Contents
Sr. No. Particulars 1 Glossary 2 3 4 Need & Objective Coverage At A Glance Accounting of FC Transactions
5 6 7 8 9
Accounting of Foreign Operations Accounting of Forward Exchange Contracts Disclosure AS 11 & Schedule VI AS 11 & International AS 21
Glossary
AS RE FSs Ex. Diff. FC US $ A/c RC Rs. Accounting Standard Reporting Enterprise (GSL) Financial Statements (BS, P & L etc) Exchange Difference Foreign Currency (US $ etc) United States Dollar Account Reporting Currency (Rs.) Rupees
Expenses in Rs.
US $ Borrowings
Rs. Borrowings
Galaxys financial reports are in Rs. All financial transactions are to be recorded in Rs.
Coverage At A Glance
Direct business dealings with Customers, Suppliers etc. from local point
Business dealings through foreign based branch, JV, Subsidiary, Associate etc.
Accounting
Disclosure
Transitional Provisions
Foreign Operations
a) b) c) d)
Conversion of FC Transactions
Initially FC transactions shall be recorded at TDR * / AR For practical purpose Average Rate (AR) can be used in place of TDR. Appropriate Accounting Policy shall be established for the purpose. View Eg. AR Policy >>>>>>> *TDR = Spot Rate on Transaction Date Conversion Rate Table for FC Transactions (FCT) Classification of BS Items Monetary Items Initial A/cing TDR / AR TDR / AR TDR / AR ----Conversion at BS Dt Closing Rate (CR)* TDR/AR Valuation Date Rate Closing Rate
Customs Ex. Rates (Currently CBEC prescribes Customs Ex. Rates by Notification U/s. 14 (3) (a) of Customs Act, 1962) Other Transactions in FC are recorded at TDR i.e. Ex. Rates prevailing on Date of Transaction
Note :- AR should approximate to the TDR i.e. AR can not be used if Ex. Rates fluctuates significantly
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50/50.00
52/50.00
47/3.00
46/47.00
52/-
DR
CR CR CR 50.00
2.00
52.00 3.00 46.00
5.00
5.00 1.00
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Classification of FO
Foreign Operation (FO) is defined as a subsidiary, associate, joint venture or branch based in a foreign country. Classified : Way in which financed & operates w.r.t. RE Particulars Definition Integral FO (IFO) Non Integral FO (NFO) FO whose activities are Negatively defined an integral part of the FO which is not an IFO activities of RE Extended arm of RE Selling Agent may just sell goods received from RE and remit proceeds back to RE Separate Entity Independent Branch Generates Income, Incurs Expenses, Accumulates Monetary Items, Borrows locally etc. etc.
Operates as Example
Effect of Rate Has immediate effect Do not have direct impact on Fluctuation on REs Cash Flows REs Cash Flows from from Operations Operations
View Indicators of NFO >>>>
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Indicators of NFO
Major factor : Impact on cash flows from operations Other indicators of NFO are a) High degree of autonomy in carrying operations b) Low proportion of transactions with RE c) No dependence on RE for finance d) COP or services settled on its own e) Sales are in currencies other than RC (Rs.) f) Cash flows of RE are insulated from day-to-day activities of FO g) Sales prices are not responsive to Ex. Rate Fluctuations h) Existence of local demand for the product If cant be classified clearly then judgment is necessary for determination.
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Particulars
P & L Items Monetary Items Non Monetary carried @ Historical Cost Non Monetary carried @ Fair Value
Integral FO = FC Transaction
TDR / AR Closing Rate TDR / AR
Non Integral FO
TDR / AR Closing Rate Closing Rate
Closing Rate
Recognition of Recognized in P & Accumulated in FOREX Reserve Ex. Diff. L A/c as & when A/c (Accumulation will continue arise until disposal of NFO) Eg. >>
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On next BS Dt 31.03.05 (Spot = Rs. 50/-, AR = Rs. 45/-) Share Capital Opening Reserves Current Profit Assets / Liabilities Total Original Original AR = 45/CR = 50/400 400 20000 20000 100 50 20 230 400 4000 2000 900 11500 1600 20000
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Disposal of NFO
Particulars
Gain or Disposal Loss
Part Disposal
Recognize in P & L A/c
Accumulated amt in 100% transfer Part amount transfer to FOREX Reserve A/c to P & L A/c P & L A/c on pro-rata basis When to trf FOREX Period in which gain or loss Reserve to P & L disposal is recognized in P & L A/c on
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15
Change in Classification of FO
Particulars P & L Items Conversion Rate for IFO = FCT TDR / AR NFO TDR / AR
Monetary Items
Non Monetary carried @ Historical Cost (FC) Non Monetary carried @ Fair Value (FC)
Closing Rate
TDR / AR Valuation Date Rate
Closing Rate
Closing Rate Closing Rate
IFO reclassified as NFO Ex. Diff. will arise on conversion of non-monetary items ;& The same shall be accumulated in FOREX Reserve
Eg.>>
NFO reclassified as IFO FOREX Reserve is continued until actual disposal of FO Translated amounts for Non Monetary Items are treated as Eg.>> historical cost of those items, from that date.
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100
400
45/-
4500
19500
50/-
5000
20000
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Remarks
100 40/-
Monetary Assets 300 50/Non Monetary @ 100 50/Historical Cost Total 400
20000
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1 Purpose
2 Eg.
Manage risks
Say Minimizing Ex. Rate Earn profit by trading in fluctuation risk associated FOREX with Accounts Receivable of USD 100K Purpose different hence different A/cting treatment
Premium/ Deferred over tenor of the Ignored Discount contract Ex. Diff.
3 Accounting
Recognize on the basis of Value of FEC is marked ex. rate movements to M.V. on BS Dt View Eg. >>>> View Eg. >>>>
4 Practical
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1/=
Spot = 43/-
FR = 48/-
Spot = 45/-
Spot = 47.50
Accounting as per Revised AS 11 (2003) Accounting Premium (5/-) Ex. Gain Ex. Loss Ex. Loss Net Gain/ Year Amortization Rs. Calculation Rs. (Loss) 2004-05 2005-06 Total 5 * (4/5) 5 * (1/5) 4/1/5/43 45 45 - 47.50 (2/-) (2.50) 4.50 2/(1.50) 0.50
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Rs. 2/-
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Disclosure
An Enterprise shall specifically disclose 1. Ex. Diff. recognized in P & L A/c for the period 2. FOREX Reserve as part of Share Holders Funds 3. Reconciliation of Opening & Closing FOREX Reserve 4. Where RC is different from the currency of domiciled country, reasons thereof 5. Where RC currency has been changed from previous accounting period then reasons for such change 6. If classification of FO has been changed, then Nature & Reasons for Change Impact of change on Share Holders Funds Impact on Net Profit or Loss for each prior period, as if change is applicable from retrospective effect.
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classified as NFO then accounting treatment pertaining to change in classification of FO shall be applied i.e. Accumulate Ex. Diff. on conversion of Non Monetary Items in FC Translation Reserve
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FOs are classified as FOs are classified as Integral & FOs that are integral to the Non Integral operations of RE & Foreign Entity
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Thank You