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  • 1. Accounting Standard (AS) 11 (Revised 2003) THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES Mandatory for Accounting Periods commencing on or after 1st April, 2004 Galaxy Surfactants Ltd., Navi Mumbai Presented by Sumit on 30/9/04
  • 2. Contents Galaxy Surfactants Ltd., Navi Mumbai AS 11 & International AS 21 9 AS 11 & Schedule VI 8 Accounting of Forward Exchange Contracts 6 Accounting of Foreign Operations 5 Disclosure 7 Coverage At A Glance 3 Accounting of FC Transactions 4 Need & Objective 2 Glossary 1 Particulars Sr. No.
  • 3. Glossary Galaxy Surfactants Ltd., Navi Mumbai Accounting Standard AS Account A/c United States Dollar US $ Reporting Currency (Rs.) RC Rupees Rs. Difference Diff. Foreign Currency (US $ etc) FC Exchange Ex. Financial Statements (BS, P & L etc) FSs Reporting Enterprise (GSL) RE
  • 4. Need & Objective Galaxy Surfactants Ltd., Navi Mumbai Galaxy Export Sales Domestic Sales Foreign Purchases Indian Purchases Rs. Borrowings US $ Borrowings Expenses in FC Expenses in Rs. Galaxy’s financial reports are in Rs. All financial transactions are to be recorded in Rs. How to treat Ex. Diff. in A/cs Which Ex. Rate ?
  • 5. Coverage At A Glance Galaxy Surfactants Ltd., Navi Mumbai Foreign Currency Transactions Foreign Operations Foreign Currency Activities
      • Conversion
      • Recognition of Ex. Diff.
      • Eg. : FC Transaction
      • Classification of FO
      • Conversion of FS
      • Disposal of NFO
      • Change in classification
    Direct business dealings with Customers, Suppliers etc. from local point Business dealings through foreign based branch, JV, Subsidiary , Associate etc. Forward Exchange Contracts Tax Effect of Ex. Diff. Disclosure Transitional Provisions Accounting
  • 6. Conversion of FC Transactions Galaxy Surfactants Ltd., Navi Mumbai 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) * CR = Rate on BS Date Closing Rate ----- Contingent Liabilities Valuation Date Rate TDR / AR
      • Fair Value
    TDR/AR TDR / AR
      • Historical Cost
    Non Monetary Carried @ Closing Rate (CR ) * TDR / AR Monetary Items Conversion at BS Dt Initial A/cing Classification of BS Items Back to Glance
  • 7. Eg. : Average Rate (AR) Policy
      • Accounting Policy for Initial Recognition : -
        • Purchases & Sales in FC are recorded at 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
    Galaxy Surfactants Ltd., Navi Mumbai <<<< Back
  • 8. Recognition of Ex. Diff. - FCT Galaxy Surfactants Ltd., Navi Mumbai Purchase Agreement @ TDR / AR Reported in BS @ Closing Rate Settled @ TDR / AR Settled after the BS Date Back to Glance The same should be recognized in P & L A/c for the period Ex. Diff. arises EITHER on Settlement OR on Reporting in BS
  • 9. Eg. : Ex. Diff. on FC Transaction Galaxy Surfactants Ltd., Navi Mumbai Accounting of asset purchase as per revised AS 11 (2003) 2005-06 2004-05 Accounting Year 52.00 2.00 50.00 52/- Payment 31.01.05 5.00 50.00 Vendor A/c CR 47.00 3.00 Vendor A/c DR 1.00 3.00 Ex. Gain A/c CR 46.00 Rs. Current A/c CR 5.00 Ex. Loss A/c DR 50.00 Current Asset A/c DR 52/- BS Dt 31.03.06 46/- Payment 30.04.05 47/- 50/- Spot Rates (Rs./$) BS Dt 31.03.05 Purchase 01.12.04 Current Asset purchase worth US $ 1/= Back to Glance
  • 10. Classification of FO Galaxy Surfactants Ltd., Navi Mumbai Negatively defined – FO which is not an IFO FO whose activities are an integral part of the activities of RE Definition View Indicators of NFO >>>> Particulars Classified : Way in which financed & operates w.r.t. RE Do not have direct impact on RE’s Cash Flows from Operations Has immediate effect on RE’s Cash Flows from Operations Effect of Rate Fluctuation Independent Branch Generates Income, Incurs Expenses, Accumulates Monetary Items, Borrows locally etc. etc. Selling Agent may just sell goods received from RE and remit proceeds back to RE Example Separate Entity Extended arm of RE Operates as Non Integral FO (NFO) Integral FO (IFO) Foreign Operation (FO) is defined as a subsidiary, associate, joint venture or branch based in a foreign country.
  • 11. Indicators of NFO
      • Major factor : Impact on cash flows from operations
      • Other indicators of NFO are –
        • High degree of autonomy in carrying operations
        • Low proportion of transactions with RE
        • No dependence on RE for finance
        • COP or services settled on it’s own
        • Sales are in currencies other than RC (Rs.)
        • Cash flows of RE are insulated from day-to-day activities of FO
        • Sales prices are not responsive to Ex. Rate Fluctuations
        • Existence of local demand for the product
    • If can’t be classified clearly then judgment is necessary for determination.
    Galaxy Surfactants Ltd., Navi Mumbai Back to Glance
  • 12. Conversion of FSs of FO & Recognition of Ex. Diff. thereof Galaxy Surfactants Ltd., Navi Mumbai For Conversion IFO is treated as FC Transaction TDR / AR TDR / AR P & L Items Closing Rate Closing Rate Monetary Items Closing Rate TDR / AR Non Monetary carried @ Historical Cost Closing Rate Valuation Date Rate Non Monetary carried @ Fair Value Particulars Accumulated in FOREX Reserve A/c (Accumulation will continue until disposal of NFO) Recognized in P & L A/c as & when arise Recognition of Ex. Diff. Non Integral FO Integral FO = FC Transaction Eg. >>
  • 13. Eg. : Conversion of NFO FS Galaxy Surfactants Ltd., Navi Mumbai Cr. Rs. Cr $ Dr. Rs. Dr $ Rate Particulars 40/- 40/- 40/- Acquisition of Galaxy Chemicals Inc., USA on 31.03.04 (Spot = 40/-) 200 2000 50 8000 Assets / Liabilities 2000 50 Reserves 4000 100 Share Capital 1600 FOREX Reserve (Balancing Figure) On next BS Dt 31.03.05 (Spot = Rs. 50/-, AR = Rs. 45/-) 400 400 CR = 50/- AR = 45/- Original Original 11500 230 20000 Assets / Liabilities 20000 400 20000 Total 900 20 Current Profit 2000 50 Opening Reserves 4000 100 Share Capital Back to Glance
  • 14. Disposal of NFO Galaxy Surfactants Ltd., Navi Mumbai Back to Glance Nature of Disposal Part amount transfer to P & L A/c on pro-rata basis 100% transfer to P & L A/c Accumulated amt in FOREX Reserve A/c Particulars Period in which gain or loss on disposal is recognized in P & L A/c When to trf FOREX Reserve to P & L Recognize in P & L A/c Recognize in P & L A/c Gain or Loss on Disposal Part Disposal 100% Disposal
  • 15. Change in Classification of FO Galaxy Surfactants Ltd., Navi Mumbai TDR / AR TDR / AR P & L Items Conversion Rate for
    • NFO reclassified as IFO
      • FOREX Reserve is continued until actual disposal of FO
      • Translated amounts for Non Monetary Items are treated as historical cost of those items, from that date.
    • IFO reclassified as NFO
      • Ex. Diff. will arise on conversion of non-monetary items ;&
      • The same shall be accumulated in FOREX Reserve
    Closing Rate TDR / AR Non Monetary carried @ Historical Cost (FC) Closing Rate Valuation Date Rate Non Monetary carried @ Fair Value (FC) Closing Rate Closing Rate Monetary Items NFO IFO = FCT Particulars Eg.>> Eg.>>
  • 16. Eg. : Reclassification IFO to NFO Galaxy Surfactants Ltd., Navi Mumbai NFO IFO US $ 50/- 50/- 50/- Original 40/- 40/- Rate 500 FOREX Reserve 1100 Ex. Gain Loss 15000 15000 50/- 300 Monetary Assets 20000 19500 400 Total 4500 100 400 Non Monetary @ Historical Cost 230 20 50 100 Rs. Rs. Rate Particulars 5000 45/- BS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-) 19500 11500 900 2000 4000 50/- 45/- 40/- 40/- 11500 Monetary Liabilities 20000 Total 2000 Current Profit 2000 Op. Reserves 4000 Share Capital << Back
  • 17. Eg. : Reclassification NFO to IFO Galaxy Surfactants Ltd., Navi Mumbai Continued until disposal of FO 1600 1600 FOREX Reserve 15000 15000 50/- 300 Monetary Assets 20000 20000 400 Total 5000 100 400 Non Monetary @ Historical Cost 230 20 50 100 $ Remarks IFO Rs. NFO Rs. Rate Particulars Treated as Historical Cost from date of reclassification 5000 50/- BS Dt 31.03.05 (Original = 40/-, Closing = Rs. 50/-, AR = Rs. 45/-) 20000 11500 900 2000 4000 50/- 45/- 40/- 40/- 11500 Liabilities 20000 Total 900 Current Profit 2000 Op. Reserves 4000 Share Capital Back to Glance
  • 18. Forward Exchange Contract (FEC) Galaxy Surfactants Ltd., Navi Mumbai Profit or Loss on Cancellation/Renewal is recognized in P & L A/c Practical
      • Ex. Diff.
      • Premium/ Discount
    Accounting Eg. Purpose Particulars Ignored Deferred over tenor of the contract Gain by calculated risks Manage risks 1 View Eg. >>>> View Eg. >>>> 4 FEC is an agreement to exchange different currencies at Forward Rate Value of FEC is marked to M.V. on BS Dt Recognize on the basis of ex. rate movements Purpose different hence different A/cting treatment 3 Earn profit by trading in FOREX Say Minimizing Ex. Rate fluctuation risk associated with Accounts Receivable of USD 100K 2 Speculative FEC Hedging FEC #
  • 19. Eg. : Hedging FEC Galaxy Surfactants Ltd., Navi Mumbai Spot = 47.50 Settlement Dt 30.04.05 1/= Accounts Receivable US $ FR = 48/- FEC Dt 01.12.04 Spot = 45/- Spot = 43/- BS Dt 31.03.05 Sale Dt 01.12.04 0.50 (1.50) 2/- Net Gain/ (Loss) 4.50 5/- Total Ex. Loss Rs. Ex. Loss Calculation Ex. Gain Rs. Premium (5/-) Amortization Accounting Year (2.50) 45 - 47.50 1/- 5 * (1/5) 2005-06 (2/-) 43 – 45 4/- 5 * (4/5) 2004-05 Accounting as per Revised AS 11 (2003) << Back
  • 20. Eg. : Speculative FEC Galaxy Surfactants Ltd., Navi Mumbai 30 th June, 2005 Maturity Date Rs. 48/- per $ Forward Rate available on BS date (31.03.05) for remaining maturity of the contract Rs. 50/- per $ Forward Rate USD 1/- Forward Purchase of Rs. 2/- Ex. Loss in 2004-05 1 st March, 2005 FEC Date Back to Glance
  • 21. Tax Effects of Foreign Ex. Diff.
      • There will be some tax effects associated with the gain or loss from exchange rate fluctuation
      • These tax effects shall be accounted for in accordance with AS 22 i.e. Accounting for Taxes on Income
    Galaxy Surfactants Ltd., Navi Mumbai Back to Glance
  • 22. Disclosure
    • An Enterprise shall specifically disclose –
      • Ex. Diff. recognized in P & L A/c for the period
      • FOREX Reserve as part of Share Holder’s Funds
      • Reconciliation of Opening & Closing FOREX Reserve
      • Where RC is different from the currency of domiciled country, reasons thereof
      • Where RC currency has been changed from previous accounting period then reasons for such change
      • If classification of FO has been changed, then -
          • Nature & Reasons for Change
          • Impact of change on Share Holder’s Funds
          • Impact on Net Profit or Loss for each prior period, as if change is applicable from retrospective effect.
      • AS 11 encourages disclosure of Enterprise’s FC Risk Management Policy
    Galaxy Surfactants Ltd., Navi Mumbai Back to Glance
  • 23. Transition on 1 st April, 2004
      • Revised AS 11 is applicable from 1 st April, 2004.
      • Old AS 11 used the term “Foreign Branch” instead of “Foreign Operation”
    • Also it did not classified FO’s as IFO & NFO
      • On 1 st time application, if a Foreign Branch is 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
    Galaxy Surfactants Ltd., Navi Mumbai
  • 24. AS 11 (2003) & Schedule VI Galaxy Surfactants Ltd., Navi Mumbai Implication Relation to old AS 11 (1994) Ex. Diff. on a/c of FC Liability linked to Fixed Asset Particulars Recognize in P & L A/c Capitalize i.e. adjust in carrying cost of Fixed Asset 1 Until the revision of Schedule VI capitalization treatment will continue & it will still be considered to be complying with New AS 11 (2003) ICAI will be approaching Govt. for revision of Schedule VI 3 As per the announcement of ICAI Capitalization provision discontinued on revision in 2003 In line with Schedule VI provision 2 Revised AS 11 (2003) Schedule VI #
  • 25. AS 11 (2003) & IAS Galaxy Surfactants Ltd., Navi Mumbai FO’s are classified as “ FO’s that are integral to the operations of RE” & “ Foreign Entity” FO’s are classified as Integral & Non Integral Terminology w.r.t. FO Permits alternative : Ex. Diff. on severe devaluation of currency can be included in carrying amt of asset s.t. conditions Preferring elimination of alternatives, IAS’s alternative treatment is not recognized Alternative A/cing in case of Severe Currency Devaluation Major aspects of FEC’s are covered under IAS 39 (Financial Instruments : Recognition & Measurement) Covers accounting of FEC’s Scope International AS 21 Indian AS 11 Particulars
  • 26. Thank You Galaxy Surfactants Ltd., Navi Mumbai

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