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TMI BlogThe Effects of Changes in Foreign Exchange RatesX X X X Extracts X X X X X X X X Extracts X X X X ..... use and how to recognise in the financial statements the financial effect of changes in exchange rates. Scope 1. This Standard should be applied: (a) in accounting for transactions in foreign currencies; and (b) in translating the financial statements of foreign operations. 2. This Standard also deals with accounting for foreign currency transactions in the nature of forward exchange contracts. 1 3. This Standard does not specify the currency in which an enterprise presents its financial statements. However, an enterprise normally uses the currency of the country in which it is domiciled. If it uses a different currency, this Standard requires disclosure of the reason for using that currency. This Standard also requires disclosure of the reason for any change in the reporting currency. 4. This Standard does not deal with the restatement of an enterprise s financial statements from its reporting currency into another currency for the convenience of users accustomed to that currency or for similar purposes. 5. This Standard does not deal with the presentation in a cash flow statement of cash flows arising from transactions in a foreign currency an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res settlement in a foreign currency, including transactions arising when an enterprise either: (a) buys or sells goods or services whose price is denominated in a foreign currency; (b) borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; (c) becomes a party to an unperformed forward exchange contract; or (d) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency. 9. 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. 10. For practical reasons, a rate that approximates the actual rate at the date of the transaction is often used, for example, an average rate for a week or a month might be used for all transactions in each foreign currency occurring during that period. However, if exchange rates fluctuate significantly, the use of the average rate for a period is unreliable. Reporting at Subsequent Balance Sheet Dates 11. At each balance sheet date: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... results when there is a change in the exchange rate between the transaction date and the [ II 3(i)] 381 date of settlement of any monetary items arising from a foreign currency transaction. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognised in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognised in each intervening period up to the period of settlement is determined by the change in exchange rates during that period. Net Investment in a Non-integral Foreign Operation 15. Exchange differences arising on a monetary item that, in substance, forms part of an enterprise s net investment in a non-integral foreign operation should be accumulated in a foreign currency translation reserve in the enterprise s financial statements until the disposal of the net investment, at which time they should be recognised as income or as expenses in accordance with paragraph 31. 16. An enterprise may have a monetary item that is receivable from, or payable to, a non-integral foreign operation. An item for which settlement is neithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the foreign operation, the activities of the foreign operation are carried out with a significant degree of autonomy from those of the reporting enterprise; (b) transactions with the reporting enterprise are not a high proportion of the foreign operation s activities; (c) the activities of the foreign operation are financed mainly from its own operations or local borrowings rather than from the reporting enterprise; (d) costs of labour, material and other components of the foreign operation s products or services are primarily paid or settled in the local currency rather than in the reporting currency; (e) the foreign operation s sales are mainly in currencies other than the reporting currency; (f) cash flows of the reporting enterprise are insulated from the day-to-day activities of the foreign operation rather than being directly affected by the activities of the foreign operation; (g) sales prices for the foreign operation s products are not primarily responsive on a short-term basis to changes in exchange rates but are determined more by local competition or local government regulation; and (h) there is an active local sales market for the foreign operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... currency occurring during that period. However, if exchange rates fluctuate significantly, the use of the average rate for a period is unreliable. Non-integral Foreign Operations 24. In translating the financial statements of a non-integral foreign operation for incorporation in its financial statements, the reporting enterprise should use the following procedures: (a) the assets and liabilities, both monetary and non-monetary, of the non-integral foreign operation should be translated at the closing rate; (b) income and expense items of the non-integral foreign operation should be translated at exchange rates at the dates of the transactions; and (c) all resulting exchange differences should be accumulated in a foreign currency translation reserve until the disposal of the net investment. 25. For practical reasons, a rate that approximates the actual exchange rates, for example an average rate for the period, is often used to translate income and expense items of a foreign operation. 26. The translation of the financial statements of a non-integral foreign operation results in the recognition of exchange differences arising from: (a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. 30. When the financial statements of a non-integral foreign operation are drawn up to a different reporting date from that of the reporting enterprise, the non-integral foreign operation often prepares, for purposes of incorporation in the financial statements of the reporting enterprise, statements as at the same date as the reporting enterprise. When it is impracticable to do this, AS 21, Consolidated Financial Statements, allows the use of financial statements drawn up to a different reporting date provided that the difference is no greater than six months and adjustments are made for the effects of any significant transactions or other events that occur between the different reporting dates. In such a case, the assets and liabilities of the non-integral foreign operation are translated at the exchange rate at the balance sheet date of the non-integral foreign operation and adjustments are made when appropriate for significant movements in exchange rates up to the balance sheet date of the reporting enterprises in accordance with AS 21. The same approach is used in applying the equity method to associates and in applying proportionate consolidation to joint ventures in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the date of the change are treated as the historical cost for those items in the period of change and subsequent periods. Exchange differences which have been deferred are not recognised as income or expenses until the disposal of the operation. All Changes in Foreign Exchange Rates Tax Effects of Exchange Differences 35. Gains and losses on foreign currency transactions and exchange differences arising on the translation of the financial statements of foreign operations may have associated tax effects which are accounted for in accordance with AS 22, Accounting for Taxes on Income. Forward Exchange Contracts 10 36. An enterprise may enter into a forward exchange contract or another financial instrument that is in substance a forward exchange contract, which is not intended for trading or speculation purposes, to establish the amount of the reporting currency required or available at the settlement date of a transaction. The premium or discount arising at the inception of such a forward exchange contract should be amortised as expense or income over the life of the contract. Exchange differences on such a contract should be recognised in the statement o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of such exchange differences at the beginning and end of the period. 41. When the reporting currency is different from the currency of the country in which the enterprise is domiciled, the reason for using a different currency should be disclosed. The reason for any change in the reporting currency should also be disclosed. 42. When there is a change in the classification of a significant foreign operation, an enterprise should disclose: (a) the nature of the change in classification; (b) the reason for the change; (c) the impact of the change in classification on funds; and (d) the impact on net profit or loss for each prior period presented had the change in classification occurred at the beginning of the earliest period presented. 43. The effect on foreign currency monetary items or on the financial statements of a foreign operation of a change in exchange rates occurring after the balance sheet date is disclosed in accordance with AS 4, Contingencies and Events Occurring After the Balance Sheet Date. 44. Disclosure is also encouraged of an enterprise s foreign currency risk management policy. Transitional Provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the general reserve. If the option stated in this paragraph is exercised, disclosure shall be made of the fact of such exercise of such option and of the amount remaining to be amortized in the financial statements of the period in which such option is exercised and in every subsequent period so long as any exchange difference remains unamortized. 46A. (1) In respect of accounting periods commencing on or after the 1st April, 2011, for an enterprise which had earlier exercised the option under paragraph 46 and at the option of any other enterprise (such option to be irrevocable and to be applied to all such foreign currency monetary items), the exchange differences arising on reporting of long- term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset, and in other cases, can be accumulated in a n Currency Monetary Item Translation Difference Account in the enterprise s financial ..... X X X X Extracts X X X X X X X X Extracts X X X X
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