting exchange differences for a non-integral foreign operation go to a foreign currency translation reserve until disposal of the net investment, not to profit and loss.

  1. ARevenue at Rs 78 average rate; exchange differences accumulated in a foreign currency translation reserve until disposal of the net investmentCorrect
  2. BRevenue at Rs 80 closing rate; exchange differences taken to profit and loss immediately
  3. CRevenue at Rs 75 opening rate; exchange differences taken to profit and loss immediately
  4. DRevenue at Rs 78 average rate; exchange differences taken to profit and loss immediately

Explanation

For a non-integral foreign operation, income and expense items are translated at exchange rates at transaction dates, with average rate allowed as an approximation, so revenue is 10,00,000 x 78 = Rs 7,80,00,000. Assets and liabilities are translated at the closing rate. The resulting exchange differences are accumulated in a foreign currency translation reserve until the net investment is disposed of. Immediate recognition in profit and loss applies to integral operations, which makes that option wrong.

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