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CMA Intermediate · Financial Accounting · The Effects of Changes in Foreign Exchange Rates (AS 11)

Under AS 11, when the financial statements of a non-integral foreign operation are translated for incorporation in the reporting enterprise's financial statements, the resulting exchange differences are to be:

Exchange differences on translating a non-integral foreign operation are accumulated in a foreign currency translation reserve until the net investment is disposed of. They are not recognised as income or expense, because exchange rate changes have little or no direct effect on the present and future cash flows.

  1. ARecognised as income or expense of the period in the statement of profit and loss
  2. BAccumulated in a foreign currency translation reserve until the disposal of the net investmentCorrect
  3. CAdjusted against the carrying cost of the fixed assets of the foreign operation
  4. DAmortised over the remaining life of the foreign operation

Explanation

AS 11 requires all exchange differences arising on translating a non-integral foreign operation to be accumulated in a foreign currency translation reserve until the net investment is disposed of. They are not taken to profit and loss because rate changes have little or no direct effect on the cash flows of the operation or the reporting enterprise. Recognising them as income or expense is the treatment for integral operations, not this one.

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