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Institute of Chartered Accountants of India (www.icai.org) has published Accounting Standard 11 which deals with effect of changes in foreign exchange rates.

AS-11 plays an important role in consolidation procedures, when the group has controlled entities located outside India.

AS-11 prescribes different accounting treatments in case of integral and non-integral foreign operations. Integral foreign operation is a foreign operation, the activities of which are an integral part of those of the reporting enterprise. Non-integral foreign operation is defined as simply a foreign operation that is not an integral foreign operation.

AS-11 prescribes different treatment for monetary items and non-monetary items. Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money.

And Non-monetary items are defined as simply the "assets and liabilities other than monetary items"! Requirements of AS-11 pertaining to reporting at subsequent balance sheet dates can be summarized in the following two tables-

 
Table 1: In case of integral foreign operations-
 
Item type Examples Revaluation on reporting date? Treatment of exchange differences
Monetary Items Cash, Bank balances, Receivables, Payables At  Closing Rate Carried to P & L account
Non-monetary  historical cost items Fixed assets (depreciation), inventories, investments No revaluation. Carry at historical transaction rate No exchange differences.
Non- monetary fair value items Inventory stated at net realizable value No revaluation. Use exchange rates that existed when fair values were determined No exchange differences
 
Table 2: In case of Non-integral foreign operations-
 
Item type Examples Revaluation on reporting date? Treatment of exchange differences
Monetary Items Cash, Bank balances, Receivables, Payables At  Closing Rate All exchange differences are accumulated in Foreign Currency Translation Reserve account in Balance Sheet, till disposal of the net investment.
Non-monetary  historical cost items Fixed assets (depreciation), inventories, investments At  Closing Rate
Income and expense items of non-integral foreign operation Revenue, Cost of goods sold Exchange rate on date of transaction (or Average rate)
 
eMerge™ has built-in functionality to meet the requirements of AS-11-
 
Trial balances of foreign entities are uploaded in their local currencies. Foreign currency translation as per AS-11 logic is done by eMerge™ automatically.
Automatic computation of Foreign Currency Translation Reserve (FCTR) at two levels-
  • While uploading the TB
  • FCTR arising at the time of elimination of intra-group balances and transactions.
  • Detailed FCTR report which gives auditable information supporting the FCTR computation.
     
    See also…
    AS-11 published by ICAI http://www.icai.org/post.html?post_id=8660
     
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