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

Rohan Ltd. has a foreign branch which is a non-integral foreign operation. At the year end the branch's net assets in the foreign currency are FC 1,00,000. The opening rate was Rs 60 per FC and the closing rate is Rs 64 per FC. Assume net assets were FC 1,00,000 throughout and there was no profit or movement during the year. How should the exchange difference of Rs 4,00,000 arising on translation be treated in the financial statements of Rohan Ltd.?

The Rs 4,00,000 difference is accumulated in a foreign currency translation reserve. For a non-integral foreign operation, translation differences are not taken to profit and loss each year; they are recognised as income or expense only when the net investment is disposed of.

  1. AAccumulated in a foreign currency translation reserve until disposal of the net investmentCorrect
  2. BRecognised as income in the profit and loss for the year
  3. CDeducted from the cost of the branch's fixed assets
  4. DTreated as a prior period item

Explanation

For a non-integral foreign operation, assets and liabilities are translated at the closing rate, and the resulting exchange differences (here 1,00,000 x 4 = Rs 4,00,000) are accumulated in a foreign currency translation reserve. They are recognised in profit and loss only on disposal of the net investment. Taking them to profit and loss is the treatment for integral operations.

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