AS 11 - The eIIects oI changes in Foreign Exchange Rate

The Institute oI Chartered Accountants oI India Iirst issued "Statement on Accounting Ior
Foreign Currency Translation" in 1976. This was withdrawn by the issue oI AS 11 in 1989
which became mandatory eIIective in respect oI account Ior periods commencing on or aIter
1-4-1991. This was revised in 1994 and again revised in 2003. Further clariIications have
been issued which exclude or modiIy the applicability oI some oI the provisions oI AS 11.
Thus, this "Standard" has been so volatile that perhaps calling it a Standard may be construed
as a misnomer. However, looking at the developments in the legal and accounting Iields, the
changes made are essential and the need oI the times. The connotation oI the word "Standard"
in this context is that the similarity oI accounting treatment oI particular types oI transactions
/ Iinancial positions during the period when such Iinancial statement are drawn up.
The standard does not lay down the currency in which the accounting statements are to be
drawn up. An enterprise would normally draw up its statements in the currency oI the country
in which it is domiciled; that is the reporting currency. II a diIIerent currency is used, the
same requires disclosure as per the Standard.
Para 9 oI the Standard lays down that a Foreign currency transaction should be recorded,
on initial recognition in the reporting currency, by applying to the foreign currency
amount the exchange rate between the reporting currency and the foreign currency at
the date of the transaction.
The issues regarding cognition oI Export revenue are discussed at length in the paper on AS9,
i.e. Revenue Recognition and thereIore are not dealt with herein.
Liabilities for acquisition of Fixed Assets and year end
balances :
AS 11 as issued in 1989 in para 9.2(c) stated that in the case oI long term liabilities incurred
Ior acquisition oI Iixed assets the gain or loss, iI material, is normally regarded as an
adjustment oI cost and included in carrying amount oI the related Iixed assets. II the gain or
loss is not material, then the Iollowing treatment is laid out :
a. iI gain - not taken into account,
b. iI loss - the liability is restated and loss is charged to ProIit and Loss A/c.
This treatment was based on the conservatism concept that an accountant should normally go
by.
However, the revision oI AS 11 in 1995 stated in para 10 and 11 as Iollows :
10."Exchange diIIerences arising on repayment oI liabilities incurred Ior the purpose oI
acquiring Iixed assets, which are carried in terms oI historical cost, should be adjusted
in the carrying amount oI the respective Iixed assets. The carrying amount oI such
Iixed assets should, to the extent not already so adjusted or otherwise accounted Ior,
also be adjusted to account Ior any increase or decrease in the liability oI the
enterprise, as expressed in the reporting currency by applying the closing rate, Ior
making payment towards the whole or a part oI the cost oI the assets or Ior repayment
oI the whole or a part oI the monies borrowed by the enterprise Irom any person,
directly or indirectly, in Ioreign currency speciIically Ior the purpose oI acquiring
those assets.
11.The carrying amount oI Iixed assets which are carried in terms oI revalued amounts
should also be adjusted in the manner described in paragraph 10 above. However,
such adjustment should not result in the net book value oI a class oI revalued Iixed
assets exceeding the recoverable amount oI assets oI that class, the remaining amount
oI the increase in liability, iI any, being debited to the revaluation reserve, or to the
proIit and loss state in the event oI inadequacy oI absence oI the revaluation reserve."
The above treatment is in consonance with Section 43A oI the Income Tax Act as well as the
provision oI Schedule VI oI the Co. Act. Both the provisions were enacted as a sequel to the
devaluation oI the Rupee in 1966.
In the revised AS 11 oI 2003 Para 11 and 12 state as under :
11."At each balance sheet date :
a. Ioreign currency monetary items should be reported using the closing rate.
However, in certain circumstances, the closing rate may not reIlect with
reasonable accuracy the amount in reporting currency that is likely to be
realised Irom, or required to disburse, a Ioreign currency monetary item at the
balance sheet date, e.g., where there are restrictions on remittances or where
the closing rate is unrealistic and it is not possible to eIIect an exchange oI
currencies at that rate at the balance sheet date. In such circumstances, the
relevant monetary item should be reported in the reporting currency at the
amount which is likely to be realised Irom, or required to disburse, such item
at the balance sheet date;
b. nonmonetary items which are carried in terms of historical cost
denominated in a foreign currency should be reported using the exchange
rate at the date of the transaction; and
c. nonmonetary items which are carried at Iair value or other similar valuation
denominated in a Ioreign currency should be reported using the exchange rates
that existed when the values were determined.
12.Cash, receivable and payable are examples oI monetary items. Fixed assets,
inventories, and investments in equity shares are examples oI non-monetary items.
The carrying amount oI an item is determined in accordance with the relevant
Accounting Standards. For example, certain assets may be measured at Iair value or
other similar valuation (e.g., net releasable value) or at historical cost. Whether the
carrying amount is determined based on Iair value or other similar valuation or at
historical cost, the amounts so determined Ior Ioreign currency items are then reported
in the reporting currency in accordance with this Statement. The contingent liability
denominated in Ioreign currency at the balance sheet date is disclosed by using the
closing rate."
Thus, the treatment as per AS is at complete variance with that under the Income Tax Act and
Companies Act.
The treatment oI interest and borrowing costs is discussed in the Chapter on AS 16
Borrowing Costs and thereIore not dealt with here.
The ICAI has given the Iollowing announcement in the Journal oI October, 2003 in respect oI
Companies, as they are governed by the Companies Act, 1956.
Announcement Requiring Capitalisation of Exchange
Difference
ICAI Announcement
Treatment oI exchange diIIerences under Accounting Standard (AS) 11 (revised 2003). The
EIIects oI Changes in Foreign Exchange Rates vis-a-vis Schedule VI to the Companies Act.
1. In this context, it may be noted that $chedule VI to the Companies Act, 1956,
provides, inter alia, that where the original cost and additions and deductions thereto,
related to any Iixed asset which has been acquired Irom a country outside India, and
in consequence oI a change in the rate oI exchange at any time aIter the acquisition oI
such asset, there has been an increase or reduction in the liability oI the company, as
expressed in Indian Currency, Ior making payment towards the whole or a part oI the
cost oI the asset or Ior repayment oI the whole or part oI moneys borrowed by the
company Irom any person, directly or indirectly, in any Ioreign currency speciIically
Ior the purpose oI acquiring the assets (being in either case the liability existing
immediately beIore the date on which the change in the rate oI exchange takes eIIect),
the amount by which the liability is so increased or reduced during the year, shall
be added to, or, as the case may be, deducted from the cost, and the amount
arrived at after such addition or deduction shall be taken to be the cost of the
fixed asset.
2. The revised A$ 11 (2003), however, does not require the adjustment oI exchange
diIIerences in the carrying amount oI the Iixed assets, in the situations envisaged in
Schedule VI to the Companies Act, 1956. As per revised AS 11 (2003), such
exchange differences are required to be recognised in the statement of profit and
loss since it is felt that this treatment is conceptually preferable to that required
in $chedule VI and is in consonance with the international position in this
regard.
3. It may be mentioned that the Institute has decided to take up this aspect with the
Government to consider the same in the revision oI Schedule VI to the Companies
Act, 1956. It may be noted that where a requirement of an accounting standard is
different from the applicable law, the law prevails. Accordingly, a requirement oI
an accounting standard is not applicable to the extent it is in conIlict with the
requirement oI the relevant law. Thus, pending the amendment, iI any, to Schedule VI
to the Companies Act, 1956, in respect oI the matter, a company adopting the
treatment described in paragraph 2 above will still be considered to be complying
with AS 11 Ior the purposes oI section 211 oI the Act. Accordingly, the auditor of
the company should not assert non-compliance with A$ 11 (2003) under section
227(3)(d) of the Act in such a case and should not qualify his report in this regard
on the true and Iair view oI the state oI the company's aIIairs and proIit and loss oI the
company under section 227(2) oI the Act.
However, Ior non-corporate assessees, the variance between the Income Tax Law and AS

continues and will thereIore invite qualiIications Irom the auditor and particular care will
have to be taken at the time oI preparation oI Income Tax returns and during assessments.
Income Tax Rules:
Attention is Iurther invited to Iollowing rules oI the Income Tax Rules, 1962:
a. Rule 115 lays down the rate oI conversion into Rupees oI income expressed in Ioreign
currency, as Iollows:
The rate applicable to the income shall be the telegraphic transIer rate on the speciIied date.
The speciIied dates Ior various types oI income are summarised as Iollows:
Salaries: the last day oI the month immediately proceeding the month in which salary is due,
or is paid.
Interest on Securities: the last day oI the month immediately proceeding the month in which
the income is due.
Income from House Property and Income from Other sources: the last day oI the previous
year oI the assessee.
usiness or Profession:
a. in case oI non-resident engaged in business oI operation oI ships, the last day oI the
month immediately preceding the month in which such income is deemed to accrue or
arise in India.
b. In other cases, the last day oI the month immediately preceeding the month in which
income is due.
Dividends: the last day oI the month immediately preceeding the month in which dividend is
declared, distributed or paid by the company.
Capital Gains: the last day oI the month immediately preceeding the month in which capital
assets is transIerred.
Where Tax has been deducted in accordance with Chapter XVII B, the date on which tax was
required to be deducted.
Rule 115A lays down the rate oI exchange Ior conversion oI rupees into Ioreign currency and
reconversion Ior purpose oI computation oI capital gains read with Section 48(1)(a).
The Supreme Court had an occasion to interpret these rules in Commissioner oI Income Tax
v/s. Chowgule and Co. Ltd., 218 ITR 384 (SC) wherein it was held as under :
Income - Conversion oI income expressed in Ioreign currency into rupees - Applicability oI
r.115 - Rule 115 can be applied only iI any income in Ioreign currency has to be converted
Ior the purpose oI computing total income Ior any accounting period - II during the
accounting period the conversion has already taken place, then there is no question oI
converting into rupees any income held in Ioreign currency - Clause (2) oI r.115 introduced
w.e.I. 1
st
April, 1990 is only clariIicatory and does not bring about any change in r.115 -
Neither CIT was justiIied in holding that r.115 was applicable and entire receipts during the
year had to be converted at the telegraphic transIer buying rate prevailing on the last day oI
the accounting year nor the High Court was justiIied in striking down r. 115 as being ultra
vires the provision oI IT Act.
Income- Vires oI r. 115 - Rule 115 could not be struck down as being ultra vires the
provisions oI IT Act on wrong interpretation / construction oI rule - Rule 115 applies only iI
any income in Ioreign currency has to be converted Ior the purpose oI computing total
income Ior any accounting period - II during the accounting period the conversion has
already taken place, then r.115 cannot be applied.
In this paper I have dealt with only certain issues and under AS 11 there are many more
issues, like Forward Exchange contracts, Foreign operation (both integral as well as non
integral, etc.)