Vivek Daga (.) (48 Points)
06 December 2012
Nithin Chettoor
(Assistant Manager)
(388 Points)
Replied 06 December 2012
Rules? there is no rule for accounting for Foriegn operations, its as laid down in AS 11. Whats your query?
Nithin Chettoor
(Assistant Manager)
(388 Points)
Replied 06 December 2012
Integral Foreign Operations
21. The financial statements of an integral foreign operation should
be translated using the principles and procedures in paragraphs 8 to 16
as if the transactions of the foreign operation had been those of the
reporting enterprise itself.
22. The individual items in the financial statements of the foreign
operation are translated as if all its transactions had been entered into by
the reporting enterprise itself. The cost and depreciation of tangible fixed
assets is translated using the exchange rate at the date of purchase of the
asset or, if the asset is carried at fair value or other similar valuation,
using the rate that existed on the date of the valuation. The cost of
inventories is translated at the exchange rates that existed when those
costs were incurred. The recoverable amount or realisable value of an
118 AS 11
asset is translated using the exchange rate that existed when the recoverable
amount or net realisable value was determined. For example, when the net
realisable value of an item of inventory is determined in a foreign currency,
that value is translated using the exchange rate at the date as at which the
net realisable value is determined. The rate used is therefore usually the
closing rate. An adjustment may be required to reduce the carrying amount
of an asset in the financial statements of the reporting enterprise to its
recoverable amount or net realisable value even when no such adjustment
is necessary in the financial statements of the foreign operation.
Alternatively, an adjustment in the financial statements of the foreign
operation may need to be reversed in the financial statements of the
reporting enterprise.
23. 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.
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.
The Effects of Changes in Foreign Exchange Rates 119
26. The translation of the financial statements of a non-integral foreign
operation results in the recognition of exchange differences arising from:
(a) translating income and expense items at the exchange rates at
the dates of transactions and assets and liabilities at the closing
rate;
(b) translating the opening net investment in the non-integral foreign
operation at an exchange rate different from that at which it
was previously reported; and
(c) other changes to equity in the non-integral foreign operation.
These exchange differences are not recognised as income or expenses for
the period because the changes in the exchange rates have little or no
direct effect on the present and future cash flows from operations of either
the non-integral foreign operation or the reporting enterprise. When a nonintegral
foreign operation is consolidated but is not wholly owned,
accumulated exchange differences arising from translation and attributable
to minority interests are allocated to, and reported as part of, the minority
interest in the consolidated balance sheet.
27. Any goodwill or capital reserve arising on the acquisition of a nonintegral
foreign operation is translated at the closing rate in accordance
with paragraph 24.
28. A contingent liability disclosed in the financial statements of a nonintegral
foreign operation is translated at the closing rate for its disclosure
in the financial statements of the reporting enterprise.
29. The incorporation of the financial statements of a non-integral foreign
operation in those of the reporting enterprise follows normal
consolidation procedures, such as the elimination of intra-group
balances and intra- group transactions of a subsidiary (see AS 21,
Consolidated Financial Statements, and AS 27, Financial Reporting of
Interests in Joint Ventures). However, an exchange difference arising on
an intra-group monetary item,
whether short-term or long-term, cannot be eliminated against a
corresponding amount arising on other intra-group balances because the
monetary item represents a commitment to convert one currency into
another and exposes the reporting enterprise to a gain or loss through
120 AS 11
of the reporting enterprise, such an exchange difference continues to be
recognised as income or an expense or, if it arises from the circumstances
described in paragraph 15, it is accumulated in a foreign currency
translation reserve until the disposal of the net investment.
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 nonintegral
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 accordance
with AS 23, Accounting for Investments in Associates in
Consolidated Financial Statements and AS 27, Financial Reporting of
Disposal of a Non-integral Foreign Operation
31. On the disposal of a non-integral foreign operation, the
cumulative amount of the exchange differences which have been
deferred and which relate to that operation should be recognised as
income or as expenses
32. An enterprise may dispose of its interest in a non-integral foreign
operation through sale, liquidation, repayment of share capital, or
abandonment of all, or part of, that operation. The payment of a dividend
forms part of a disposal only when it constitutes a return of the investment.
In the case of a partial disposal, only the proportionate share of the related
accumulated exchange differences is included in the gain or loss. A writedown
of the carrying amount of a non-integral foreign operation does not
constitute a partial disposal. Accordingly, no part of the deferred foreign
exchange gain or loss is recognised at the time of a write-down.
The Effects of Changes in Foreign Exchange Rates 121
Change in the Classification of a Foreign Operation
33. When there is a change in the classification of a foreign operation,
the translation procedures applicable to the revised classification should
be applied from the date of the change in the classification.
34. The consistency principle requires that foreign operation once
classified as integral or non-integral is continued to be so classified.
However, a change in the way in which a foreign operation is financed
and operates in relation to the reporting enterprise may lead to a change in
the classification of that foreign operation. When a foreign operation that
is integral to the operations of the reporting enterprise is reclassified as a
non-integral foreign operation, exchange differences arising on the
translation of non-monetary assets at the date of the reclassification are
accumulated in a foreign currency translation reserve. When a non-integral
foreign operation is reclassified as an integral foreign operation, the
translated amounts for non-monetary items at 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
Vivek Daga
(.)
(48 Points)
Replied 07 December 2012
CAclubindia
